Basel Committee on Banking Supervision (BCBS) has identified Compliance Risk as one of the major risk faced by banks. In this context, explain the Basel Committee's principles for managing 'Compliance Risk' in banks.

Basel committee has defined "Compliance risk" as the risk of legal or regulatory sanctions, material financial loss, or loss of reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities (together, compliance laws, rules and standards). Basel Committee's Principles The bank's board of directors is responsible for overseeing the management of the bank's compliance risk. The board should approve the bank's compliance policy, including a formal document establishing a permanent and effective compliance function, the board should oversee the implementation of the policy, including ensuring that compliance issues are resolved effectively and expeditiously by senior management with the assistance of the compliance function. The bank's senior management is responsible for the effective management of the bank's compliance risk. Senior management should, with the assistance of the compliance function at least once a year, identify and assess the main compliance risk issues facing the bank and the plans to manage them, report to the board of directors or a committee of the board on the bank's management of its compliance risk and report promptly to the board of directors or a committee of the board on any material compliance failures. The bank's senior management is responsible for establishing a permanent and effective compliance function within the bank as part of the bank's compliance policy and take the necessary measures to ensure that the bank can rely on a permanent and effective compliance function. The bank's compliance function should be independent. Head of Compliance should not be placed in a position where there is a possible conflict of interest between his compliance responsibilities and any other responsibilities he may have and Banking supervisors must be satisfied that effective compliance policies and procedures are followed and that management takes appropriate corrective action when compliance failures are identified. Compliance starts at the top. It will be most effective in a corporate culture that emphasizes standards of honesty and integrity and in which the board of directors and senior management lead by example and compliance function staff should have access to the information and personnel necessary to carry out their responsibilities. The bank's compliance function should have the resources to carry out its responsibilities effectively. Compliance function staff should have a sound understanding of compliance laws, rules and standards and their practical impact on the bank's operations. The compliance function should advise senior management on compliance laws, rules and standards, including keeping them informed on developments in the area. The compliance function may have specific statutory responsibilities (e.g. fulfilling the role of anti-money laundering officer). It may also contact relevant external bodies, including regulators, standard setters and external experts. The scope and breadth of the activities of the compliance function should be subject to periodic review by the internal audit function. Compliance risk should be included in the risk assessment methodology of the internal audit function, and an audit program that covers the adequacy and effectiveness of the bank's compliance function should be established, including testing of controls that commensurate with the perceived level of risk. Banks should comply with applicable laws and regulations in all jurisdictions in which they conduct business, and the organization and structure of the compliance function and its responsibilities should be consistent with local legal and regulatory requirements. Procedures should be in place to identify and assess the possible increased reputation risk to the bank if it offers products or carries out activities in certain jurisdictions that would not be permitted in its home jurisdiction. Compliance should be regarded as a core risk management activity within the bank. Specific tasks of the compliance function may be outsourced, but they must remain under the appropriate oversight of the head of compliance.