Homework Question on The Red Flag Rule
- Answer the following questions in essay form:
- What business risks does the Red Flags Rule protect against? Briefly discuss who is covered by the Red Flags Rules and how does a subject entity demonstrate compliance with Red Flags Rule?
- Describe “internal control” as it relates to a corporate compliance program. Identify the five interrelated components of internal control and briefly describe how their implementation impacts internal control.
Homework Answer on The Red Flag Rule
The Red Flag Rule and its application
The red flag rule is a Federal Act that guards banking agencies, credit unions and trade commissions against the risks of identity theft. The rule became effective on 1st January, 2008 with the intentions of assigning reasonable procedures that would assist financial institutions and creditors with the opportunity to investigate, identify, and prevent identity theft (Finklea 51).
In an attempt to prevent the risk of identity theft, the rule spells out provisions that govern transactions involving debit and credit cards in which case the card issuers are in a position to receive notification in case there is a change in customer’s billing address. Apart from guarding against the risks of identity theft, the rule ensures process validity by providing financial institutions and creditors with flexible compliance efforts as well as maintaining a focus on Red Flags that are only relevant to particular businesses.
This means that the rule allows stakeholders to judge financial institutions and creditors based on the overall effectiveness of the business and enterprise program (Finklea 54). In order to address the risks attached to financial performances, the rule requires depository institutions to apply the “know you customer” rule as outlined under section 326 of the PATRIOT Act. The red flag rule becomes only effective where the financial institutions are in a position to incorporate relevant policies and procedures attached to customer identification programs (Finklea 55).