INDIA BUSINESS WORLD - AUGUST 2006
THE MONTH THAT WAS...

US LOOKING TO REGULATE BPOS HERE

THE US Office of the Comptroller of the Currency (OCC), which regulates and supervises US banks and their agencies, is extending its jurisdiction to Indian shores. It is looking at auditing and inspecting Indian BPOs that directly or indirectly serve US banks.

A few weeks ago, a consultative team from OCC was in India , and an inspection/audit team is expected to land here later this year. OCC is looking at inspecting and auditing firms that provide offshore outsourcing services like equity research, analytics, and back office services to US banks.

Till date, OCC had confined itself to inspection of captive operations of US banks like American Express, Citigroup and JPMorgan Chase. Now, it has extended its jurisdiction and scope to Indian BPO companies. Several small and mid-sized BPO firms have been already told by OCC to be prepared for an inspection. A US regulator auditing Indian companies may seem strange, but it's already a practice in the pharmaceutical sector. "The lack of any regulation in India for BPOs means that OCC is able to enforce its norms. Indian BPO companies targeting US banks seem to be headed for US-based controls, possibly more stringent than the US FDA's controls for the pharma sector," Sunil Mehta, spokesperson for apex software industry body Nasscom.

Some Indian BPOs see it as a non-tariff, regulatory barrier being imposed by the US authorities on outsourcing. "We can't really afford this kind of audit, and it means revamping our operations to meet their requirements. But since our customers want it, we have to do it," said an official from a company that is expecting an OCC inspection. Even in its inspection of banks' captive operations in India , OCC is looking at processes outsourced with a fine-tooth comb. There are several mid-office transactions that are now being carried out by captives in India .

Milan Sheth, associate director, Ernst & Young, says, “Mid-office operations are important for OCC as approval or clearance is needed in some of these processes.” Say, loan terms have to be renegotiated due to a change in rating, or a bank is planning to raise the credit limit for a customer. These decisions are made on the basis of the customer's past financial data.

Along with data analytical work, decision making also takes place in Indian BPO firms. OCC wants to examine this part of the captive operations much more closely, to ensure that the processes follow US banking regulations. In some cases, US regulations are very strict about the jurisdiction under which the decision takes place. OCC wants to establish whether this is being followed by the captive units of US banks.

According to officials here, OCC is extending its jurisdiction from a circular it had issued some time back. Under this circular, OCC had warned CEOs of US banks about the risks of outsourcing and the need for paying more attention to managing third-party service providers based outside the US .

The circular also gives powers to OCC to inspect Indian BPO companies. The circular says, “OCC's supervisory approach to cross-border outsourcing will emphasise the responsibility of the serviced national bank to conduct adequate due diligence, manage risks appropriately, comply with applicable laws, and ensure access to critical information with respect to the services being provided by a foreign-based third party.”

“If any of these risk management processes are found deficient, OCC will ask the bank to take necessary steps to strengthen risk management controls or terminate the outsourcing relationship,” adds the circular.

“If circumstances warrant, OCC may examine a national bank's outsourcing arrangement with a foreign-based service provider. If the provider is a regulated entity, OCC may arrange through the appropriate foreign supervisor(s) to obtain information related to the services provided to the bank, and, if significant risk issues emerge, to examine those services.” OCC seems to have taken the mantle of examining these services and audit them.