Financial Crime Compliance for Super Regional and Regional Banks: Achieving Tier 1 Standards Without Tier 1 Resources

As larger financial institutions create sophisticated financial crime compliance (FCC) infrastructures and threats from illicit actors grow more complex, super regional and regional banks are expected to keep pace despite operating with smaller teams and sometimes tighter budgets.

This article explores how super regional, regional, and mid-size banks can strengthen their financial crimes compliance programs by adopting a more efficient, intelligence-driven, and risk-based approach. It also covers how to optimize sanctions screening practices and broader financial crime detection practices for small banks and build cost-effective financial crimes compliance programs, whether meeting Bank Secrecy Act (BSA) requirements or navigating similar frameworks in other jurisdictions.

The Compliance Challenge for Smaller Banks

While regulators like the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Financial Crimes Enforcement Network (FinCEN) recognize the need for tailored approaches based on an institution’s risk profile and operational scale, they continue to maintain strong expectations for the effectiveness of financial crime compliance programs across the industry.

A notable example is the 2022 Finding of Violation issued by the Office of Foreign Assets Control (OFAC) to MidFirst Bank, a U.S. financial institution with over $40 billion in assets. The bank processed dozens of transactions for newly sanctioned parties due to a misunderstanding of how frequently its sanctions screening vendor updated the SDN List. MidFirst’s provider only screened the bank’s entire customer base against new Specially Designated National (SDN) List entries once a month, leaving a critical gap that led to violations under the Weapons of Mass Destruction Proliferators Sanctions Regulations. In its finding, OFAC made clear that the responsibility for effective screening ultimately rests with the financial institution, not the vendor.

Failure to modernize transaction monitoring, sanctions screening, or due diligence related to sanctioned entities, or the 50% Rule, may result in serious enforcement consequences. As regulatory expectations continue to evolve, smaller banks must take a more strategic and proactive approach to financial crimes compliance.

Yet as global regulatory requirements continue to rise and scrutiny intensifies, many institutions struggle to shift from reactive to proactive compliance – often responding to headlines, audits, or policy changes despite efforts to adopt a longer-term strategy. These efforts are frequently constrained by structural limitations, including:

• Lean compliance teams with limited bandwidth
• Outdated or manual legacy systems that don’t scale with risk
• Fragmented data across departments or silos

These constraints may make it difficult to implement the sophisticated, risk-based compliance programs regulators increasingly expect.

The Pillars of Effective Financial Crimes Compliance

Effective FCC programs are built on several foundational elements:

• Senior Management Commitment & Governance
  A modern program starts with a clear tone from the top. Boards and executives allocate resources, empower compliance staff, and oversee escalation channels.
• Enterprise-Wide Risk Assessments
  Regular, documented assessments identify products, customers, geographies, and delivery channels that present the highest money laundering, terrorist financing, sanctions, and proliferation risks, allowing controls to be proportionate.
• Policies, Procedures & Internal Controls
  Written, risk-based policies translate regulatory requirements into day-to-day processes (such as onboarding, screening logic, and escalation paths) and are updated as laws or the firm’s risk profile evolve.
• Customer Due Diligence & Beneficial Ownership
  Robust CDD, including verification of ultimate beneficial owners, establishes a baseline understanding of counterparties and flags higher-risk relationships for enhanced review.
• Sanctions Screening & Transaction Monitoring
  Automated and manual controls identify direct and indirect exposure by screening or monitoring names, ownership chains (including the 50 Percent Rule), and transactional behavior against up-to-date lists and typologies.
• Independent Testing & Audit
  Qualified, independent parties periodically test the program’s design and effectiveness, report findings to the board, and confirm that remedial actions have addressed identified gaps.
• Ongoing Training & Awareness
  Role-specific, documented training keeps employees and relevant third parties up to date on legal obligations, red-flag indicators, and internal procedures.
• Suspicious Activity & Sanctions Reporting
  Clear protocols ensure the timely filing of Suspicious Activity Reports, blocking/OFAC reports, and other required regulatory notifications when potential violations or unusual activity are identified.
  
• Record-Keeping & Documentation
  Firms maintain audit-ready records of CDD files, screening results, investigations, and reports in accordance with local retention requirements, supporting both internal reviews and external examinations.
• Continuous Improvement & Data/Technology Governance
  Results from testing, regulatory feedback, and emerging threats inform updates to models, data quality controls, and workflows. These updates support an ongoing cycle of improvement that keeps the program effective over time.

A range of laws, rules, and regulatory guidance frameworks such as the aforementioned BSA, FFIEC BSA/AML Examination manual, FinCEN’s CDD Rule under the BSA, Section 312 of the USA PATRIOT Act, the OCC’s supervisory guidance, OFAC’s Framework for Compliance Commitments, as well as the Anti-Money Laundering Act of 2020, FinCEN’s National AML/CFT Priorities, NYDFS Part 504 Rule, OFAC’s Economic Sanctions Enforcement Guidelines, and the FATF 40 Recommendations outline the required controls for financial institutions. This list is not exhaustive, but highlights several foundational sources that shape AML and sanctions compliance programs.

But execution is what separates passive, at-risk programs from effective ones.

Achieving Tier 1 Compliance With Tier 2 Resources

The challenge for smaller banks often lies in achieving a reasonable level of compliance effectiveness while operating within resource constraints. Mid-size banks don’t need to match large institutions’ spending dollar-for-dollar; rather, their investments in technology and data should be guided by a clear risk assessment and aligned with their institutional profile, risk appetite, and tolerance, ensuring resources are deployed where they can have the greatest impact.

This includes leaning on modern solutions that address critical areas where external intelligence and better data quality, in conjunction with automation, can bolster the work of smaller internal teams. That’s where solutions like Kharon come in for any institution looking to improve the effectiveness of its FCC program.

An Intelligence-Driven Approach

Legacy compliance tools often rely exclusively on limited static lists or simple adverse media resources. But today’s financial crime threats are dynamic and require more than just automation. Banks need structured, contextualized intelligence that can surface hidden risks and guide smarter decisions.

Smaller banking institutions can leverage external intelligence to:

• Prioritize risk indicators, such as ownership structures, geographic exposure, and counterparties with complex affiliations—for deeper review
• Expose hidden ownership and control structures and indirect sanctions exposure that list-based tools often miss
• Identify material connections between clients, counterparties, or transactions and entities subject to sanctions, export restrictions, or investment prohibitions
• Enhance financial crimes compliance by exposing networks tied to corruption, terrorist financing, and transnational organized crime
• Strengthen sanctions and export controls programs through visibility into indirect ownership, trade activity, and high-risk jurisdictions
• Manage third-party and trade finance exposure by uncovering affiliations with restricted parties, risky intermediaries, or entities operating in sensitive sectors or geographies
• Inform customer onboarding, ongoing monitoring, and escalation workflows with curated intelligence aligned to internal risk appetite and evolving regulatory expectations

Rather than expanding headcount, investing in legacy systems, or allocating significant time to train new staff to investigate and analyze open-source data, smaller banks can achieve stronger outcomes by integrating structured intelligence into existing compliance processes.

Reducing False Positives

False positives consume valuable time and bandwidth, and divert limited resources from genuine hits or concerns.

Excessive alerts can also:

• Disrupt day-to-day operations by overloading investigative teams and straining cross-functional workflows
• Undermine examiner confidence in your compliance program
• Prolong investigation timelines and delay legitimate threat detection
• Contribute to SAR backlogs and increased risk exposure
• Create unnecessary friction for legitimate customers

Reducing false positives starts with improving the quality of alerts. By using more accurate and complete data, incorporating machine learning models, and establishing feedback loops to refine screening parameters, smaller banks can dramatically reduce noise and sharpen their focus on the alerts that matter.

The value of accurate and high-quality data cannot be overstated in this context, as it can lead to a substantial reduction in over-screening and the associated wasted resources. This institutional efficiency and cost savings are crucial for entities operating with smaller teams.

Building a Scalable, Cost-Effective Compliance Program

Smaller teams need flexibility, scalability, and agility, not large and rigid platforms.

Several strategies can help achieve this:

• Conduct regular risk assessments to guide resource allocation: Well-executed risk assessments can inform decisions around tooling, staffing, and oversight, and make sure your compliance investments are aligned with your actual risk profile, not just regulatory checklists.
• Leverage a customizable risk-intelligence feed: Opt for a platform that lets you dial in exactly the data you need, adjusting ownership thresholds, geography filters, or sanctions-program focus as your needs change, so your feed evolves with your risk profile instead of forcing a one-size-fits-all view.
• Outsource strategically: Outsourcing of certain compliance functions can provide access to expertise and efficiency gains without the need for significant in-house investment. The right third-party partners can also help teams leverage automation, modernize workflows, and scale capabilities more effectively.
• Invest in your people: Upskilling teams with ongoing financial crime compliance training allows smaller teams to take on more complex tasks more effectively. The best training can be free— especially when it’s targeted and timely. Pairing that training with intuitive tools and structured intelligence can reduce the learning curve and help team members contribute faster.
• Plan ahead for system compatibility and extensibility: Choose screening tools and data integrations that can scale with your needs and adapt to future regulatory and operational requirements.

Financial Crimes Compliance with Kharon

Meeting today’s standards for financial crimes compliance in banking doesn’t have to mean overextending your team or matching the resources of a Tier 1 institution. Kharon offers small banks scalable, intelligence-driven solutions that enhance screening accuracy, strengthen investigations, and improve efficiency.

Kharon’s ClearView and GraphCast platforms equip compliance teams with contextual intelligence that:

• Surfaces hidden ownership and control risks across customer and counterparty networks
• Improves sanctions screening with structured, contextualized data
• Reduces false positives through precise data and advanced network analytics
• Seamlessly integrates into all existing screening, investigative and analytical platforms, both third-party and in-house

By embedding actionable intelligence into your existing workflows, Kharon helps you focus on what matters most: detecting real threats, meeting regulatory expectations, and protecting your institution from reputational and financial harm.

Explore Kharon’s Sanctions and Financial Crimes Compliance solutions