The increasing regulatory burden for small island economies is part of a game that is played to close down Caribbean financial centres, that can only escape their fate if they find niches where they can develop better regulation, according to finance professor and consultant Avinash Persaud.
Speaking last week at a conference hosted by the Caribbean Regional Compliance Association in Trinidad and Tobago, Mr. Persaud, a Barbadian and senior fellow at the London Business School, said big financial centres love big regulation, but the countries that bear most of the cost of compliance are not the ones that caused the financial crisis.
Instead the financial crisis was the result of cyclical booms and poor fiscal regulation, such as the trade imbalances created by the United States, he said.
“The bad apple theory of bad instruments and bad jurisdictions” is an unfair game, he added, the goal of which is “to close down Caribbean financial centres, all small financial centres.”
“Despite the shame and hypocrisy of it, we have to play the game,” Mr. Persaud said. The only way to be successful was to become an intelligent participant, “to specialise, find a niche and invest in compliance in that niche”.
Small financial centres further need to invest in advocacy and have the confidence to develop regulation that is right for their niche. Naming Bermuda as world class in insurance regulation and Cayman as world class in hedge fund regulation, Mr. Persaud argued that if other financial centres do not find similar areas of expertise they will not have an industry in 10 years time.
Industries that are solely based on tax efficiency will perish, because the large countries will not allow tax revenue to go into these countries, he said.
Regulation should be “risk tolerant”, Mr. Persaud noted, but there are large areas that were “badly regulated”, in part because financial regulation was disproportionately focused on banking.
Titled the Elephant in the Room, the CRCA compliance conference provided an overview of the latest regulations that will be of importance for financial services firms in the Caribbean from a regulatory compliance perspective.
Jeff Green, vice president of global compliance with RBC, said the “compliance function has been under the gun for at least the last three years and that is not likely to change”.
In his opinion, the main issues this year will involve anti-money laundering and enhanced client due diligence, anti-bribery and anti-corruption, privacy concerns and US regulation such as Dodd-Frank and the Foreign Account Tax Compliance Act.
Another important topic will be the recently adopted Financial Action Task Force rules on anti-money laundering and anti-terrorism financing. The revised 40 recommendations will create more work for compliance professionals than the 40 plus 9 recommendations, which they are replacing, said Dawn Spicer, deputy executive director at the Caribbean Financial Action Task Force, an associate member body of the FATF.
“There will be a lot of challenges as it creates a lot of work and a lot of costs, I have to stress that,” Ms Spicer said.
An FATF meeting in Rome, Italy, in June will begin the discussion about the methodologies for peer reviews.
Her presentation also highlighted the lack of compliance with existing anti-money laundering and anti-terrorism financing recommendations in parts of the Caribbean as less than 40 per cent of the rules were fully complied with across the region. This constitutes a “failing rate”, she said.
Although some CFATF members, such as the Cayman Islands, had a high level of compliance, five countries remained “grey-listed”, indicating they had strategic AML/CFT deficiencies for which they have developed an action plan with the FATF.
As a result, Antigua and Barbuda, Honduras, Nicaragua, Trinidad and Tobago and Venezuela were placed under review and entered the so-called International Cooperation Review group process. Honduras has been removed from the list because it has cured the deficiencies. Conference host Trinidad and Tobago is in the process of addressing the areas highlighted by the review, such as the creation of an effective financial intelligence unit.
Ms Spicer said the most common areas of noncompliance, or lack of full compliance, include the handling of customer due diligence, politically exposed persons, correspondent banking, misuse of technology, intermediaries and third parties, freezing of terrorist assets, wire transfers, money value transfer, nonprofit organisations and money carriers.