Financial Crime World

Financial Institutions Must Ensure Effective Internal Controls

Introduction

São Paulo, Brazil - In a bid to maintain stability and transparency in the financial sector, regulatory bodies have emphasized the importance of effective internal controls for financial institutions. According to Circular No. 3,978 of January 23, 2020, payment institutions are required to adopt systems that correspond to the risk presented by their activities.

Executive Committee Responsibilities

  • Implement an effective internal control structure
  • Define responsibilities and control procedures
  • Set out corresponding objectives at all levels of the institution
  • Verify compliance with internal procedures
  • Ensure that internal auditors report directly to the Board of Directors or management

Anti-Money Laundering Controls

  • Financial institutions are subject to specific anti-money laundering controls and procedures
  • Regulated entities must adopt a risk-based approach to ensure their safety mechanisms correspond to the amount of risk they present to the financial system

Payment Institutions

  • Subject to separate guidelines outlined in BCB Resolution No. 260 of November 22, 2022
  • Starting January 2024, payment institutions will be required to appoint a statutory officer responsible for observing compliance with these regulations

Operational Risk Management

  • Financial institutions must maintain robust operational, liquidity, and credit risk management structures consistent with the type of activities performed and the degree of complexity of their products and services
  • Strict cybersecurity rules in place to prevent breaches

Central Bank Oversight

  • The Central Bank performs regular oversight of financial institutions
  • May order additional measures if it believes actions taken by institutions are insufficient or inadequate
  • Stronger internal controls or compliance measures may be required

Capital Requirements

Minimum Capital Requirement

  • Varies depending on the type of license held
  • For example:
    • Commercial banks: R$ 17.5 million
    • Credit unions: R$ 10,000 to R$ 6 million

Basel III Rules

  • Aim to ensure the stability of the global financial system
  • Financial institutions are required to maintain a minimum Basel index of 10.5% to 15%, depending on their risk profile

Consumer Protection

Consumer Defence Code (CDC)

  • Outlines rules for consumer relations between suppliers of products or services and consumers
  • Applies to transactions between financial institutions and their customers
  • Recognized by the Brazilian Supreme Court as applicable to end-consumers

Conclusion

Financial institutions in Brazil must ensure that their internal controls are effective and consistent with the nature, complexity, and risk of their transactions. Failure to comply with these regulations may result in penalties and damage to reputation.