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Published date: 28 April 2005

Compliance and the compliance function in banks

Introduction

1. As part of its ongoing efforts to address bank supervisory issues and enhance sound practices in banking organisations, the Basel Committee on Banking Supervision (the Committee) is issuing this high level paper on compliance risk and the compliance function in banks. Banking supervisors must be satisfied that effective compliance policies and procedures are followed and that management takes appropriate corrective action when compliance failures are identified.

2. Compliance starts at the top. It will be most effective in a corporate culture that emphasises standards of honesty and integrity and in which the board of directors and senior management lead by example. It concerns everyone within the bank and should be viewed as an integral part of the bank's business activities. A bank should hold itself to high standards when carrying on business, and at all times strive to observe the spirit as well as the letter of the law. Failure to consider the impact of its actions on its shareholders, customers, employees and the markets may result in significant adverse publicity and reputational damage, even if no law has been broken.

3. The expression "compliance risk" is defined in this paper as the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities (together, "compliance laws, rules and standards").