Audit Essentials for Financial Institutions with International Staff

The rise of remote work and globalization has led many financial institutions to expand their talent pool by employing foreign or internationally based employees. While this brings access to a broader range of talent, it also introduces complex compliance requirements, particularly when it comes to the narrow regulatory avenue that financial institutions must navigate. The audit process becomes essential in ensuring compliance with these regulations, as well as international labor laws and financial reporting obligations.

With all this in mind, it should go without saying that there are key audit responsibilities that financial institutions must meet when working with foreign employees, from the Office of Foreign Assets Control (OFAC) compliance program and due diligence for foreign-based service providers to the mechanics of paying foreign remote employees and security concerns. Let’s go over a few of the main auditing considerations that financial institutions should keep in mind when employing internationally-based employees.

The Office of Foreign Assets Control (OFAC) plays a critical role in regulating financial transactions involving foreign entities, and this also includes the employment of international staff. Financial institutions must ensure that their employees – no matter where they are based – do not violate U.S. economic sanctions. To maintain compliance, financial institutions must incorporate these OFAC regulations into their internal audit processes.

Key Audit Considerations for OFAC Compliance:

• Screening Employees and Vendors: OFAC maintains a regularly-updated list of Specially Designated Nationals (SDNs), which includes individuals and companies owned, controlled, or acting on behalf of targeted countries. Financial institutions should regularly audit their workforce and vendor lists against the SDN list to ensure no sanctioned parties are involved.
• Record-Keeping Requirements: Auditors should verify that financial institutions maintain adequate documentation which proves screening procedures were performed before hiring foreign employees or entering into agreements with foreign vendors. These records must be kept for at least five years, per OFAC regulations.
• Employee Training: Audits should assess the institution’s OFAC training program to ensure employees, particularly those involved in hiring, payroll, or international operations, are fully trained to understand the sanctions programs and the risks of non-compliance.

Failure to comply with the above OFAC regulations can lead to severe institutional penalties, including hefty fines and even criminal charges in serious cases. With these potential punishments in mind, lenders and other financial companies must be sure that their OFAC audits are thorough and consistent.

2. Due Diligence for Foreign-Based Service Providers

When employing international employees, it is common for financial institutions to engage third-party service providers for various purposes, such as payroll processing, IT services, and compliance management. Conducting thorough due diligence is essential to mitigate any possible risks related to non-compliance with international and U.S. regulations. While these providers are not directly related to the international employee(s) in question, the very nature of international employment necessitates these steps to ensure a safe and fruitful partnership.

Audit Responsibilities for Due Diligence:

• Verification of Compliance Policies: Institutions must be sure to audit the compliance protocols of their internationally-based service providers, verifying that they align with both local laws and U.S. financial regulatory requirements. Additionally, providers are required to comply with anti-money laundering (AML) regulations and data protection laws.
• Third-Party Risk Assessments: Financial institutions are also responsible for conducting a third-party risk assessment before entering into any agreement. Audits should verify that these assessments have been thoroughly completed and clearly documented. This process often includes evaluating the provider’s financial stability, operational capacity, security measures, and historical performance.
• Contractual Safeguards: Contracts with foreign service providers must include explicit compliance obligations, so that both parties are aware of expectations and applicable rules. Auditors should ensure that clauses related to data privacy, OFAC compliance, and confidentiality are part of these agreements. Furthermore, audit teams should review contract terms regularly to accommodate any possible changes in the regulatory landscape.

 3. Paying Remote International Employees

When employing internationally based staff, financial institutions can face challenging complexities in managing payroll. The methods of payment, tax obligations, and benefits administration often vary depending on the employee's location. In addition, employing foreign staff can trigger additional reporting requirements, such as the Foreign Bank and Financial Account Report (FBAR), if the employee has authority over or signatory rights to foreign financial accounts.

Audit Focus Areas for Payroll and Payments:

• Tax and Regulatory Compliance: Auditors must verify that tax withholding and reporting are compliant with both U.S. tax regulations and those of the country in which the employee resides. This includes evaluating whether the correct tax forms (ex: W-8BEN for non-U.S. citizens) were used and filed on time. Audits should also check for any related tax treaties that may apply.
• Payroll Accuracy: Institutions must ensure that payroll is processed accurately for foreign employees, including currency conversion calculations. Auditors should review payment processes to verify that foreign currency exchange rates are applied correctly and that any fees associated with international transfers are properly accounted for.
• International Tax Reporting: If foreign employees earn income from U.S. based financial institutions, the institution may need to report this income to both U.S. and foreign tax authorities. Auditors must confirm that the institution is in compliance with all tax reporting requirements, including the potential need for filing FBAR for accounts exceeding $10,000 held by foreign employees.

4. Security Concerns

Employing foreign or remote employees in the financial sector requires heightened attention to data security. Financial institutions routinely handle highly sensitive information that are potentially vulnerable to cyberattacks, especially when employees are accessing systems from different countries. Ensuring that security measures are implemented and audited regularly is absolutely essential.

Audit Responsibilities for Security:

• Access Control Measures: Auditors should assess the institution's access control policies to make sure that foreign employees are granted access to only the data and systems necessary for their roles. Multi-factor authentication (MFA) should be enforced for all employees, regardless of their location.
• Data Encryption and Privacy Protections: For financial institutions employing international staff, data transmission across borders must comply with both U.S. regulations (such as the Gramm-Leach-Bliley Act) and the data protection laws of the employee’s country. All sensitive data must be encrypted during transmission and privacy protections enforced.
• Incident Response Plans: All financial institution should have an up-to-date incident response plan in place that accounts for international cybersecurity threats. Remote workers may be more vulnerable to phishing and ransomware attacks, so robust monitoring systems must be in place to detect and respond to threats in real time.

Responsible Audits: An Added Layer of Institutional Protection

As financial institutions increasingly employ foreign and internationally based employees, the difficulty of staying within the boundaries of a complex array of regulations can substantially increase. However, careful and diligent audits play a crucial role in mitigating this difficulty by verifying compliance with OFAC guidelines, ensuring thorough due diligence for foreign service providers, managing payroll and tax obligations, and securing sensitive data.

Regular audits not only help institutions avoid regulatory penalties but also enhance operational efficiency, mitigate risks, and uncover regulatory blind spots that might otherwise have been missed. Financial companies should always be proactive in adapting their audit strategies to the evolving global workforce landscape to maintain compliance and security at all times. By focusing on these critical audit areas, banks, lenders, and other financial institutions can protect their business while taking full advantage of a global talent pool. This approach can minimize the risks of non-compliance, financial penalties, and cybersecurity threats, while maximizing the power that an international staff can bring to the table.