prepared to manage these risks. such plans should address any shortfalls ( policy, procedures, implementation or execution ) related to how effectively existing compliance risks have been managed, as well as the need for any additional policies or procedures do deal with new compliance risks identified as a result of the annual compliance risk assessment 9. this risk assessment, together with the subsequent introduction of improvements to the control framework, form an essential step in the ongoing process to ensure adequate control of the risks banks are faced with. aside from the responsibilities of the board of directors and senior management, the paper also mentions principles concerning the status and responsibilities of the compliance function. it is essential that the compliance function has a formal status within a bank. this in order to give the compliance function the appropriate standing, authority, and independence 10. the responsibilities of the compliance function should be to assist senior management in managing effectively the compliance risks faced by the bank. specifically this means that the compliance function should : • advise senior management ; • provide guidance and education to employees on compliance issues ; • identify, measure and assess compliance risks ; and • monitor and test compliance and report the findings through the reporting line in accordance with the bank ’ s internal risk management procedures. once more, i would like to stress the importance of timely identification, measurement and assessment of compliance risks. citing the compliance function paper “ the compliance function should, on a pro - active basis, identify, document and assess the compliance risks associated with the bank ’ s business activities, including the development of new products and business practices, the proposed establishment of new types of business or customer relationship, or material changed in the nature of such relationships ”. the paper continues by stating that the compliance function should consider ways to measure compliance risk ( e. g. by using performance indicators ) and use such measurements to enhance compliance risk assessment. it should assess the appropriateness of the bank ’ s compliance procedures and guidelines, promptly follow up any identified deficiencies and formulate proposals for amendments 11. institutions are expected to tailor their control measures to the risk classification of both their clients, and their products and to implement specific control measures for the nature and severity of the compliance risks posed by each category. therefore, the question that each one of you will need to answer for his or her organisation is : “ how can i be sure that my organisation is compliant? ” the abn amro case 12 recently, the importance of an adequate compliance function was illustrated by events that took place within abn amro,

operating cross border. another challenge is that our understanding of what constitutes sound operational management is continuously changing. what we all understood to be sound operational management five years ago compliance and the compliance function in banks, basel committee on banking supervision, april 2005, paragraph 3. compliance and the compliance function in banks, basel committee on banking supervision, april 2005, paragraph 4. no longer applies. the recent best practices papers produced by the basel committee sustain the view that the understanding of adequate operational management is rapidly changing 5. the number of standards and regulations that banks have to adhere to, is tremendous and not by definition in accordance with how banks in practice have been conducting their businesses. the development of new products and the increasing complexity of the products being offered by financial institutions, are making life even more difficult. the specific risks of these complex products and their global distribution, should be analyzed by banks and be included in their global risk management framework. given the ongoing evolution of the financial markets in asia, it is essential for your institutions, like ours, to analyze the compliance risks that relate to the financial products sold by them, especially since these products will continue to evolve. the increasing globalization, issues with the corporate governance of complex institutions, the continuously changing understanding of what constitutes sound operational management, changing laws and regulations, as well as the ongoing evolution of products - combined with a determination with governments and regulators to fight money laundering, terrorist financing and other illegal financial transactions - all create complex situations for banks that operate cross border. the unavoidable conclusion is that banks need to address these compliance challenges in their risk management programs on a global basis, and that the most stringent requirement quickly becomes the benchmark. when reflecting on these challenges, one may wonder whether the compliance framework in place is robust enough to effectively manage the challenges and risks that financial institutions face. what, then, are the latest developments concerning such compliance framework? closer look at compliance during the last couple of years, various international standard - setting bodies have published papers on compliance related issues. for instance, as a response to the increasingly sophisticated moneylaundering techniques the financial action task force has revised its recommendations in 2003. also, the basel committee on banking supervision published a paper on customer due diligence in 2001 and the consolidated know your customer paper in 2004 6. the cause for these papers was that supervisors around the world were increasingly recognizing the importance for banks to have adequate controls and procedures in place so that they know the customers who they are dealing with