In a civil complaint last month, US authorities charged financier R. Allen Stanford with orchestrating a fraud connected to $8 billion of certificates of deposit sold by Antigua-based Stanford International Bank through a network of advisors. Does this incident show a need for stricter regulation of financial services companies in the Caribbean? What role should Caribbean governments and private sector businesses play in maintaining the integrity of financial services firms in the region?
ABoard Comment: Michael Diaz:
"Between 2005 and 2007,Stanford International Bank(SIB) sold more than $1 billionin certificates of deposits which promiseddouble-digit returns based on their‘unique investment strategy.’ This soundseerily similar to the claims made by thegood folks that worked for Bernie Madoff.The Stanford International Bank saga hasbrought to light what all investors shouldconsider before investing in tax havens—ifit seems too good to be true, it is. Thenotion that SIB had a magical formula thatallowed greater returns in certificates ofdeposits than any other financial institutionwas suspicious from its inception.Whether it was SIB’s intention to attractdeposits from tax evaders, money launderersor from other illicit sources versus asimple Ponzi scheme remains to be determined as evidence is publicly displayed in US courts. What is clear however is that Caribbean countries like Antigua must be vigilant in their financial, regulatory and legal systems. The SEC alleges that SIB took great lengths to prevent any independent examination of its portfolios, notwithstanding the fact that it is subject to annual audits by Antiguan regulators, the Financial Services Regulatory Commission. That, however, never occurred. The lax financial regulations in Antigua allowed SIB to steal hundreds of millions of dollars from Latin American investors and may very well subject the West Indies island to lawsuits for failure to diligently supervise and regulate SIB. Antigua at minimum should bear some of the burden of bailing out the victims of this fraud, which took place right under their nose or, worse, under their blind eye."
ABoard Comment: Earl Jarrett:
"Over the past decade, the member countries in CARICOM have enacted laws to modernize and tighten the governance of the financial sector in the region. The countries in the region have also improved the capacity of the regulatory agencies to supervise the entities that they are required to monitor. Most countries have adopted international best practice and to date, the region has not experienced the massive banking failures of Europe and North America. It is evident however, that closer attention may be required in the regulation of International Financial Entities. Based on published reports, it is apparent that Stanford operated a complex structure spanning many countries. The group owned the Antiguan domestic bank, the Bank of Antigua, which was supervised by the Eastern Caribbean Central Bank. The bank is reported to be sound but has experienced a liquidity problem due to the levels of customer withdrawals, which followed media reports of Stanford’s problems. During this week, a consortium of banks supervised by the Eastern Caribbean Central Bank has taken control of the entity. The banks regulated by CARICOM member states have demonstrated soundness."
AGuest Comment: Bernardo Vega:
"For some time now, firstthe European Union and laterthe United States have pressuredthe Caribbean to curtail offshorebanking. First it was for tax reasons andlater because of money laundering involving drugs and perhaps terrorism.Antigua, in particular, has been pointedout not only because of banking, but alsobecause of offshore betting and theinvolvement of local politicians in theseactivities. The communique from thelast G-20 meeting made reference to theneed to curtail offshore banking, linkingits activities to the international bankingcrisis. After the Stanford scandal, it isforeseeable that more outside pressurewill be applied to the region. The smallerthe island and the bigger its financialsector, the more difficult it will be for itsauthorities to regulate banking, givenhuman resources constraints. Caribbeanoverseas territories like the Turks andCaicos Islands have also been affectedrecently by scandals involving investmentschemes. In the DominicanRepublic, financial regulation, which wasvery loose, became and still is very strictafter three banks committed fraud andbecame insolvent in 2003. Subsequently,under IMF supervision, new and amplecontrols were imposed and thanks tothat, Dominican banks have not beenaffected by the international crisis."
AGuest Comment: Ronald Sanders:
"The matter of theSEC prosecuting a civil suit foralleged fraud against R. AllenStanford points to the absolute need forstricter regulation not only in Antiguaand Barbuda but also in the UnitedStates. Court documents about this matter claim that the alleged fraud relates tothe sale of products by the StanfordInternational Bank (SIB) in Antigua andby the Stanford Financial Group inHouston. The regulators in both jurisdictionsare, therefore, culpable. Whilethe smallness of its resources does notabsolve the Antigua regulators ofresponsibility, the vastness of theresources available to the US regulatorscondemns their failure to recognize thedanger signals in the operations at amuch earlier stage. The Stanford allegationshould not be used to stain Caribbean regulators while ignoring thefact that deficiencies also existed in theUS system. No Caribbean jurisdictionshould wish to remain in the business ofhosting companies that offer financialservices without strong, relevant andappropriate legislation and supervisionthat protects the interests of customers.In this regard, independent statutorybodies that are free of political interferenceand are overseen by bipartisancommittees drawn from the legislatureshould be established to raise their credibilityand give confidence to domesticand international clients. So there is aneed for stricter and fearless regulationof financial services as much in the US asin the Caribbean.
Michael Diaz is a member of the Financial Services Advisor board and Managing Partner at Diaz, Reus & Targ, LLP.
Earl Jarrett is a member of the Financial Services Advisor board and General Manager of the Jamaica NationalBuilding Society.
Bernardo Vega is President of Fundación Cultural Dominicana and served as Dominican Ambassador to the United States from 1997 to 1999.
Ronald Sanders is an International Relations Consultant and former Chairman of the Caribbean Financial Action Task Force against money laundering and drug trafficking.
Source: Latin America Advisor, Financial Services, Feb. 19 – March 4, 2009