KYC360 File Story: Are regulators losing the war against financial crime?
29 Oct 2018
    Regulators the world over are stepping up the war against financial crime, issuing a raft of rules and hitting banks with some serious penalties. Despite these efforts, it’s still not uncommon to hear of financial firms being entangled in stunning money laundering and fraudulent schemes.

    Are regulators losing the war on economic crime, what is holding them back from doing more?

    KYC360 Editor Irene Madongo discusses the issue with Dr Dayanath Jaiyasuriya, the Sri Lankan President’s Counsel and former Chairman, Securities and Exchange Commission of Sri Lanka. He is also a consultant to the International Compliance Association.

    Dr Dayanath Jaiyasuriya (DJ): I think, it’s fair to say that regulators in most countries are doing their best, but they face many limitations.

    For instance, evidence is something that you require in order to launch a prosecution, and if you take inside dealing as an example, it’s very, very difficult to find necessary evidence, because the burden of proof is beyond reasonable doubt.

    Whereas, if you have a civil law regime, then the burden of proof is on a balance of probability, and it’s much easier to get the judgement in favour of the prosecution and recover damages.

    Irene Madongo (IM): How much does the issue of limited resources still come into play? Would bigger budgets, better trained staff, empower them more?
    DJ: Yes, lack of resources is a major constraint; the lack of expertise is again another problem, because the businesses are coming with up with different models, hybrid products are on the market and sometimes regulators don’t have a fairly good understanding of the nature of the products and how they market these products.

    There’s another problem, that’s the inter-agency problem: for instance, the Securities and Exchange Commission, may not be able to get the information from the Central Bank and vice versa. So, there are the inter-agency co-ordination issues and there are also turf issues.

    And the judiciary, they don’t sometimes have the necessary expertise in some of these highly technical areas. In some countries, there is a concerted effort to set up special courts and train the judiciary.

    IM: How much do factors like political pressure or government interference with certain cases inhibit regulators from performing their work?
    DJ: In theory, regulatory bodies are expected to be independent; the regulators themselves are expected to be people of integrity and who are able to pass the fit and proper test.

    But in most countries around the world, you find that, political pressure is often brought to bear on these regulatory bodies and sometimes regulators have no choice but to follow the instructions coming from the Minister in charge of the regulatory body, or to resign.

    If you resign of course, there may probably be a few options as to what you could do after you resign. So you need politicians who are socially committed, who know that it is not their mandate to use political influence on their regulators.

    IM: In some jurisdictions, regulators are funded by the private purse i.e. subscriptions from financial firms, and then in other countries they are funded partially by the state as well as small parts by the private sector. Do you think who funds the regulator makes a difference, impacts the way it handles enforcement?
    DJ: Well the same thing can be said about the Medical Profession. There are pharmaceutical firms that sponsor doctors to go to events, if they prescribe their drugs and so on. However, that should not influence professional judgement.

    But it is important that the state funds the regulator, and at the same time regulatory entities must pay their licence fee. Another point is that the remuneration of regulatory staff should be sufficiently attractive to keep them in the state sector.

    IM: Some experts, your peers in the field of financial compliance and anti-money laundering, have mooted having a global regulator to oversee regulators i.e. a watchdog to watch the watchdogs. Do you think such a set up might help?
    DJ: I do not believe that there is a place for a global supervisor – that would not work because legal and socio-political systems are so different and market structures are also different. But there is another way forward, and that is through the harmonization of standards.

    I think if you have international standards and these are closely monitored, that does help. For example, there’s IOSCO (the International Organisation of Securities Commissions), which has come up with global standards; it closely monitors the implementation of the multilateral agreement for the exchange of regulatory information.

    There’s also the FATF (Financial Action Task Force), which too has guidelines, and certainly countries have been under pressure to enact and enforce anti-money laundering and combating of financing of terrorism legislation and streamline procedures.

    There are certain new areas yet to be seriously tacked on a global basis e.g, cybercrime. Unfortunately, criminals are always ahead with regulators and law-makers coming limping behind!

    Read more:

    AML robots: UK regulator highlights use of machines to combat money laundering

    Singapore: Regulator ‘to strengthen individual accountability’ of senior managers

    Swiss banking regulator concludes Panama Papers

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