The Taiwan Banker

Globally, the financial regulatory environment is tightening. There is an increased focus on controlling money laundering and strengthening overall compliance. Jye-Cherng Lyu, Chairman of the Bankers Association of the Republic of China, believes Taiwan's financial industry can more speedily move into line with these new trends by expanding interactions with other nations while internally developing new systems and regulations. Globally, financial regulation is becoming stricter. Jye-Cherng Lyu, Chairman of the Bankers Association of the Republic of China and Chairman of Taiwan Financial Holdings and Bank of Taiwan, has been among the leaders of Taiwan's effort to bring its financial sector into line with emerging global regulatory norms. In less than one year, he has led Taiwanese financial delegations on visits to the global financial centers of New York, Hong Kong and London, as well as other financial centers in North America, Asia and Europe. Having previously worked in the Bank of New York as a vice president, he has deep financial industry experience. In a short period, he has successfully built a bridge between local and overseas financial institutions. Consequently, heavyweights in the global financial industry have taken note of Taiwan's determined - and successful - efforts to combat money laundering and strengthen overall compliance. The Banker spoke with Jye-Cherng Lyu about his work since beginning to serve in his new positions, in particular in bolstering Taiwan's money laundering controls and compliance system. Regarding the seminars he attended abroad, they offered some useful ideas about how to strengthen compliance in the financial sector here: It is important for Taiwan to strengthen the self-regulation mechanism of its financial sector so that laws and regulators are in line with the internal auditing system. Secondly, it is a good idea for Taiwan's national banks to engage with international finance experts and regulators. Thirdly, it is important for Taiwan to show its determination to strengthen compliance in the financial sector. Internal auditing can be helpful in this endeavor. Build a self-regulation mechanism for banks and provide small banks with resources to strengthen their compliance In Taiwan, Lyu has been hard at work helping to build a self-regulation mechanism for the banking industry. He also has been helping to develop new regulations for national banks with overseas branches. Bank associations will also promote two important self-regulatory frameworks. The FSC has already instructed national banks to implement uniform self-regulation mechanisms to combat money laundering and terrorism and financing. This also applies to their overseas branches - which is a first. It is easier for larger banks to implement effective self-regulation mechanisms because they have abundant resources. It is not always so straightforward for smaller banks. Thus, by encouraging the establishment of a working group for self-regulation that include both large and small banks, Taiwan's financial regulators will help small banks access more resources and build more effective compliance systems. At present, the plan for self-regulation working groups is as follows: The eight state banks and interested private banks can set them up first. It is imperative that these working groups operate in accordance with relevant individual and client information protection regulations. The goal of the working group will be to a build a "protective umbrella" system. It is a significant cost for banks to implement effective anti money-laundering controls and and strengthen compliance. For a smaller bank, the cost may be difficult to absorb. But if banks can share resources with each other, they all can reduce their costs and improve efficiency. Further, smaller banks have the opportunityt to develop global-standard compliance systems. Overall, two state banks, Bank of Taiwan and Land Bank, have already set up a preliminary self-regulation working group. They will co-organize financial personnel taxation training two weeks before income tax filing this year. Taxation is a good area in which for them to begin their cooperation because it is not a field in which they compete. Rather, taxation is an area in which two state banks can interact with and learn from each other. They, in turn, can help their clients to more effectively follow tax regulation and laws.In Lyu's view, the banks' self-regulation mechanism must be well organized, with three lines of defense to safeguard the anti-money laundering system. Three lines of defense to ensure comprehensive risk management in the banking sector As long-time soccer player and fan, Lyu sees how the 3-4-3 formation (the three lines of defense) used in soccer are applicable to banking. Lyu played soccer throughout elementary and secondary school, and at university too. In soccer, midfielders are the first line of defense, then forwards, and finally fullbacks. In banking, the first line of defense is top management and front office, then risk management and finally audit. Some people in the industry advocate adding a fourth line - to hire external management to assist with monitoring work, but thus far a consensus on this has not been reached. The first line of defense is the top management and front office. This involves new regulations designed to prevent money laundering, such as photo ID requirements and the requirement of detailed information about transactions. The company's front office needs to be responsible for handling this work. If they fail, the second life of defense must rectify the situation. The second line of defense, risk management, can be carried out by the self-regulation working groups, improving the efficiency of oversight in the banking industry. The third and final line of defense is internal audit. For those involved in internal audit, it is important that they receive proper training and are dedicated to upholding the bank's integrity. To achieve healthy profitability, banks should be people-centered, portfolio-sound, performance-driven, prospection oriented and principle-based, Lyu says. To strengthen compliance, state banks should invest in talent, knowledge, hardware and softwareMuch has been accomplished to bolster compliance in Taiwan's bank industry recently. Money-laundering legislation has been revised; 53 suspicious cases have been investigated and state banks have familiarized themselves with global anti money-laundering standards. Still, a long road lies ahead for Taiwan's banks to further strengthen compliance. They must continue to perform strongly in three areas: recruitment, training and their information systems (hardware and software). Drawing on his experience the Bank of New York, Lyu says that the bank's headquarters emphasized the importance of Know Your Customers (KYC) and Understand the Transaction, meaning understand the transaction process on a deep level to know when something is amiss. The Bank of New York has long had a strict set of controls to prevent money laundering, but for Taiwanese banks, this is a new process. Taiwanese banks only began to progress from KYC to Understand the Transaction after they opened branches overseas and the U.S. became stricter about requiring comprehensive compliance. In anti money laundering, there is another important trend called Keep Abreast of the Development. That means it's important to keep up with relevant anti-money laundering and compliance news to know how it can be applied to a bank's business. In the future, Taiwan's state banks will need to do this to ensure they keep up with global standards. To prevent money laundering, Taiwan's banks must integrate their labor forces and advanced technology, Lyu says, adding that this means banks will need to make a considerable investment over the long term. How reforming compliance culture in a company can prevent money laundering Taiwan is currently focusing on six key areas to control money laundering: 1. Set up the Anti-Money Laundering Office, Executive Yuan 2.Established the Directions Governing Anti-Money Laundering and Countering Terrorism Financing of the Banking Sector and put chief executive officer in charge3. Earlier this year, hired independent third parties to audit the anti-money laundering and counterterrorism system and also hired external professional consultants to help Taiwanese banks to move into line with global standards4. Set up and optimized the anti money laundering and counterterrorism information system5. Set up a special division for anti-money laundering and counter terrorism financing in the industry6. Educational training for the people and supervisors in charge; total of 24 hours training and evaluation for 200 people. Furthermore, in July, Taiwan was removed from a regional money-laundering watchlist. Still there will be a third-round evaluation next year. Lyu points out that APG is judging countries' commitment to fighting money laundering based on the effectiveness of regulations and law enforcement, not just having the laws on the books - as they did previously. Thus, Taiwan's public and private sectors should work together to ensure financial institutions ultimately reform compliance culture. They must strengthen board management, the three lines of defense and finally staff training systems.