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Compliance Function Critical to Effective Operation of AI

The Bank of Papua New Guinea (BPNG) has emphasized the importance of developing and implementing an effective compliance function within Artificial Intelligence (AI) systems in Papua New Guinea.

Importance of Compliance Function

According to BPNG’s latest prudential standard, the compliance function is responsible for ensuring that the AI operates in full compliance with all relevant laws and other compliance requirements. This includes monitoring, escalation, and reporting procedures, as well as advising the Board on compliance issues.

Characteristics of Effective Compliance Function

To achieve this, the compliance function must be:

  • Permanent
  • Effective
  • Independent
  • With clear and unfettered access to the Board or its committees
  • Headed by a Chief Compliance Officer who has overall responsibility for coordinating the management of AI’s compliance risk, ensuring that there is no conflict of interest with other responsibilities

Responsibilities of Compliance Function

The compliance function will be responsible for:

  • Identifying, documenting, and assessing compliance risks associated with AI business activities
  • Educating staff on compliance issues
  • Providing assurance to the Board on a regular basis, including reporting on compliance matters and associated risks

Notification Requirements

BPNG has introduced notification requirements for AIs to inform the regulator of any changes in their compliance function or material breaches of compliance requirements. Under this new standard:

  • The AI’s Board must notify BPNG in writing within 7 working days when the Chief Compliance Officer (or person responsible for compliance) takes up or leaves that position
  • The AI must also provide advance notice to BPNG if it anticipates a material breach

Corrective Measures

If BPNG is not satisfied with the adequacy of an AI’s systems and procedures for compliance risk management, it may:

  • Vary the conditions of the AI’s licence under section 14 of the Banking and Financial Institutions Act (BFIA) 2000
  • Require immediate remediation of issues
  • Suspend or limit certain business activities
  • Prohibit certain transactions
  • Reassess the fitness of responsible persons to continue holding their position in the AI

Effective Date

The effective date of this prudential standard is January 1, 2017, with full compliance required by December 31, 2018. Questions and enquiries relating to this standard should be addressed to the Financial System Development Department at the Bank of Papua New Guinea.