Tuesday, July 7, 2020
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Giving financial offenders no room to hide

Dubai: The world has changed radically since the global financial crisis. In a concerted effort both to restore public confidence in the integrity of the financial system and to immunise it from the worst effects of any similar future events, governments are putting in place stronger laws, regulations and regulators.

To respond to these developments, many recruits are joining compliance and related functions of financial institutions in an environment where these functions have far more power than before. Indeed, such is the level of regulation that banks are reexamining rigorously where and with whom they do business and, in many cases, seeking to exit territories or relationships that fail to meet standards in the current environment.

And while contraction of available finance is an unintended consequence of tougher regulation, the upside is that it is now harder for criminals to hide their illicit gains, harder for insider trading rings to profit, and harder for money launderers to blend their funds with funds obtained legitimately. Moreover, transparency itself is no longer just a buzzword, it has become an integral part — if not requirement — of modern international business.

It is no secret that the Gulf countries are among the richest in the world. An oil price in excess of $100 per barrel has made life more comfortable, but the leadership of these countries is acutely aware of the responsibility this brings — fortune can become misfortune in a matter of months. For example, a geo-political event could severely limit a nation’s ability to move oil to market, just as the North American shale gas industry could dampen long-term prices.

In order to address these risks, Gulf countries have put in place a series of plans focused on expanding the development of the non-oil sector and put controls in place to combat graft, waste, and corruption.

In a bold move to bring greater transparency to the Arabian Peninsula, late last year Saudi Arabia determined that a reward of 5 per cent of the value of funds confiscated would be disbursed to individuals (excluding those who work for financial institutions, specified non-financial institutions and professions, and not-for-profit organizations) who report cases of money laundering or terrorist financing, where the evidence provided is credible and leads ultimately to a criminal conviction. This decision, to link financial reward to the provision of information on entities and individuals involved in these practices, is a ground-breaking move for Saudi Arabia and for the Middle East as a whole. It makes Saudi Arabia one of the very few countries in the world (and the first in the region) to implement such a measure and ultimately raises new questions — if not hopes — about the region’s efforts to increase transparency and tackle corruption.

As background, the US became one of the first members of the international community to usher in rich rewards (between 10 and 30 per cent of the assessed penalty) for individuals who identify financial wrongdoing. Reeling from the financial crisis, the US brought forward a scheme to incentive information as part of the much publicised Dodd-Frank legislation.

While the programme has had its critics, the early results appear to be positive. For example, in the first full year post implementation of the legislation, the Securities and Exchange Commission (SEC) received more than 3,000 tips from whistleblowers, dramatically increasing both the quality and volume of information used to help spot the bad apples that put profits ahead of principles.

Companies also stand to benefit from this shift to popular transparency. Indeed, more and more companies, including those in the Middle East, are putting systems in place for employees to report potential financial and other wrongdoing. With these programmes come additional staff training and a message to employees that management takes these issues seriously. In EY’s ‘First Middle East Bribery, Corruption and Fraud’ survey, 61 per cent of respondents said the promotion of the corporate culture of whistle-blowing was effective. In other words, well executed whistle-blowing programmes work.

In short, the theme of transparency has gone global. Its emergence as the most recent raison d’être for the G7, G8, G20 and regional bodies such as the Middle East and North Africa Financial Action Task Force has put governments, entities and individuals on notice.

From trans-national organized crime and tax evasion, to money laundering, bribery, and corruption, the reach and co-operation of regulators has never been so extensive.

Saudi Arabia’s implementation of a reward system is an important and encouraging development. The key to its success will be in ironing out the specifics and ensuring robust implementation and follow up because, as is so often the case, the devil is in the detail.

Suffice it to say, however, that the world is changing and not just mature or developed economies. As one major client in the Eastern Province of Saudi Arabia recently put it, “Saudi Arabia has changed and so must we.”

CREDIT: Robert Chandler is a partner with EY’s Middle East and North Africa Fraud Investigation & Dispute Services (FIDS) function. Stuart Jones, Jr. is executive director at EY’s MENA FIDS.