In the vast number and scope of regulatory requirements governing cross-border business and the enormous range of activities and processes affected by them, we see a demand for IT-assisted measures that are lastingly effective and efficient. We show that such an approach can succeed through business rules management (BRM) with the benefit of executable models.
Banks and other financial service providers with an international outlook are faced by ever greater challenges. As well as the constantly expanding regulatory requirements, the call for greater efficiency increasingly places businesses under pressure to act. At the same time, the delivery of financial services abroad or for clients in other countries demands compliance with numerous regulations and restrictions in the countries concerned. The vast number of processes affected, each performed by a different group of people within the business, results in a further layer of complexity in cross-border banking.
Definition of “cross-border”
The term “cross-border” covers a variety of activities performed by a business that are related to preparing the way for and delivering financial services. Their common feature is their association with one or more countries that are outside the domicile of the company. Specifically they comprise:
- Activities carried out by the business abroad
- Services provided for foreign clients
- Investments in foreign markets
Such activities can be associated with burdens and disadvantages. Therefore, financial service providers should be aware of the risks and implement suitable measures without making their businesses uneconomical.
Sustainably effective implementation
The business rules management system ACTICO Rules helps financial institutions to recognize the risks involved in cross-border business and identify the processes affected. In addition, we analyze typical measures that are commonly employed today and discuss their effectiveness. We then reveal how executable business rules can be used to support the measures in such a way that they become sustainably effective and open up opportunities for efficiency and quality improvements.
This article is focused on technical support for measures employed in cross-border business. The measures described should be understood as illustrative examples. This paper does not offer any legal advice but rather uses examples to describe the IT-assisted implementation of measures that a financial service provider defines on its own account.
Risks in cross-border business
The potential risks in cross-border business are many and varied. Ultimately, they are determined by the actual countries involved in the company’s operations in the particular case concerned. In general terms, however, it is possible to identify a number of legal areas that are affected.
Regulatory legislation
Most obviously, and therefore first to be mentioned, are the regulatory legislation requirements of the country concerned. One possible challenge may be presented by the fact that in the market concerned, activities may be regulated more strictly than in the domestic market, or activities that are not regulated at home may be regulated abroad (e.g. in the generation of new business, i.e. in advertising, marketing or cold-calling). Under certain circumstances, international trading may give rise to requirements imposed by the domestic supervisory authority (lead regulator), either in the form of specific regulations governing activities abroad or else due to the demands placed on organization and risk management in general.
Civil law and civil procedural law
Other risks are to be found in the areas of civil law and civil procedural law. In these areas it is primarily a question of liability and the revocability and/or invalidity of contracts with clients. For certain country combinations (e.g. bank based in Switzerland, client in a different Lugano Convention member state) claims in the client’s domicile can become an issue.
Tax law
The tax legislation abroad can also contain a number of hidden traps. One example is the repeated and/or regular presence of your own employees, which is interpreted as “fictional representation” and so can provide justification for corporation tax liability in the country concerned.
Criminal law
In extreme cases, criminal law provisions may also be relevant. As well as independent actions not necessarily recognized under domestic law, activities that might be interpreted as incitement to commit or aiding and abetting criminal acts (such as tax offenses under foreign law) are also of relevance in this regard.
Reputation
Across all the areas of law referred to, there is also the risk that in the event of a contravention and its associated publicity, the reputation of your company is damaged both at home and abroad. In cross-border banking it is a massive challenge to control all of those risks. The measures that can be employed to do so are described below.
Examples of potentially affected activities
- Advertising/marketing
- Cold-calling
- Networking
- Phone calls to clients
- Appointments with clients, especially trips abroad
- Asset and investment consultancy
- Tax consultancy
- Performance of contracts
- Acceptance of clients’ funds
- Distribution networks and partnerships
- Service provision by outsourcing
- Mediation of customer contacts by a third party abroad
- Handling (personal) data
Measures taken by the company
In order to counter the risks outlined, a company is called upon to define and implement suitable measures.
Organizational measures
Many of the measures required are of an organizational nature. They range from expertise development, the creation of information bases and, where applicable, the centralization of activities in “country desks”, through supporting directives (for instance regarding unlawful business activities and travel) to internal monitoring systems and appropriate sanction regimes.
In addition, existing business processes have to be re-examined and revised where necessary. Examples include customer acceptance and due-diligence processes.
Limited effectiveness
The effectiveness of many organizational measures is often limited.
Expertise development by means of training schemes is often very effective in the short term. But in the medium term, details are forgotten and refresher courses are required. Furthermore, organizational measures are frequently perceived as obstacles to doing business. Compliance with them demands extra time and concentration. The plethora of directives seems unmanageable.
Strategic decisions
Strategic decisions are also required, however. On the basis of an assessment of the balance between opportunities and risks and an examination of the actual cross-border activities ongoing at present, modification of your own business model may also be necessary.
External requirements and business policy decisions both result in a large number of rules and regulations that have to be implemented and/or complied with in operational trading.
We will now look at how those measures can be sustainably and efficiently implemented with the aid of modern computer programs.
IT assistance for the measures adopted
Vast numbers of regulatory requirements relating to cross-border business have to be implemented. The company puts numerous measures in place in order to meet all the requirements. Those measures can only be effectively and efficiently implemented with the assistance of information technology.
Taking sustainably effective measures
Directives and other comparable company rules are of major significance in terms of their legal effect. However, they rarely directly influence the daily processes and decisions. For that to happen, the people taking the actions have to be familiar with and aware of their contents. That may be the case with a manageable number of directives with a manageable scope. Especially so if the persons concerned perform a specialized role and consequently make decisions of a similar nature subject to similar general parameters.
In the world of cross-border services, however, that is frequently not the case. In smaller financial institutions staff frequently perform multiple roles and have to take decisions of widely differing kinds on a daily basis. Often days can pass before a decision of the same type has to be made again. Staff have to adjust quickly to what is required of them in the next process and comply with the rules that apply to it.
But even in cases where a degree of specialization can be achieved, the challenge lies in the absolute number of transactions to be dealt with and the complexity of the instructions and requirements – which the decision-maker cannot always call to mind in precise detail at all times.
Sustainably effective approaches are therefore required to effectively implement the measures planned.
Combining compliance and economy, increasing efficiency
Alongside effectiveness, efficiency plays an increasingly important role. As a rule, the implementation of a regulatory requirement is perceived as an obstacle to day-to-day business. Compliance is perceptibly achieved at the cost of efficiency. If the requirement is not met, efficiency increases but financial success is placed at risk.
What is needed is an approach that increases efficiency and which is perceived as a help to everyday business dealings instead of a hindrance. An approach that ensures the requirements are sustainably and effectively implemented, largely removing the risks to financial success.
Integrating requirements in the practiced processes
The approach must take all of the processes mentioned into account. It is not sufficient to simply document all specified roles and their duties in the processes. Unfortunately, process management frequently fails to go beyond a documentation exercise. Then it is often the case that the process actually practiced is different from the one documented.
Only when regulatory requirements are integrated in the processes as practiced do they become sustainably effective. The information is provided selectively at precisely the point at which it is required. The measure is demanded at exactly the stage when it will minimize the dangerous risk. The person actively performing the role is thus efficiently assisted and is able to keep to the directives without having to keep them constantly in mind at all times.
Standardizing complex decisions in line with regulations
The decisions taken in the processes are becoming more and more complex. The people actively performing the roles frequently make those decisions on the basis of their own judgment. In such situations, aims in terms of financial success play an extremely important role. But it is essential not to lose sight of compliance with the regulatory requirements.
In business rules management (BRM), decisions are graphically modeled as rules and then standardized, taking the regulatory requirements into account. Those rules are automatically applied from within processes. Sustainably effective implementation is thus guaranteed.
BRM can be used to effectively and efficiently support measures (i.e. in a sustainably effective and economical way) in cross-border business.
The next section uses examples to show what the crossborder rules system might look like. The section that follows it shows how the rules are integrated into a process.
The cross-border rules system
With business rules management (BRM), rules can be represented in various forms. A familiar format in everyday situations is the decision matrix. For more complex rules, decision trees are more suitable. Both formats are briefly explained below, with examples.
Coverage of cross-border markets is described by means of a tree chart.
Based on the external regulatory requirements, a financial institution makes internal strategic decisions.
In cross-border business, every financial institution must decide on the markets for which it knows the regulatory requirements and is able to meet those requirements.
In some cases, the requirements may only be satisfied if the business is conducted from a specific location.
Another factor that can be decisive is whether the clients are actively serviced, i.e. whether the business is actively acquired and clients are potentially served at their own locations. Where active servicing is subject to a substantial regulatory burden, passive servicing may be preferable. In such cases, the bank waits for the client to make contact and services the business from its own location only.
The above scenarios are all presented in the tree chart on the right. The example illustrated is: “A prospective client from Russia visits the Zurich office”
The chart maps the planned visit by the client from left to right and top to bottom (as when reading), starting from the green root node.
- First of all, the first yellow decision diamond looks at the client’s home market. As that is Russia, the chart starts mapping the client’s visit from the fourth branch down and moves across to the next yellow decision diamond.
- This considers from which location the client is to be serviced. As that is Zurich, the chart takes us to another decision.
- The question here is whether the prospective meeting with the client constitutes active or passive servicing. As it is a case of a visit by the client to the bank, the passive branch is chosen.
- Finally, the blue action circle is reached. That signals that from a cross-border viewpoint, this is a target market. As that action is the outcome, there is no reason not to allow the visit.
