Compliance Policy

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1 MAIN : ADMIN-13/ a DT SUB : ORG-02 CO: Department FILE M 8 S 801 Policy Our Board of Directors at the meeting held on reviewed the existing Policy of our Bank for the year and approved the same for adoption with certain modifications. A Copy of the Board approved Policy is available for the reference in the CBS Held Desk Intranet-> Policies-> Policy. Nominated Officers at Branches, Zonal Offices & Corporate Office Departments are advised to ensure adherence to activity as detailed in the Policy. In brief, the compliance officers should ensure the following; a) All Regulatory, Statutory and internal guidelines governing the various functions spelt out in the various Manuals, Circulars and Letters are complied with. b) Non-s / breaches, if any, are reported to the higher authorities immediately and followed up for compliance. c) The quarterly on-line compliance reports and the Certificates are submitted within the stipulated time. N Natarajan DGM/Chief Officer

2 COMPLIANCE POLICY INDEX Para No. Subject 1 Introduction 2 Risk 3 Objectives of the Function 4 Types of 5 Organisational Structure 6 Process and Procedure 7 Risk Management 8 Reporting Structure 9 Annual Review by Internal Audit 10 Cross Border Issues 11 Disclosures 12 Modifications and Review 1

3 COMPLIANCE POLICY Introduction 1.1 Reserve Bank of India vide Circular No.DBS.CO.PP.BC.06/11/01.005/ dated has issued comprehensive final guidelines on and Function in Banks. RBI has advised that each bank will formulate a Function for their Bank and put in place a Policy to manage compliance risk. In accordance with these guidelines, this Policy aims at establishing a robust System in our Bank. 2. Risk 2.1 The Basel Committee on Banking Supervision (BCBS) has published a high level paper on Risk and the Function in Banks in April 2005 prescribing certain principles aimed at strengthening structure in Banks. The paper defines Risk 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 organization standards and codes of conduct applicable to its banking activities. 3. Objectives of the Function : The Function is For monitoring strict observance of all statutory provisions contained in various legislations such as Banking Regulation Act, Reserve Bank of India Act, Foreign Exchange Management Act and Prevention of Money Laundering Act. To monitor observance of other regulatory guidelines issued from time to time To monitor observance of standards and codes prescribed by Indian Bank Association (IBA) Foreign Exchange Dealers Association (FEDAI) and Fixed Income Money Market and Derivatives Association (FIMMDA), etc. To monitor observance of bank s internal policies and fair practices code. function shall also cover matters such as observing proper standards of market conduct, managing conflicts of interest, treating customers fairly and ensuring the suitability of customer advice and may extend to tax laws that are relevant to the structuring of banking products or customer advice. 2

4 The Function is to: 3.1 Assist the Top Management of the bank in managing effectively the compliance risks faced by the Bank. 3.2 Identify statutory and regulatory compliance requirements and other compliance obligations arising out of the fair practices codes and other codes prescribed by self-regulatory organizations, IBA, FEDAI,, FIMMDA, IRDA, SEBI, etc., government policies, prevention of money laundering and funding of illegal activities and the Bank s internal policies. 3.3 Define the role and structure of the compliance Department, composition of its staff and their specific responsibilities at CO, controlling offices and branches. 3.4 Provide a mechanism to ensure that regulatory guidelines / instructions are promptly issued / disseminated within the organization and to monitor with the regulatory guidelines / instructions. 3.5 Provide a methodology to proactively identify, document, assess the compliance risks associated with bank s business activities and products. 3.6 Provide procedures to integrate the risk management framework with the Bank s operational risk management framework. 3.7 Create group / enterprise wide compliance programme covering its Subsidiaries, Regional Rural Banks(RRBs) etc. 3.8 Provide procedures that compliance responsibilities specific to the foreign branches of the Bank, viz. adherence to applicable laws and regulations of the Host countries are duly carried out. 4. Types of 4.1 The compliance functions in the Bank shall be divided into three broad Categories Statutory : The Bank has to ensure strict observance of all statutory provisions contained in various legislations such as Banking Regulation Act, Reserve Bank of India Act, Foreign Exchange Management Act, Prevention of Money Laundering Act, etc. 3

5 4.1.2 Regulatory : The bank has to ensure strict observance of other regulatory guidelines issued from time to time by the regulators such as RBI, SEBI, IRDA, etc. Such compliances shall be termed as Regulatory compliance Other s: In addition to the statutory and regulatory compliance, the Bank has to comply with standards and codes prescribed by IBA, FEDAI, FIMMDA, etc. and also bank s internal policies and fair practices code. Such compliances are termed as other compliances. 5. Organizational Structure: The following shall be the Organizational Structure for the Function: Board of Directors Audit Committee of the Board Executive Director / Chairman & Managing Director Chief Officer s Officers at Branches/ Zonal Offices / Overseas Branches & CO: Departments Officers at Subsidiaries and RRBs. 4

6 5.1 The Functions of the various Tiers in the Organizational Structure are detailed below: Board / ACB The Bank recognizes that the compliance starts at the top. In order to inculcate the best corporate compliance culture that emphasizes standards of h o n e s t y a n d integrity, the Board as well as the Top Management will lead by example by setting the right tone for others to emulate The Policy shall be approved by the Board. The implementation of the Policy and Function shall be overseen by the Board. The Audit Committee of the Board (ACB) shall review the Reports on a quarterly basis. A detailed Annual Review shall be placed before the Board. 5.2 CO / Department The Department at Corporate Office shall be responsible for implementing the Policy. The Department at Corporate Office will be headed by an executive not less than in the rank of Deputy General Manager designated as Chief Officer with overall responsibility for identification and management of the bank s compliance risk and supervising the activities of other compliance function staff. He shall not be removed / transferred without the specific approval of the Board. The Bank shall keep informed RBI as well as the Board and the Audit Committee of the Board of the name of the Chief Officer as also any change thereof as and when it takes place with reasons for change The staff of CO/ Department shall have specialized knowledge of Law, Accountancy and Information Technology and also adequate practical experience in various business lines and Audit/ Inspection functions to enable to carry out their duties effectively. Besides they should be provided with suitable training to update them in new products and services as well as in areas of Corporate Governance, Risk Management, Supervisory Practices, etc To start with, CO/ Department will be provided with a Chief Manager assisted by a team of Officers having exposure in Credit/Credit related matters, Legal issues and documentation, Treasury, Information Technology, Risk Management and Banking Operations. 5

7 5.2.4 CO/ Department should submit quarterly report to the ACB and Annual Review to Board to enable the Board members to make an informed judgment on whether the bank is managing its compliance risk effectively CO/ Department shall report promptly to the Board of Directors or the ACB on any material failure(eg). Failure that may attract a significant risk of legal or regulatory sanctions, material financial loss or loss of reputation) The Department shall arrive at comprehensive data based on the Regulatory and Statutory compliances required and also from the data on internal policies, rules and guidelines of rules and regulations derived from various sources for compliance by functional departments. The functional department shall disseminate all such regulatory and statutory guidelines to field level functionaries for compliance. The Department shall also update and circulate all the rules, standards and laws to the functional departments from time to time for compliance CO/ Department shall design the Reporting Formats and update it periodically to enable branches/ Zonal Offices for reporting compliance to CO: Dept on quarterly basis. CO:ORMC Support Group shall also verify and approve the same CO: Department, once in a year, to identify and assess the main compliance risks facing the Bank in their respective functional area upon receipt of input from all departments on compliance failures if any during the preceding year, scope of compliance procedures and processes, system of internal control to minimize compliance risk, progress in rectification of deficiencies pointed out by auditors, inspectors and regulators etc., and place Annual Review to Board. 5.3 Functional Departments at Corporate Office: Functional General Managers in-charge of departments at Corporate Office will nominate the the concerned department head DGM/AGM/CM as the case may be coming under his control as compliance officers for managing risk pertaining to their functional area Such nominated compliance officer of the department will in turn identify an officer, for managing the Risk in the department to assist him/her for reporting compliance to CO/ Dept. 6

8 5.3.4 Each Functional Department shall maintain all compliance issues / checklists duly approved by the Chief Officer. The same will be provided to the staff associated with the respective functions and such manuals shall be updated at periodic intervals. These compliance checklists will serve as the basis for the quarterly compliance reports to be submitted by Branches / Zones Each Functional Department shall submit a detailed quarterly compliance report to CO: Department relating to their function General Managers in charge of various functions would ensure that appropriate remedial or disciplinary action is taken if breaches are identified. 5.4 Field Level: Branches: At branches, the second in command will perform the role of Officer. However, in single man branches, the BM/Officer-in-charge of the branch will perform the role of the Officer The Officer in each branch shall submit the online compliance report on compliances / non-compliance of various compliance issues to CO: Dept. In addition, the Officer in each branch shall submit a quarterly Certificate to Zonal Office in the prescribed format, Zonal Offices: In Zonal Offices the Second in command are nominated as Officers. All the departmental heads in Zonal Office are equally responsible for managing the function pertaining to their functional area and will assist the Officer by providing inputs relating to their functions to enable the Officer in Zonal Office to report to Chief Officer The Officer at Zonal Office shall submit on-line compliance report on status / extent of compliance to CO/ Department at quarterly intervals 7

9 The Officer in the Zonal Office, shall appraise the Zonal Manager the level of and failures, if any so that the Zonal Manager shall take prompt / corrective action. 5.5 Foreign Branches: In respect foreign branches also, the respective Second-in-command will be the compliance officers. The Officer will ensure that all regulatory guidelines of the Host country and Home country are complied with. The branch shall maintain a comprehensive data of rules and regulations issued by their Host country and Home country and will prepare a Manual for the guidance of staff working in the branches. They shall submit a quarterly report on the status of compliance to the CO/Chief Officer and to CO/International Division in a format prescribed. 5.6 Subsidiaries and Regional Rural Banks : In respect of Subsidiaries and Regional Rural Banks, the Chairman / President of these entities will designate the officer second in command to perform the role of Officers for the respective entities. The Officers shall maintain a comprehensive data on rules and regulations pertaining to their operations and prepare Manual for the guidance of their staff members. They will ensure that all regulations are complied with and will send a quarterly report on the status of compliance to the Chief Officer at Corporate Office besides placing to their Boards. Besides they shall send an Annual Review of Risk Assessment identifying main compliance risks facing them and steps taken to manage them to CO/ Department under copy to the respective Functional Department. 6. Process and Procedure:- 6.1 Bank shall ensure independence of the Chief Officer and the other staff in the Corporate Office, Department to avoid conflict of interest and the compliance staff should primarily focus on the compliance functions. However, in Branches / Zonal Offices / Functional Departments, compliance staff may perform some other duties other than Audit / Inspection duty while ensuring that there is no conflict of interest. 6.2 The compliance functionary should be looked at as a friend, philosopher and guide by the business units. There should be a close coordination and partnership between compliance and Business operations functions. To achieve this purpose, the Chief Officer will be a member of the 8

10 various interdepartmental committees in the Bank. Chief Officer shall be a special invitee to Audit Committee of the Board. 6.3 Chief Officer shall have access to all information he requires and have the right on his own initiative to communicate with any staff member of the Bank and obtain access to any records or files necessary to carry out his responsibilities The Chief Officer shall be empowered to conduct compliance review investigations whenever required and to request assistance from the specialists within the Bank. The authority to use external experts for the purpose of investigation shall be left to the discretion of the Chief Officer with the permission of CMD. 6.5 The Chief Officer shall be free to report to ED / CMD on any irregularities or possible breaches disclosed by its investigations without fear of disfavour from management or other staff members. The Chief Officer shall also have the right of direct access to the Audit Committee of the Board (ACB). 6.6 The Chief Officer shall be a participant in the Quarterly Discussions held with RBI. In case, no quarterly meeting is held, he shall meet the Chief General Manager, DBS, in charge of the bank at Central Office of RBI once in every quarter of the year to discuss compliance issues. 6.7 All regulatory and statutory guidelines, circulars / letters received from RBI and Government of India at the CMD s Secretariat will be forwarded to the concerned functional department under copy to CO/ Department to enable CO/ Department to follow up with the respective functional department as to its compliance. 6.8 CO: Department to ensure that the instructions / guidelines based on the circulars / notifications of Reserve Bank of India/Government of India pertaining to the functions of various departments are promptly issued to field level functionaries for compliance by the functional departments at Corporate office. Copies of such circulars should be sent to CO/ Department for vetting with a view to ensure compliance with the regulatory guidelines. 6.9 CO/ Department shall follow up on a weekly basis compliance of all guidelines / Circulars / letters from RBI and GOI and submit a weekly status report on action taken on the 9

11 guidelines / letters / circulars to the ED/CMD. Further a quarterly note on Status with regard to of various directions of Reserve Bank of India / Government of India is placed to ACB / Board CO/ Department shall monitor timely submission of regulatory returns by the controlling offices through a system of monthly / quarterly Return calendar which will indicate the returns / reports to be submitted by each branch / controlling office / functional department along with the due date of submission CO/ Department shall serve as reference point for the Bank s staff for operational departments for seeking clarifications / interpretation of various regulatory and statutory guidelines With a view to create awareness and educate staff on the Function, the training programmes conducted by IMAGE / Staff Training Centres should include suitable sessions on compliance and compliance risk management Staff Accountability shall be examined for all compliance failures. Bank shall endeavour to design a suitable system to give due weightage to the record of compliance during performance appraisal of the staff CO Department shall at frequent intervals interact with Legal Department, Operational Risk Department and Audit and Inspection Department to take stock of the latest developments. 7. Risk Management 7.1 CO/ Department in coordination with Risk Management and Audit Department will identify and document the compliance risk associated with the Bank s business activities / products and formulate procedure for measuring the compliance risk and compliance testing The compliance risks in all new products and processes should be thoroughly analysed and appropriate risk mitigants by way of necessary checks and balances should be put in place before launching. The Chief Officer should be a member of the new product committee to ensure that the new products / processes monitoring for the first six months of introduction by the relevant functional department to ensure that the indicative parameters of compliance risk are adequately monitored and reported to CO/ Department. 10

12 7.3 The Department shall categorize the compliance issues as High, Medium, and Low risks This would enable the Bank to focus on the compliance issues that demand appropriate attention to mitigate the risks. 7.4 Verification of : CO: Dept will randomly select branches every quarter for verification of the compliance reported by the branches through Zonal Officers. 7.5 Inspection / Audit findings should serve as a feedback mechanism for the Department for assessing the areas of compliance breaches / failures. For this purpose the CO/Inspection Department should include compliance aspect as a part of the inspection reports for the inspectors / concurrent auditors to verify the level of compliance. The CO/Inspection Department should keep the CO/ Department informed of inspection / audit findings related to compliance. 7.5 CO/ Department shall periodically circulate the instances of compliance failures among staff along with preventive instructions. 7.6 CO/ Department shall carry out an annual compliance risk assessment in order to identify and assess major compliance risks faced by them and prepare a plan to manage the risks. The Annual Review shall broadly cover the following aspects covering all the Bank s activities. failures, if any during the preceding year and consequential losses and regulatory action as also steps taken to avoid recurrence of the same. List of all major regulatory guidelines issued during the preceding year and steps taken by the bank to ensure compliance. Independence of compliance function. Scope of compliance procedures and processes. System of internal control to minimize compliance risk. with fair practices codes and adherence to standards set by self-regulatory bodies and accounting standards. Progress in rectification of significant deficiencies 11

13 pointed out in the internal audit, statutory audit and RBI inspection reports and position of implementation of recommendations made therein. Strategy for the next year including restructuring of compliance department, if necessary, posting/transfer/training of staff. The report of the Annual Review shall be placed before the Board. 8. Reporting Structure: Reporting Level Reporting To Monthly Quarterly Annual Branches CO/ Dept online Report Zonal Offices Foreign Branches RRBs/ Subsidiaries CO/ Dept CO/ under copy to CO/International Division CO/ under copy to CO/Functional Departments Certificate Certificate & online Report Report Report CO/Functional Departments CO/ Certificate & online Report CO/ ACB / Board Status Report on Position CO/ EDs/CMD Weekly status of RBI / GOI letters / directions Annual Review of Risk Assessment CO/ ACB/Board Status report on compliance of various directions of RBI / GOI 8.1 Besides the above, any major breaches / non-compliances 12

14 should be reported immediately by the above functionaries to CO/ Department under copy to respective Functional Department so that corrective steps are taken promptly. 8.2 The Formats for the above reports will be designed by CO/ Department and advised to the Zones / Branches. 9. Annual Review by Internal Audit: The activities of the compliance function should be subject to Annual Review by the Internal Audit. Risk shall be included in the risk assessment methodology of the internal audit function and the audit programme shall cover the adequacy and effectiveness of the bank s compliance function including testing of controls commensurate with the perceived level of risk. The report of the Annual Review shall be placed before the Board. 10. Cross Border Issues: As regards our branches in Singapore, Colombo and Jaffna, it shall be ensured that they comply with applicable laws and regulations in the respective jurisdictions and that the organization and structure of the compliance function and its responsibilities are consistent with local legal and regulatory requirements. It is the responsibility of the designated Officers of the respective branches to ensure that individuals with the appropriate local knowledge and expertise carry out compliance responsibilities specific to each jurisdiction. CO/International Division will oversee these functions in coordination with the Foreign Branches and report compliance to CO/ Department. 11. Disclosures: 11.1 Non-compliance with any regulatory guidelines and administrative actions initiated against the Bank along with corrective steps taken to avoid recurrence of the lapses should be disclosed in the annual report of the Bank Discomfort conveyed to the Bank on any issue by any regulator other than RBI, shall be brought to the notice of RBI. 12. Modifications and Review: The Policy shall be reviewed once in a year and modified, if necessary, to suit the needs of the Bank and to comply with Revised Guidelines issued by RBI from time to time. 13

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