The Banker, an FT publication, recognized The Bahamas with The Banker Award as Best International Financial Centre in the Western Hemisphere in late 2005. This is the result of the effort of so many qualified Bahamian professionals who work in the sector, our political stability, a sound legal structure, progressive regulatory and legislative framework, and tax environment.
Yet, this positive could so easily be shattered if we do not take steps to ensure that we build upon, improve and enhance what we currently have in place. With one rogue or one lapse by a financial institution the picture could change dramatically.
The Central Bank Guidelines for the Corporate Governance of Banks and Trust Companies licenced to do business within and from within The Bahamas defines reputational risk as follows:
“The risk to earnings or capital arising from the potential that negative publicity regarding an organization’s business or ethical practices will cause a decline in the cutomer base, costly litigation or revenue reduction; such risk often arises from the mismanagement of other risks.”
Reputational risk has been identified as one of those risks, if not the most important risk that financial institutions must mitigate. Certainly, if the reputation of one of our financial institutions is called into question it jeapordises the entire jurisdication. Bad news travels fast and the implications are grave. The Bahamas’ reputation as a premier financial jurisdiction must be jealously guarded to avert the reoccurence of our pre- 2000 “blacklisting” experience as well as to ensure the continued flow of legitimate business into our country. Reputation is about how this jurisdiction is perceived by those who may seek to access it for financial services and those who monitor us. How do we manage reputational risk?
Ensure the Adequacy of Customer Due Diligence
The Basel Committee on Banking Supervision in October of 2001 issued a paper on Customer Due diligence for banks ( http://www.bis.org/publ/bcbs85.pdf ). It was acknowledged in the paper that it is important for financial institutions to have adequate controls and procedures in place so that they know the customers with whom they are dealing. Adequate due diligence on new and existing customers is a key part of these controls. Without this due diligence, banks can become subject to reputational, operational, legal and concentration risks, which can result in significant financial cost. It was noted in particular in paragraph 11 that:
“11. Reputational risk poses a major threat to banks, since the nature of their business requires maintaining the confidence of depositors, creditors and the general marketplace. Reputational risk is defined as the potential that adverse publicity regarding a bank’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution. Banks are especially vulnerable to reputational risk because they can so easily become a vehicle for or a victim of illegal activities perpetrated by their customers. They need to protect themselves by means of continuous vigilance through an effective KYC programme. Assets under management, or held on a fiduciary basis, can pose particular reputational dangers.”
Sound KYC procedures have particular relevance to the credibility of financial institutions as they:
* Assist with the safeguarding of the institution’s reputation and the integrity of banking systems by reducing the likelihood of financial institutions being used for or becoming a victim of financial crime and suffering consequential reputational damage;
* Customer Due Diligence procedures serve as an essential part of sound risk management (e.g. by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management).
The inadequacy or absence of KYC standards can subject banks to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks. It is worth noting that all these risks are interrelated. However, any one of them can result in significant financial cost to banks (e.g. through the withdrawal of funds by depositors, the termination of inter-bank facilities, claims against the bank, investigation costs, asset seizures and freezes, and loan losses), as well as the need to divert considerable management time and energy to resolving problems that arise.
The Bahamas is subject to continued monitoring of our customer due diligence processes. In fact next week the CFATF will be in the Bahamas to conduct an evaluation. The Bahamas Association of Compliance Officers has been invited to be a part of this process and speak to the implementation of our customer due diligence policies and procedures. The reputation of The Bahamas is hinged on the extent to which we effectively implement our customer diligence laws and regulations. It is one thing to have them on the books but enforcement is key to the maintenance of our reputation.
The Re-Education of those abroad of Bahamas as a Financial Centre Offering Quality Finnacial Services
Yes, the Bahamas in the past “got a very bad rap”. We have grwon so much since the mid to late eighties and Financial Institutions and Country Representatives we must constantly promote the products and services offered here in The Bahamas and the laws that govern them. We must speak intelligently to these laws. At international conferences and other fora, Bahamian professionals or representatives of the Bahamas must speak up and have a command of the intricacies of our Financial Services sector. We all have a role to play in safeguarding and enhancing the Reputation of the Commonwealth of the Bahamas as a premier financial services jurisdiction! To borrow the slogan from the Ministry of Tourism – in the context of financial services as well we must say “My Bahamas” and take ownership of the image that we project to the outside world.
The Nassau Guardian
