Think Global, Act Local: How Data Residency Regulations Influence Banks’ LLM Use

Banks and financial institutions must adhere to strict data residency laws that dictate where data can be stored and processed. These laws often prohibit the export of regulated data, even in anonymized form. Such regulations, adopted in more and more countries, impact the way banks can use large language models (LLMs) in their operations.

However, this does not mean banks must stop experimenting with generative AI. In fact, there is a solution that encourages innovation AND helps financial institutions comply with data residency laws.

So, read on to learn about data residency regulations in countries around the world and see how locally hosted LLMs can mitigate the associated risks and limitations.

What is data residency?

Data residency means storing and processing regulated data, like personal information, within a specific country or region. As companies that handle primarily sensitive customer data, banks must strictly adhere to localization regulations, which usually aim to maintain privacy, prevent cybercrime, and support the local economy.

While this is relatively easy for banks that work in one country, international banks have to comply with the data residency laws of each country they operate in. And there’s a whole cohort: McKinsey estimates that 75% of all countries have implemented some data residency requirements.

Unsurprisingly, data localization regulations mostly overlap across countries and — worst of all — are often confusing. Whether well-known laws like GDPR or more minor regional laws, data residency regulations require international banks to shift from a uniform global approach to a more localized one, forcing them to set up physical infrastructures and teams in each location.

Importance of Data Residency Compliance for Financial Institutions

The sensitive nature of the data financial companies process means facing additional restrictions, including strict rules on where this data can be stored. Here’s why it's so important for banks to follow all the requirements:

• Data security. Storing data within a specific jurisdiction can enhance security by having data protection measures meet local standards.
• Confidentiality. Ensuring data residency helps maintain the confidentiality of sensitive data and reduce the risk of unauthorized access and breaches.
• Disaster recovery. Local data storage can improve disaster recovery and business continuity planning, ensuring critical data is available in case of emergencies.
• Operational efficiency. When data is stored and processed locally, latency decreases and data-intensive applications like LLMs perform better.

Overall, data localization reduces risk by ensuring compliance with local laws, thus avoiding fines and potential operational restrictions. For example, in July 2021, the Reserve Bank of India banned Mastercard from issuing new cards because the company didn't store payment data within the country. 

Users also care about how financial organizations protect data and have high expectations for how their information is handled. Banks can improve their reputation and attract new customers by being seen as trusted guardians of data privacy. Some banks even tout their strict data policies to gain an advantage over competitors that don't have similar safeguards in place.

Data Residency Challenges and Solutions for Banks

Complying with all these rules does come with a set of challenges, like compliance costs. Implementing data residency requirements can be expensive and needs investment in local data centers or hybrid cloud solutions. Managing data across multiple jurisdictions with different regulatory requirements can also be complex and resource-intensive. And, of course, restrictions on data transfers can limit the ability to use global cloud service providers, potentially reducing flexibility and scalability.

However, a mature financial institution can always solve this with:

• Data governance frameworks. Implementing sound data governance practices to ensure that user data is managed in line with legal requirements across all jurisdictions.
• Hybrid cloud models. Combining local data storage with cloud services that comply with data residency regulations can strike a balance between compliance and flexibility.
• Locally hosted solutions. Using local or on-premises data centers to host sensitive data and applications, including LLMs, ensures regulated data access and compliance with data residency laws.

Let’s take a closer look at how locally hosted large language models can solve privacy issues, help banks comply with local laws, and allow them to innovate in a regulated environment.

Locally Hosted LLMs: Compliance Plus Innovation

Investing in physical local infrastructure for training and deploying LLMs comes with many advantages: 

• Adherence to local laws. Hosting LLMs on-premises ensures data remains within a set location, as required by regulations.
• Controlled environment. Locally hosted LLMs offer better control over data access and security measures.
• Reduced exposure. Minimizes the risk of data breaches and unauthorized access by limiting data transfer to external servers.
• Faster processing. On-premises LLMs provide lower latency and faster response times, which are crucial for financial applications.
• Reliability. Greater control over infrastructure improves reliability and uptime.

Now that we’ve discussed data residency and why banks must comply with it, let’s examine some of the most popular — and demanding — data privacy regulations across the globe.

Data Residency Laws in Europe

Strong legal and regulatory environments in European countries help ensure data privacy, and compliance.

European Union (EU)

The General Data Protection Regulation (GDPR) is probably the best-known of these laws. It stipulates that personal data may only be stored within the EU or transferred to a location with equivalent data protection standards (many similar regulations follow this pattern).

Financial businesses and other entities operating in the EU must obtain explicit consent for data processing, which greatly benefits the security of customer data. However, restrictive data-sharing rules imposed by the government limit the ability to use cross-border cloud services for LLM training and deployment.

If you want to learn more, please read our article on using LLMs under GDPR.

Switzerland

One of the few European countries that is not part of the EU, Switzerland can boast the Federal Act on Data Protection (FADP) — a robust data protection law comparable to GDPR. The country is also known for its banking secrecy laws, which safeguard confidential data.

United Kingdom

After Brexit, the UK introduced its own version of GDPR, which enforces strict data protection standards. However, the UK is still part of Europe, so financial institutions operating in both regions must comply with both the EU and UK data protection laws. This need for a dual compliance framework makes operations even more complicated.

Data Residency Laws in North America

While North America technically only consists of two countries, the US state and federal laws make compliance a real challenge.

United States

Varied federal laws (e.g., Gramm-Leach-Bliley Act — GLBA) and data protection standards across states (e.g., California Consumer Privacy Act — CCPA) complicate nationwide LLM implementations. On top of that, financial businesses must comply with sector-specific laws.

Canada

Canada has strict privacy laws that protect personal data under the Personal Information Protection and Electronic Documents Act (PIPEDA). Additionally, the Office of the Superintendent of Financial Institutions (OSFI) provides data residency and outsourcing guidelines for banks.

Data Residency Laws in Asia

The following Asian countries have developed strong data residency regulations.

Singapore

Singapore’s Personal Data Protection Act (PDPA) provides comprehensive data protection measures. It also includes provisions for data residency, which helps financial institutions manage and use LLMs within a clear regulatory framework. In addition, the Monetary Authority of Singapore (MAS) offers guidelines for technology risk management, making Singapore a leading hub for fintech and financial services.

Japan

The Act on the Protection of Personal Information (APPI) sets strict guidelines for collecting, using, and transferring personal data in Japan. APPI allows data transfers to countries with adequate data protection measures, providing flexibility for multinational financial businesses.

South Korea

South Korea’s Personal Information Protection Act (PIPA) is one of the strictest data protection laws in Asia. It prescribes strict security measures for customer data and contains data residency requirements to ensure that data is stored and processed in South Korea or transferred under certain conditions.

Hong Kong

Hong Kong’s Personal Data (Privacy) Ordinance (PDPO) provides a tight legal framework for data protection. It contains clear data residency provisions that support the use of advanced technologies, such as LLMs, by financial institutions. Furthermore, the Hong Kong Monetary Authority (HKMA) offers additional guidelines for data protection and risk management in the financial industry.

India

Though still evolving, India’s Digital Personal Data Protection Act (DPDP) sets out comprehensive data protection standards that align with global best practices. It requests data localization for certain types of sensitive data and ensures that important financial data is stored in the country. At the same time, the Reserve Bank of India (RBI) provides specific guidelines for financial businesses on data protection that support the compliant use of LLMs.

Data Residency Laws in Australia

The Privacy Act 1988 stipulates that customer data must be stored and processed in compliance with strict data protection and security standards. Data transfers overseas are only permitted if the recipient location provides equivalent protection.

The Australian Prudential Regulation Authority (APRA) offers additional guidelines for data protection and risk management in the financial sector, which benefits banks using LLMs.

Data Residency Laws in the Middle East

The Middle East is a hot fintech market, so it’s no surprise that its biggest players have adopted local data residency laws.

United Arab Emirates

The UAE boasts its Federal Decree-Law No. 45 of 2021 on the Protection of Personal Data (PDPL). It contains comprehensive guidelines for data protection, requiring that customer data must be stored and processed within the UAE unless stringent conditions for cross-border transfer are met.

In addition, both the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) have their own data protection laws, which align with international standards and set clear data residency requirements for financial institutions.

Saudi Arabia

The Personal Data Protection Law (PDPL) of Saudi Arabia requires that personal data must be stored and processed within the country unless specific conditions for transfer are met. The law contains detailed data security and privacy requirements, helping financial institutions manage and use LLMs in accordance with local regulations.

Qatar

Qatar’s Law No. 13 of 2016 on Personal Data Privacy Protection ensures that customer data is handled securely within the country. It regulates data storage, processing, and transfer. At the same time, The Qatar Financial Centre (QFC) has its own data protection regulations, which are based on international standards and provide additional guidance to banks.

Bahrain

Bahrain’s Personal Data Protection Law (PDPL) sets comprehensive data protection standards and requires personal data to be stored and processed within Bahrain or under strict conditions for cross-border transfers. The Central Bank of Bahrain (CBB) also provides specific guidelines for financial institutions on data protection and compliance with the PDPL.

Data Residency Laws in South America

Several South American countries have developed tight data residency regulations.

Brazil

Brazil’s data residency regulations are governed by the General Data Protection Law (Lei Geral de Proteção de Dados, LGPD). This law, modeled after the European Union's GDPR, requires that personal data be stored and processed according to local regulations. It also contains strict guidelines for cross-border data transfers, ensuring that data remains secure and protected.

Argentina

Argentina’s Personal Data Protection Law (PDPL), also known as Law No. 25,326, is closely aligned with international data protection standards. It requires that personal data must be stored and processed in Argentina or under conditions that offer equivalent protection. This ensures that data handled by financial institutions remains secure and compliant with local laws.

Conclusion

Data residency regulations increasingly dictate how banks and financial institutions can use large language models. These laws require data to be stored and processed within specific geographic boundaries, making data management even more complex and costly. Despite these challenges, complying with data residency regulations is critical for regulatory compliance. It keeps data secure and builds customer trust.

Hosting LLMs locally and investing in regional infrastructure allows banks to innovate while complying with regulations. Should you need assistance hosting your LLMs on-premises, Dynamiq is here to help. Contact us if you want to gain full control of your data and ensure compliance with data residency requirements in each location where you operate.