Financial sector scandals: Who's to blame?

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Dubai's enforcement of financial regulations has been lauded as 'very good'.
Dubai's enforcement of financial regulations has been lauded as 'very good'.

Dubai - Investors repose full trust in UAE governance and regulations, but recent incidents indicate need for regulators to be more vigilant

By Muzaffar Rizvi

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Published: Thu 7 May 2020, 4:41 PM

Last updated: Thu 7 May 2020, 6:46 PM

Mega financial scams are a result of poor corporate governance and regulations, underlining the need to strengthen the role of regulators to plug the loopholes to retain investor confidence in the system, experts say.
Investors have reposed full trust in corporate governance and regulations in the UAE, but recent incidents such as those of NMC Health and Abraaj Capital indicate that regulators must be vigilant to check violations at an early stage. Corporate governance standards need to be improved and enforced without any bias to attract more investment into the country.
Analysts said rules and regulations should be updated to protect investors from unfair, improper or fraudulent practices and only an efficient regulator can contribute to the stability of the financial system and the reduction of systematic risk.

'Vicious cycle'
Atik Munshi, senior partner at Crowe, said the role of the regulators is to promulgate laws and monitor compliance. After the 2008 global economic crisism numerous measures were adopted to overhaul existing regulations to make them tighter. As the adage goes, "systems are not corrupt; people are".
"No matter how stringent the rules or how rigid the compliance procedures are, if a group of people collude to override them [albeit with support of documents] then frauds take place," said Munshi, a certified fraud examiner.
"Regulators are perpetually trying to plug loopholes. It is a vicious cycle - new loopholes are found and new regulations are framed to plug those, but new loopholes are found. It is the integrity and governance at the top or the lack of it that will either protect or mar the organisation," he said.

Not all scams can be stopped
Matthew Shanahan, partner at Clyde & Co, said regulators set the framework for regulation, such as rules and guidance, and they supervise for compliance. But they cannot stop every scam that occurs.
Referring to the NMC and Abraaj cases, he said the real issue appears to have been poor corporate governance standards. "Too much power was concentrated in a very small number of hands, with little or no independent oversight. Corporate governance standards need to be improved and enforced across the wider region," he said.
While terming the Dubai Financial Services Authority's (DFSA) enforcement process 'very good', he said it is important to understand that the DFSA enforcement division's role is, more often than not, to investigate and enforce regulatory breaches after they have already happened, and impose sanctions on persons who they have found to have broken the rules. "This is no different to the role of the police, which is to investigate and enforce crimes, and prosecute them through the courts," Shanahan said.
He said the DFSA enforcement process, and the enforcement division, already operates on a par with the best international regulators.
"The DFSA enforcement division is unmatched in the wider region. The only suggestion I would make to improve the DFSA enforcement division would be to increase its size and resources in order to match the recent rapid growth in the number of regulated firms in the DIFC, and to address the wider risks facing the UAE financial services sector," Shanahan said.
Honesty to pay the price
Munshi said regular and honest companies - whether big corporates or SMEs - will have to face the burden of additional compliance cost as regulators bring in new regulations and governance measures to plug loopholes.
Over the last decade or so, he said the cost of compliance for corporates and SMEs have increased substantially as the regulators have brought in extra measures to avoid and restrict such rogue behaviour.
Other experts also pointed out that high cost of compliance is one of the major reasons for companies in the financial sector not to set up base in the Dubai International Financial Centre.
They said the GCC's best venture capital funds, who raised funds from Mubadala and IFC, are operating in Dubai but they have not opened offices in the specialised free zone as regulations are not suitable for entrepreneurs. "Frauds are mostly committed by the corporates and not the regulators. More personal liability of individuals who are responsible for compliance could bring some more discipline," Munshi said.
CHALLENGES TO DFSA'S AGGRESSIVE APPROACH
In a recent research, Clyde & Co said the number of investigations the Dubai Financial Services Authority (DFSA) has opened in 2019 is likely to be higher than in previous years.
As the DFSA annual report is expected by next month, the research paper further said the DFSA's new aggressive approach, together with the effect of the proposed procedural changes, will ultimately lead to more and more challenges in the Financial Markets Tribunal (FMT) and the DIFC Court of First Instance.
The research paper pointed out few fundamental issues raised by some of the proposals which may risk a significant reduction to the fairness of the DFSA's decision-making processes, particularly in enforcement cases:
. By legislating to mandate publication of any or all information about a decision notice prior to the completion of a full merits review by the FMT, the DFSA may cause significant prejudice and loss to a person who is subject to an enforcement action
. The DFSA's proposed power to publish information about its decisions prior to re-view by the FMT may occur where a person subject to the relevant decision has not had a single opportunity to make representations in person to the DFSA
. The DFSA's proposed pre-FMT publication policy does not address the fact that some affected persons may not have any, or any adequate, legal representation in their matter. In such situations, there may have been little or no substantive challenge to the DFSA's proposed decision, risking a serious miscarriage of justice
. For individuals subject to DFSA enforcement action, there is often a disparity in re-sources compared to corporates to be able to challenge and protect their personal positions. If the proposed pre-FMT publication changes come into force, this disparity will become even more acute given the legal resources required to seek an order from the FMT preventing publication
. The DFSA's proposed pre-FMT publication, once enacted, should not apply retrospectively to enforcement actions which were commenced prior to the relevant legislative changes. This would be unfair to affected parties, as this would, among other things, change the dynamic of any ongoing proceedings

REGULATORS STRIVING FOR COMPLIANCE
When contacted, a DFSA spokesperson said it is often the case that material corporate misconduct results from a failure of corporate governance at the most senior levels of a company.
Even when firms have good corporate governance, this will not necessarily pre-vent rogue individuals or dominant CEOs from engaging in misconduct.
"While regulators are always striving to improve corporate governance requirements, it is very difficult to eliminate all corporate governance weaknesses and misconduct through regulations. As well as the role that boards of directors need to play in governance, auditors, investors and advisors have a role to play in monitoring and questioning governance practices in order to spot unusual or abnormal trends early," the DFSA spokesperson said.
"When a company breaches financial services regulations, a regulator must act with an appropriate level of corrective measures against the firm, and any person[s] involved. This will credibly deter other misconduct. The DFSA combines its focus on improving corporate governance with a strong enforcement capability. We have demonstrated this over a number of years with a robust enforcement function, and that function has the same principles for large and small companies. This can be clearly seen from our past enforcement actions, which include, amongst many others:
. A fine of $315 million imposed on two Abraaj entities and an ongoing investigation into connected individuals and entities;
. A fine of $8.4 million on Deutsche Bank's DIFC branch; and
. A fine $640,000 on the DIFC branch of ABN-Amro Bank."
The spokesperson said the DFSA has also taken a number of enforcement actions against individuals who bear responsibility for misconduct. "Unfortunately, it is often the case that firms and individuals engaging in misconduct go to great lengths to conceal their wrongdoing and mislead investors and regulators. This can mean that market participants and regulators do not become aware of misconduct until after it has occurred. Such concealment or misleading conduct will result in a higher sanction being imposed on the firm or individual.
"The DFSA has no remit in terms of the judicial system," the spokesperson said.
- muzaffarrizvi@khaleejtimes.com


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