Money makes the world go round. But what they don’t tell you is that compliance allows that to happen. Without financial regulatory compliance, money markets would be all over the place.
Luckily, financial institutions are required to submit to regular compliance audits. These audits and compliance requirements force financial institutions to protect sensitive data and limit fraud. Unfortunately, the requirements can be costly, time-consuming, and slow down the start of even the most modern businesses.
Financial compliance is absolutely critical for a business that handles financial transactions. However, it can be outsourced.
Consider outsourcing your US financial compliance with Sila’s compliance-as-a-service. Read on to learn more:
US Financial Compliance Overview
If you are a financial institution or are thinking of starting one, you need to understand financial compliance. Generally, financial compliance includes the regulation and enforcement of laws around financial and capital markets. These laws will vary based on the financial system it is housed in (national vs. international) and can range from investment banking best practices to retail banking requirements.
Most businesses in the US follow two main financial practices, know your customer/business (KYC/B) and anti-money laundering (AML). However, ACH Operators also have to abide by National Automated Clearing House Association (NACHA) Operating Rules and International ACH Transaction (IAT) requirements as well.
Know Your Customer/Business
Know your customer (KYC) or know your business (KYB) is a standard practice that requires financial institutions to identify the customer or business they are working with. The bank must therefore collect customer identifying information as a means of reducing the risk of taking on the client’s business.
KYC/B asks who the client is and what their financial position is. By doing so, banks and other financial institutions can greatly reduce fraud; it acts as an added barrier against identity theft and malicious actors.
KYC/B is largely used against money laundering, forgery, and financial fraud. Still, it informs financial institutions about the client’s needs as well, so there is an added benefit for the client. This is one of the most important compliance measures in the US financial systems, and it is a step up from previous compliance measures of Customer Due Diligence (CDD).
Anti-money Laundering (AML)
Money laundering refers to the act of illegally moving funds through complex financial systems to make the funds appear legitimate. Money laundering can include a wide range of activities but is simply understood as using techniques to make “dirty” money, or money obtained through illegal activities, “clean” by moving it through financial systems.
Today, money laundering is extremely common. The US’s Financial Crimes Enforcement Network (FinCEN) oversees anti-money laundering laws. It acquires information passed from banks to the Treasury Department to deter, detect, and prevent terrorist financing and money laundering.
FinCEN applies mandates to financial institutions and audits these banks if they fail to comply. By failing to comply, FinCEN might assume that the bank is willfully or negligently financing terrorist acts. FinCEN might analyze financial transactions, research trends and patterns, identify suspicious transaction reports, ensure compliance, and act upon evidence of money laundering or financing terrorist activities.
ACH Gateway Operators
ACH Operators are financial institutions that facilitate the passing of Automated Clearing House (ACH) transactions. These transactions, considered ACH debits and ACH credits, are electronic transactions issued between peers and organizations. The Clearing House uses sets of return codes to diminish financial terrorism, fraud, and money laundering.
Therefore, ACH operators must obey the NACHA Operating Rules, KYC/KYB, and anti-money laundering laws.
If the financial institution sends ACH transfers to internationally-located banks, they must also comply with IAT Rules.
Importance of Financial Compliance
The 2008 Global Financial Crisis showed just how vulnerable our economies and financial markets were. Following that crisis, compliance became more strict. Estimates suggest that strict regulations could have saved retirement funds, houses, pensions and even drastically reduced the magnitude of the recession.
In general, financial compliance maintains the public’s trust in capital markets and holds the banking system accountable for financial crimes.
Examples of Unethical Financial Compliance Practices
Agencies and regulators must work together to stop unethical compliance practices. Here are just some examples of unethical practices that might occur in capital markets and the overall banking system:
Distorting transaction prices or the value of a security
Attempting to manipulate the market prices or the market through an agreement or scheme
Manipulating the appearance of public trading in a security
Falsely disclosing the level of risk of a security or not disclosing dangerous risks to a client
Aggressively pressuring clients into buying or selling securities even though it is not in their best interest
Common US Financial Regulators
There are three common financial regulators that US financial institutions need to abide by: the Federal Reserve, the SEC, and the FDIC:
The Federal Reserve
The Federal Reserve is the central bank of the United States, and it regulates the US’s monetary policy. The Federal Reserve is designated with maintaining inflation (around 2%), printing money, and regulating the federal funds rate.
A Board of Governors manages the Fed, and there are currently five individuals on the Board. The most important role of the Board is to set and establish compliance and regulation practices within the Federal Reserve since its policies greatly impact the national economy.
Priorities of the Fed also include not being swayed or influenced by the Secretary of the Treasury and the President. It is supposed to stay independent as a way of ensuring a stable US economy.
Securities and Exchange Commission (SEC)
The SEC is the Securities and Exchange Commission, and it is a regulatory agency independent of the government designed to oversee the US securities market. Roles of the SEC include:
Monitoring security exchanges
Enforcing securities law
Looking for signs of front running
Looking for signs of trading on public information
Checking against fraud
And looking for evidence of corporate malfeasance
As you may be able to tell, the main purpose of the SEC is to establish transparency in the securities market. One way that it does this by requiring public companies to file quarterly and annual financial reports available to the public. This system of checks and balances forces public companies to be honest about their financial situations with an ability to enforce mandates.
The SEC might also monitor the Standards and Poor’s ratings and Moody’s ratings to ensure their integrity and that they aren’t misleading investors.
Federal Deposit Insurance Corporation (FDIC)
You’ve probably heard of the FDIC the most as it is an overseeing regulatory agency that provides deposit insurance to banks and financial institutions. Most trustworthy banks have FDIC insurance.
The Federal Deposit Insurance Corporation (FDIC) provides banks with at least $250,000 deposit insurance on all accounts within that bank or institution. Through this deposit insurance, the FDIC is able to preserve the public’s confidence in the US financial system. The FDIC is just one branch of the US financial regulations strategy, and it examines over 4,000 banks for soundness and operational safety.
The FDIC only insures checking accounts, savings accounts, and certificates of deposit (CDs). It does not insure bonds, stocks, or mutual funds.
As you can see, just keeping up with the number of compliance regulations and agencies is a lot. Luckily, you can use a service model to offset the cost and time to start up that most financial institutions require.
Sila offers compliance-as-a-service and stablecoin-as-a-service to help fintech businesses get up and running faster:
The as-a-service model for compliance provides businesses with a fully prepared framework for following the necessary financial compliance requirements.
Our compliance-as-a-service provides the tools to become initially compliant, especially since this startup period takes longer (compared to other general startup procedures) and is extremely costly.
Not being compliant can cost you too, so it’s important to get this process confirmed.
Here’s what you could expect if you were to hire Sila’s compliance-as-a-service:
Funds in accounts are optimized to the appropriate regulatory requirements, based on industry and payment handling needs
Sila reviews your procedures to make sure they hit compliance obligations
Businesses are provided support so they better understand payment issues and compliance for long-term operating
Sila advises on remediating payment issues
Your technical security policies and requirements are audited to make sure they meet compliance
Sila provides high-level compliance consultants for expertise around compliance
If you use the Sila SDK package, then your team can build an API for financial transactions that is already partially compliant. Here is how compliance is built into the Sila API structure:
Cash deposits are held in accounts that are FBO and FDIC-member protected (via Bank Evolve Bank & Trust)
All users are outside the flow of funds to limited liability
The API uses trusted third-parties for KYC & KYB (and they follow compliance requirements from all 50 states) and bank-account linking (for secure transaction storage and sending)
The API is non-custodial by default
Sila issues stablecoins in accordance with the US’s Office of the Comptroller and of the Currency
Sila’s compliance-as-a-service model also provides operational compliance:
Support with SARS filings, bank audits, and OFAC checks
Compliant identity verification: Customer Identification Program (CIP), Anti-Money Laundering (AML), and Bank Secrecy Act (BSA)
Access to CIP and ACH Authorization doc templates
Comprehensive fraud prevention
Customers are also educated and/or trained on the following items:
The appropriate regulations
Customers’ responsibilities under these regulations
What Sila will handle on the business’ behalf
Where businesses need to fill gaps in compliance (i.e., what Sila doesn’t handle)
Risks associated with failing compliance
Sila’s compliance-as-a-service offers not only the ability to get compliant but also resources, support, and knowledge to remain compliant and scale so that your business can do it on its own eventually.
Get support through the startup years to become fully compliant and startup faster. Then, decide to remain with Sila or wean off Sila support to scale and implement compliance internally.
Using Sila’s stablecoin-as-a-service also eliminates many international bank transfer risks and additional compliance hurdles through the IAT.
This service provides:
Compliance around stablecoin use
Having pre-built stablecoin SDKs as part of your accepted payment methods
Engineer support to design and implement a banking app with stablecoin functionality
Ongoing support and training
Cut the cost of financial startups with a stablecoin SDK while remaining compliant and getting ahead of the competition.
Why You Need Sila’s Compliance and Stablecoin Services
Fintech compliance is complex, takes time, and can be costly. However, you can offset these negatives by using a compliance-as-a-service model. You can also consider stablecoin-as-a-service to offset more downtime and offer crypto payment options to your clients or as part of your service.
By using Sila, you are outsourcing OFAC, SARS filings, bank audits, and identity verification checks like Customer Identification Program (CIP) and Anti-Money Laundering (AML) regulations, as well as Bank Secrecy Act (BSA). You also get ACH transaction capabilities and the ability to create a fully insured digital wallet.
If you operate in a certain industry, becoming initially compliant might require extra unforeseen steps. Compliance often takes two to three years and thousands of dollars. Fintech companies that handle sensitive data often require PCI-SSD hardware and are audited under additional security requirements. And third-parties that operate through the app might require certain authentication (for them to be compliant) and identity verification, and non-custodial defaults.
Operating but failing compliance so could result in fines. Take advantage of our stablecoin and compliance services to get compliant faster, startup faster, save time, money, and maintain compliance for strong customer trust and peace of mind.