Compliance: the elephant in the room

The Caribbean Regional Compliance Association’s conference in Trinidad and Tobago in March showed the difficulties that many Caribbean countries face when implementing the latest regulations and processes demanded by international organisations. 

  In terms of anti-money laundering regulations alone, countries in the region comply with only 40 per cent of the rules, which is essentially a failing rate, according to Dawn Spicer, deputy executive director at the Caribbean Financial Action Task Force.  

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, non-profit organisations and money carriers.  

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. 

The lack of compliance is not necessarily due to a lack of commitment on the part of the countries, but a reflection of the limited resources available in the region.  

Given that the level of regulation is increasing and becoming broader, the challenges in terms of compliance can only grow. 

The current 40 plus 9 rules on anti-money laundering and anti-terrorism financing advocated by the Financial Action Task Force have been revised and are now incorporated in the 40 new recommendations. 

These will create a lot of challenges in terms of additional work and costs, stressed Ms Spicer.  

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”.  

Of his Top 10 global compliance issues four dealt with anti money laundering topics, specifically enhanced due diligence efforts, how to avoid tipping off clients, implications of being grey listed and how to deal with US/Canadian correspondents. 

Other important compliance issues included anti-bribery and anti-corruption regulations, the Dodd-Frank and Foreign Account Tax Compliance Act out of the US, privacy concerns and how to balance local and global policies. 

FATCA for instance represents a significant burden for financial institutions without any positive effect for the institutions themselves, Green said. 

Finance professor Avinash Persaud, a senior fellow at the London Business School, argued that the level of regulation was designed to shut down small Caribbean financial centres.  

Because big financial centres like big regulation, the smaller financial centres that were in no way responsible for the financial crisis, have to bear the biggest burden. 

While small financial centres are not able to escape the regulatory initiatives, the copy and paste approach to compliance would not work either, he said. Small financial centres have to realise they are playing in a game and need to become intelligent participants of that game. 

The FSA with 2,000 employees and a massive budget still missed the biggest financial crisis, Persaud said. “So how can we tick the same number of boxes? The only way to play the game is to specialise, find a niche, and invest in compliance in that niche.” 

Financial centres should become experts in proper regulation, because there were too many areas in finance that were badly regulated, risk intolerant and not right for the businesses that they govern. 

The disproportionate focus of financial regulation on banking was one of the causes of bad regulation Persaud mentioned. 

But it is not only regulation that increases the pressure on compliance professionals.  

Delegates also heard how criminals move counterfeit goods across borders. Robert Duncan of British American Tobacco, said compliance professionals should be on the lookout for market traders with irregular cash flows, and know their own customers and what they are selling. But he conceded that counterfeit goods were not the priority of either law enforcement nor compliance. 

Mafia expert and author Antonio Nicaso pointed out the level of organised crime and its ties to the Caribbean. Criminal proceeds amount to 3.6 per cent of global GDP, he said and offered some advice on spotting drug trafficking proceeds.  

500 euro bills are the denomination of choice for drug traffickers, Nicaso said, because one million euro fit neatly into one suitcase, whereas $1 million in 100 dollar notes require three and a half suitcases.