Risk Management in Heterogeneous Regulatory Environments: A Framework for Interpretable Compliance

Cross-border financial activity reveals a persistent supervisory issue: institutions applying the same regulatory requirements are assessed differently across jurisdictions due to differences in supervisory expectations and evidence standards. This paper argues that the root cause is not insufficient regulation, but heterogeneity in interpretation. Compliance is therefore not only a function of rules and controls, but also of how these are interpreted in practice. We define interpretation risk as the risk that documented compliance is assessed as insufficient by a competent authority due to differences in interpretation of evidence or risk thresholds. To address this, the paper introduces an Interpretable Compliance Framework (ICF), which structures compliance into control objectives, control design, evidence standards, and escalation thresholds. The framework enables institutions to make their interpretation explicit, documented, and reviewable. Using AML/KYC examples, the paper demonstrates how differences in evidence expectations and risk tolerance lead to inconsistent supervisory outcomes. The proposed approach reduces interpretative variance without modifying regulatory requirements and improves auditability, predictability, and supervisory transparency.