So let me start by giving you a banking supervisor’s view of internal controls. But first, what exactly do we mean by “internal controls”? The definition I would suggest, which is borrowed from the Basle Committee on Banking Supervision, is that internal controls refers to the ongoing process by which the Board of Directors and management of an institution ensure that the institution meets three key sets of objectives. First, operational objectives - the efficiency and effectiveness of the institution in using its assets and other resources and in protecting the institution from loss. Second, information objectives - the reliability and completeness of financial and management information needed for decision-making within the institution and for regulatory and other external uses. Third, compliance objectives - compliance with applicable laws and regulations, supervisory requirements, and internal policies and procedures, in order to protect the institution’s franchise and reputation. What, then, are the main elements of the sort of control systems needed to achieve these objectives? Basically, there are five inter-related elements: management oversight and the control culture; risk assessment; control activities; information and communication; and monitoring activities. The Basle Committee on Banking Supervision has recently put all this together into a set of fourteen principles for regulators to use in evaluating institution’s internal control systems. I do not propose to run through these one by one, but I would like to pick out one or two points so as to give you an idea of what I, as a regulator, see as the key ideas.
Mr. Carse gives a banking supervisor’s perspective on control issues in financial institutions Speech by the Deputy Chief Executive of the Hong Kong Monetary Authority, Mr. David Carse, at the BanComp ’98 conference in Hong Kong on 25/5/98. I am pleased to be here this morning to speak to you at the start of this conference on internal controls and anti-money laundering. The advertised title of my speech is “Understanding the role and needs of the regulator in all authorised financial institutions”. This is a very broad subject and I have therefore narrowed it down to focus on the banking supervisor’s perspective on control issues in financial institutions. I am sure there are many compliance and audit professionals in the audience today, so I trust I should not have too hard a hard job persuading you that good internal controls are not only important, but crucial to the success of financial institutions. Just consider, for example, what poor internal controls did for BCCI, Daiwa Bank and Barings. So what advice can I offer you today to help you ensure that your institution will not meet the same fate? Well, what I will do is to share with you my thoughts on the key elements of a financial institution’s control systems, and highlight some of the areas where other institutions have gone horribly wrong. I will also talk about one of the key areas of a financial institution’s controls its controls against being used for money laundering.