A practical look at how internal control failures—not policy gaps—are driving regulatory penalties.
The European financial services sector—spanning traditional banks, emerging fintech firms, and the rapidly evolving space of Crypto-Asset Service Providers (CASPs)—has seen a marked increase in regulatory enforcement actions in recent years. From anti-money laundering (AML) breaches to data protection violations and failures in consumer safeguards, institutions across the EU are facing mounting fines from national and supranational regulators, including the European Central Bank (ECB), European Banking Authority (EBA), and Data Protection Authorities under the GDPR framework.
Despite the presence of formal compliance frameworks, certified personnel, and written internal policies, many firms are still falling short of regulatory expectations. For compliance officers, this presents a pressing challenge: why do infractions persist even in firms with well-established compliance functions?
The answer often lies in the weakness or inconsistency of internal control frameworks—the operational backbone that enables regulatory requirements to be effectively implemented and enforced.
A Shift from Policy to Practice
Take, for example, a bank with a sound AML program and a dedicated team of compliance experts. If its customer due diligence (CDD) process is inconsistently applied across branches or overly reliant on manual checks without data validation tools, the risk of non-compliance remains high. In fintechs, even with strong GDPR policies in place, poor access controls and inadequate system integration can expose sensitive customer data, resulting in substantial penalties under data protection law. CASPs, often navigating emerging regulatory regimes such as MiCA (Markets in Crypto-Assets), face additional challenges due to underdeveloped internal controls around transaction monitoring, digital wallet security, and asset custody.
For all these entities, the critical risk is not only regulatory scrutiny—but a false sense of security based on policy documents that fail to translate into practice.
Common Gaps Undermining Internal Control Effectiveness
Several systemic issues are frequently observed across EU financial institutions:
1. Design Deficiencies
Policies may appear compliant but lack operational clarity. For example, a transaction monitoring policy that mentions suspicious activity without defined thresholds, risk typologies, or escalation mechanisms is unlikely to support real-time intervention.
2. Implementation Gaps
Uniformity across entities—especially cross-border operations—is vital. Disparities in training, unclear responsibilities, or failure to embed controls in business processes can lead to inconsistent execution of even the best-designed frameworks.
3. Operational Weaknesses
Controls must evolve alongside changing risk landscapes, business models, and regulations. Poor segregation of duties, lack of second-line review, or outdated manual processes can quickly become compliance liabilities—particularly in complex or high-volume environments.
4. Monitoring and Oversight Deficiencies
Effective governance requires both real-time monitoring and structured review. Where there is limited internal audit capacity, weak compliance dashboards, or delayed escalation of incidents, minor breaches can compound into significant enforcement actions.
5. Technological Shortcomings
Fragmented systems, lack of automation, and cybersecurity vulnerabilities create significant obstacles to regulatory compliance—especially under regimes such as the Digital Operational Resilience Act (DORA). For fintechs and CASPs, who rely on technology as core infrastructure, these risks are even more pronounced.
A Blueprint for Stronger Internal Controls
To comply not only in letter but in spirit, EU financial institutions must invest in operational resilience and cultural alignment across their control environment. Key pillars of an effective internal control framework include:
A Robust Control Environment
Instill a culture of integrity, backed by leadership commitment, clear governance structures, and well-defined accountability at all levels.
Dynamic Risk Assessment
Continuously assess legal and regulatory risks relevant to business activities, particularly in light of evolving EU regulations such as MiCA, DORA, and the Anti-Money Laundering Package.
Clearly Defined Control Activities
Documented, delegated, and embedded into operational workflows—control activities should include authorization checks, reconciliations, access management, and oversight of third-party relationships.
Integrated Information and Communication Systems
Accurate, timely, and actionable data must flow across departments to support compliance, risk, and business operations in unison.
Continuous Monitoring and Testing
Regular internal audits, compliance testing, and management reviews are critical to assessing control effectiveness and driving continuous improvement.
The Bottom Line for Compliance Officers
The increasing frequency and severity of regulatory fines across Europe underscore one truth: policy alone is no longer enough. The true test of a compliance framework lies in its execution—and that depends on robust internal controls. As EU regulations continue to expand in scope and complexity, financial institutions must evaluate their internal control maturity not just by what is written, but by what is working.
For compliance officers, this is both a challenge and an opportunity: to lead the charge in embedding compliance into the operational DNA of the organization—and to move from reactive remediation to proactive resilience.
Simon Academy © 2025
Created with
