Bu-201105 C&A Compliance-1589194103353
Banks and bankers must not be burdened with more stringent requirements to get the funds moving. Image Credit: Gulf News

Our experience of financial crises and economic malaise is in a sense exhaustive. But our sense of how they started is confined to just two models — the traditional boom-bust, which is characterised by speculation and euphoria, and the other one is the pandemic-induced coma.

Both are critical accidents that lead to unappeasable psychosis. However, in a world where the private sector is in desperate need for assistance (both financial and regulatory) to start up again, we have lurking in the shadows the ghost of compliance, dictated by Big Brother’s nemesis, the Financial Action Task Force (FATF).

Equipped to eradicate the scourge of criminal financial activity, the long arm of compliance has frozen banking and business activity, boiling otherwise irreducible complexity and nuance of business into a series of checklists.

In the post COVID-19 world, even as developed economies announce record stimulus packages, the private sector in other parts of the world has struggled to make sense of these draconian laws that, left unchecked, will hinder any hope of a recovery.

Compliance overload

Even as companies look to process transactions that were stuck midway, the list of compliance questions have increased. This is a natural occurrence that has snowballed. Even though FATF recommendations have been to adopt a “risk-based” approach to companies as well as transactions, the assumption behind this is that individual banks will be able to do so in a practical manner.

The reality on the ground has been far different. Banks, under threat of punitive action, have adopted for a conservative approach, which overestimate the risk and consequently deploy over-engineered mechanisms.

This has meant limited access to credit and credit growth, which is bad enough in normal circumstances. But in the environment that we now face, it is devastating.

Bizarrely, even as these mechanisms have not been relaxed, the alternative embryonic “crypto world” has largely escaped scrutiny, resulting in no net decrease in financial crimes. Meanwhile, the more traditional financial world, which encompasses SMEs, has been left without any effective recourse to credit in these desperate times.

Even in the non-profit sectors, where aid needs to be reached for the most desperately affected people, ad hoc control mechanisms largely based on the overzealousness of compliance departments has meant that money flows have been hindered, and in some cases even denied.

No policing the regulator

It is curious to note that the FATF itself has not been subject to any oversight. Were this to be the case, many of the shortcomings could have been addressed on a case-by-case basis, rather than adopting a one size fits all approach.

Various parts of the world’s financial architecture have developed at different rates. To be sure, the FATF recommendations in the early days were instrumental in plugging obvious gaps in financial plumbing. But in recent years, the chutzpah that accompanied the increasingly bizarre mechanisms have been financially and economically counterproductive.

We know now that aid alone will not be enough to get companies moving again; relief measures have to encompass regulatory latitude. The longer it takes for this realisation to sink in, the longer will be the duration of economic pain.

Diminishing returns

It should be said that these criticisms are not new. For anyone who has been in business, dealing with the compliance departments of banks has become a daily and never-ending nightmare. Even as there has been recognition that the intent of the task force has been good, the letter of the laws have long since outlived its usefulness, freezing entrepreneurship, whilst achieving diminishing returns on arresting financial crime.

In the post COVID-19 world, it is time these stringent mechanisms be relaxed, either through a moratorium, or through exclusion by some of the participating countries, without threat of financial sanction.

On the ground, there has long been the realisation that many of these regulations are in fact puerile, and induce bafflement more than anything else. There was a time that bankers recall with fondness when banking meant being partners with business owners, showing the flexibility that nurtured growth and fostered trust.

The “reset” mechanism necessitates in some ways is a return to those days. As we look to jump-start the global economy, we shouldn’t be asking the question of whether we need to roll back some of the onerous checks in place.

Perhaps we should be asking, given its abysmal track record, is it now historically relevant?

— Sameer Lakhani is Managing Director at Global Capital Partners.