Part 1 in a 2-part series. Read Part 2.
From the codified law of Hammurabi to the paper currency of the Chinese empire, regulations have been around for different reasons – financial, political, or a combination thereof – for centuries. In recent human history, as governments were formed, regulations became a way of ensuring public safety, from how we drive our cars to more complex regulations covering trade and business. In the last 50 years, regulations are not only getting more complicated, but also global, with international trade agreements and coalitions coming into the picture.
The shift to real-time compliance
Despite their deep-rooted presence in socio-political history, regulations have always been an afterthought, be it in terms of implementation or execution. Businesses submit a summary of transactions every month and individuals file tax returns every year. This is because none of these entities has real-time data available.
However, the way we interact with each other has changed dramatically. Normal communication has become real-time, where WhatsApp and WeChat have almost ousted email. Governments and businesses are looking to bring this aspect of communication and data transfer into their processes.
What this really boils down to is that, thanks to real-time regulatory compliance checks, periodic regulatory reporting is losing its relevance. Businesses need to define the most current and relevant strategy to stay compliant in the future.
“Mere technology-driven compliance in a country’s regulatory framework is time-worn. It is the real-time compliance monitoring, through the use of data analytics tools, which drives present-day norms in the evolving and expansive risk space.”
– Radhika Verma, Partner at LnCo Advisors.
The impact of real-time compliance (or the lack of it)
Being real-time also changes the way businesses, governments, and individuals behave. Such a system or platform requires more clarity and less trust. Sounds contradictory, right? Let us dive into what it means.
In the example of the Volkswagen-EPA emission test scandal, where a piece of software was used to rig the car so it behaved differently in different settings, the biggest questions that emerged were: Why was the software not detected earlier? Where was the provenance of the software? What is the clear workflow of the software that Volkswagen employees could see? If this was available, could the scandal have been detected earlier?
Another example of the failure of conventional regulatory compliance checks is the Bernie Madoff scam. The mechanics of the scam were simple. Whenever Madoff determined a customer’s return, two bank offices would backdate the trade and manipulate the accounts to produce required higher profits. Why was this not detected, despite the presence of the latest accounting software?
If we analyze where the problem lies, it is in capturing real-time data, proving its provenance, and detecting unusual patterns. The means to achieve these objectives already exist, and governments and businesses are racing to adopt these technologies.
Disrupting the regulatory landscape
In the next blog, we’ll look at how these pillars hold up the regulations.
Learn more about detecting fraud with compliance software solutions.