Mateusz Pniewski

CEO @ TransactionLink

Making Sure Your Fallback Rules are Compliant with Industry Regulations

Contingency plans can prevent risk. An integral part of this plan is the fallback rules. Find out what Fallback rules are & how to use them effectively in compliance in this article.

As no business can predict the future, it’s important to prepare for a range of eventualities. This is called contingency planning. Contingency plans allow businesses to mitigate risk by plotting out processes that might be needed if something goes wrong.

Contingency plans cannot stop bad things from happening, but can prevent risk or reduce its impact. An integral part of a contingency plan is the fallback plan or rules. Fallback rules are used when the primary action plan is insufficient due to  an event that has already occurred, or may happen soon.

Compliance Programs and Fallback Rules?

Corporate compliance programs require adherence to both federal and state regulations, as well as internal policies and processes. Enforcing compliance enables your business to avoid penalties and legal action by assisting in the detection and prevention of rule infractions. 

The main goal of corporate compliance programs is to safeguard your company. This can be through assisting you in avoiding waste, fraud, abuse, discrimination, and other behaviours that jeopardise operations and your business. In safeguarding your business, a major responsibility of corporate compliance is to monitor all risks your business may face in the future. This includes ensuring the fallback strategy is adequate to mitigate risks and in line with rules and regulations in your geography and industry. 

When are Fallback Rules important?

A contingency plan is a mandatory strategy designed to accommodate unforeseen events. A contingency plan's main goal is to make sure there are prompt, suitable, and effective reactions to potential future events.

A fallback plan is used in the event the contingency plan is unsuccessful. When the first and second plans don't work out, a third plan that serves as a fallback becomes necessary.

The following are the few of the instances where fallback rules are important:

  • For future financial forecasting of the business
  • Implementing SEC rules and regulations company wide
  • Expanding a business into a new industry or country
  • Onboarding a new vendor

Examples of Fallback Rules

Example #1

For Know Your Customer (KYC), automation is hugely important to make verification faster during customer onboarding. It's a method that saves both time and resources while increasing the likelihood of customers completing the onboarding process.

Let’s imagine a bank is digitally onboarding a new client and the client uploads their ID documents. For some reason, the automated procedure is rejecting this document. There isn't a clear explanation as to why. It could be that the picture is hazy or blurry, or it could be more complex. As a result, the system flags the document as a false positive, or more accurately, a mislabeled security alert, and raises a problem that has to be resolved. This is where a fallback rule comes into play. This bank’s rule could be that an employee will manually inspect the ID and confirm that it is a genuine, legitimate piece of identification.

Example #2

When it comes to Know Your Business (KYB), a company must submit numerous papers, such as its financials, corporate registration information, company house registration numbers, Ultimate Beneficial Owner (UBO) information, and more, during the digital onboarding process.

Compared to ID checks, these documents present a much greater difficulty. There’s a vast amount of data, and many of the files can't be automatically categorised. Before they’re approved or rejected due to their flaws, they will need to be examined and verified by someone.

Banks and other regulated institutions including insurance companies, markets, gaming platforms, and others are among the entities required to routinely verify their clients' continued financial soundness.

This entails checking to see if any of the clients have recently been added to penalty lists, for instance. Additionally, it requires ensuring that they remain the company's owners. The ultimate beneficial owners (UBOs) may occasionally change, but the business may not have declared the change or neglected to update its corporate records.

When the appropriate information isn't supplied at the right time, banks may need to apply fallback rules and have a person look into the situation and make an effort to correct any of the data that hasn't been updated and  manually examine a UBO for signs of money laundering (AML).

Example #3

Recently, governments have asked banks to spot accounts connected to the Russian government after the invasion of Ukraine. Bank data must be current if a regulator instructs them to freeze Russian assets. Where do the account owners live? What do they own, who do they work for, and who are they? A fallback strategy to assign trained AML/CFT officers to carry out the task will come into play in this scenario to successfully be compliant with government provisions as automated systems are limited.

Fallback Rules and Industry Regulations

There is a lot involved in creating a compliance program. It’s important that you spend enough time on each part of the process to ensure that all requirements are adhered to. This is especially true for fallback rules as they help to manage risk within the business. No business is safe from fraudulent activities. By making sure your fallback rules are robust, you can protect your business and clients against unforeseen risks.

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