Our dysfunctional banking system, pt. 2

Mon, Nov 4th 2013, 09:42 AM

I believe that banking institutions are more dangerous to our liberties than standing armies. - Thomas Jefferson
Last week, we addressed our dysfunctional banking system and highlighted the frustration that so many persons from all sectors of society experience with banking in The Bahamas. We received many comments on that article, some of which recounted the irrationally intense inspection and extreme examination to which they are subjected when conducting business here at home. Therefore, against this backdrop, we would again like to Consider This... why has banking in The Bahamas become such an ordeal and so dysfunctional and, more importantly, what immediate remedies are required to reverse this?
In a column earlier this year, we described some bureaucrats as "enemies of the state" whose common characteristics we described as:
1. Regulators who never had a job in the private sector and, if they did, never excelled in their jobs and therefore returned to the public sector, were promoted to senior positions, and ultimately morphed into super-bureaucrats whose primary objective is to frustrate and obfuscate.
2. Regulators who have never taken the risk of starting a business because they did not possess the entrepreneurial acumen or an understanding of how things operate in the "real business world".
3. Regulators who have never had to produce a payroll for their staff because they work for institutions where their salaries are guaranteed by the state.
4. Regulators who are often privy to the personal wealth of individuals whom they regulate and are jealous of those successful individuals. Consequently, instead of assisting such persons, their myopic regulatory perspectives and practices often achieve the intended effect of thwarting the progress and advancement of the persons whom they regulate, sometimes with a damaging effect on domestic output.
We can now conclude that enemies of the state do not exclusively occupy the bureaucratic halls of government. They also now reside in the halls of some of our financial institutions. Let us review some of the comments that we received on last week's article.
Real life examples
One writer observed that, 50 years ago, the highest aspiration of a Bahamian bureaucrat was to be seen to protect the interest of the Crown. That writer continued that "perhaps, for some bankers, the commercial bank's head office, has now replaced 'the Crown', and that we have not yet found our own interests worth protecting?"
Could it be that some of our bankers have assumed the role of gatekeeper, sacredly protecting their jobs by imposing excessive banking procedures on our citizens while scrupulously protecting the interest of their new masters in the banking sector? Have they become so myopic in the execution of their duties that our bankers are so terrified of the Central Bank, which in their view has morphed into the modern-day Gestapo of the banking industry? Can the characteristics of "enemies of the state" now be accurately applied not only to some regulators, but also to the regulated banks?
Another writer observed that, several years ago, he went into a commercial bank to open an account with what he thought was all the necessary information. He was compelled to make a second visit because he was required to produce his passport. This individual is an extremely prominent person who is known to virtually every school child in The Bahamas, but the bank asked him to prove who he was by requiring a passport with which he was advised he had to personally return to the bank. That same person observed that he heard that it is easier for a Bahamian to open a bank account in Miami than here at home.
This is a fact of which this writer has first-hand knowledge and is true of many Bahamians who have U.S.-based bank accounts. The aforementioned writer further commented that the OECD (which has imposed unreasonably stringent requirements on our banks) is very hypocritical and unfair and that its purpose is to crush small states like ours who dare to compete in the banking industry. Hence their demands for standards they do not themselves adhere to.
A bank compliance officer's perspective
We also received commentary from a former bank compliance officer. He indicated that we should also consider the perspective of the bank compliance officer and the precarious position which compliance officers find themselves in discharging their daily responsibilities. He noted that the compliance officer has a statutory responsibility (via legislation) as gatekeeper and very often becomes the "fall guy" in these organizations when things go wrong. However, the compliance officer has no statutory protection which explains why they often appear to act in a very dictatorial fashion. It is purely a matter of survival and job protection. To sum up, banking has evolved into an activity with an insidious split personality.
The writer continued that the sales or organizational perspective is: "Let us book whatever business we can no matter how questionable it may be, because, at the end of the day, if anything goes wrong particularly from a regulatory perspective, we can always blame the compliance officer." However, from the compliance officer's perspective: "I have personal commitments, I need this job, and there is no one watching my back. Therefore, I cannot take any chances."
Over regulation
Without a doubt, the Central Bank over-regulates the banking sector. We are aware of an instance in which persons from two different regulators simultaneously performed an examination of a well-established offshore bank. The group of regulators numbered nearly 50 percent of the total amount of employees that the bank had, or one regulator to every two employees. That, in our opinion, approaches the definition of insanity.
The fallout for our financial services industry
Banks that operate in The Bahamas have left, are leaving or are seriously considering leaving The Bahamas and relocating to other jurisdictions like Panama and elsewhere, partly because of the over-regulation of some of those institutions.
The solution
We need to urgently adopt a more sensible - and less draconian - approach to commercial and offshore banking and the regulation of those institutions in The Bahamas, if we want to retain and develop that sector. We have to strike the right balance in fulfilling our anti-money laundering mandate, while adopting reasonably practical procedures regarding the way we conduct banking business in The Bahamas. Failure to do so will result in a contraction of the sector, with increased unemployment of our second economic pillar and the concomitant loss of high-paying jobs.
In addition, we must encourage the establishment of more Bahamian-owned banks that are not dictated to by their foreign masters. This will empower more Bahamians to have greater ownership of this sector and will also result in considerably more banking profits remaining at home.
Conclusion
Twenty-first century banking practices in The Bahamas are in urgent need of reform. Failure to do so will result in the gradual evaporation of a sector that presently accounts for at least 20 percent of our gross national product. We need to recognize that this is a problem, address it and fix it because the potential fallout is real and could be catastrophic for the future of not only this sector but our national development.

o Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com

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