Walking on thin ice

In recent weeks, the financial services sector in Mauritius has experienced a shockwave following the revocation of the banking licence of Bramer Bank as well as the appointment of conservators for BAI Insurance, reported to be at risk of insolvency. We have witnessed a slew of allegations around fraudulent transfer of funds, money-laundering and other financial malpractices linked to BAI Group. Beyond the trauma of investors and policy holders, there is more at stake – the very credibility of our financial institutions and regulatory bodies is being questioned. And in this instance, doubt can have far-reaching consequences.

While the ongoing debate on whether the BAI investments are part of a Ponzi scheme is still a hot potato, the facts around what actually led to this conundrum are hazy. There is no denying that what started as an alleged breach of compliance or potential fraud has quickly grown into a ‘butterfly effect’ with ripples impacting economic, political and social spheres. Fraud is omnipresent in both mature and growing economies and the issue is often likened to an iceberg where the true size of the problem remains below the water line. Understanding fraud therefore requires a multi-faceted approach, using data interrogation and advanced analytic techniques.

The technical definition of fraud varies across different legislations but a common understanding is that any act of deception with intent to derive illegitimate benefits constitutes fraud. In the BAI situation, there are clear signs of poor corporate governance and reported evidence suggests that compliance rules have not been duly enforced. Whilst BAI is the easy scapegoat, where does responsibility truly lie? The cynics would say the current state of affairs is arguably the child of inconspicuous relationships between politicians and institutions, despite the necessary segregation and independence required by law. In reality, these boundaries are often porous.

The financial regulator will have to step up and provide answers in due course. We recall several instances following the credit crunch where major financial institutions benefited from aid from the U.S Treasury, following the toxic ‘too big to fail’ legacy of these entities. Likewise, in the UK, Lloyds Banking Group and RBS had to be bailed out by the government to stay afloat. Following fierce criticism of the UK regulator for lack of protection and enforcement, the FSA (Financial Services Authority) was dissolved and replaced by the FCA (Financial Conduct Authority) and the PRA (Prudential Regulation Authority). This ‘twin peaks’ regulatory structure was created to better safeguard the interests of the public by ensuring that the financial industry is run with integrity and to improve the stability of the UK’s financial system through regulatory supervision respectively. The lax attitude of the local regulator, which reportedly acted as a watchdog with more of a bark than a bite, will now come under closer scrutiny. Prompt reforms need to follow. There is consensus that regulators must not allow themselves to bend under political pressure, following basic principles of integrity, and be prepared to denounce any such attempts. Sadly, in practice, this is easier said than done.

The $1.9bn fine inflicted on HSBC in the U.S. for breach of AML regulations and similar sanctions imposed on Standard Chartered bear testimony that banks, despite bearing the onus of compliance, can be oblivious to financial crime within their organisation. This further reinforces the need for concerted efforts for better controls, involving regulators, subject matter experts and external auditors. Fines are amongst the last resorts in the regulatory framework but are nonetheless very effective to ensure adherence to standards and to negate any perceptions of tolerance for malpractices. At the moment, there are few verifiable facts around this affair in the public domain and the noise is exacerbated by inconsistent messages from various parties, only to contribute to further confusion.

So amidst the ongoing crisis, what does ‘good’ look like going forward? Clearly, a magic ‘fix it all’ wand does not exist and the optimal solution will be multi-layered. At an operational level, a “whistleblowing helpline” would help responsible employees to flag serious malpractices that could impact customer interests. At an executive level, the board needs to ask for more accountability from Chief Risk Officers and Money Laundering Returning Officers (MLRO). My experiences working with major global banks is that they often operate in siloes, with disparate systems that do not project a holistic view on customer profiles or transactions. Following global scandals, banks are now starting to consolidate their fraud, financial crime and compliance teams into financial intelligence units with overarching responsibility. It might also be worth looking into a statutory compensation scheme for customers of authorised financial services firms, similar to the FSCS (Financial Services Compensation Scheme) in the UK. And whilst this might sound like a naive recommendation for entities that primarily exist to generate profits, financial organisations do need to embrace a culture of self-regulation and responsible corporate governance. At a social level, Mauritius has a fair way to go in terms of financial awareness and empowerment of its citizens for a country claiming financial services as one of its economic pillars. A final word of caution regarding the BAI situation is that all stakeholders need to tread with diligence as any brash action could ignite a wildfire.