Making Money Moves

We are constantly overwhelmed by the amount of articles telling us about the need to budget our money, but there is never a true guide on how budgeting should be done. Budgeting is simply the process of planning and outlining the means in which funds should be utilized. Usually governments and businesses complete this process annually, but it is important that individuals also create a budget to efficiently plan how income should be utilized. It is of even more importance during the current economic climate marked by rising prices and increased unemployment therefore, the aim of this article is to provide a step-by-step approach to developing good budgeting habits.

Step 1: Understanding Your Income

Income earned is used in three ways: consumption, savings and taxes. Unfortunately, we have no control over the taxes attributed to our income; as we commonly are told “The only things certain are death and taxes”. However, it is pertinent that we know how much we actually spend in taxes per month and the impact of changes on taxable income. For instance, during the 2019 budget presentations, the government announced reductions to the income taxes payable. The income tax bands were revised to remove the rates of 16%, 33.5% and 40% and institute tax bands of 12.5% on income up to $50,000 and 33.5% on income over $50,000 from July 1st 2019.The rate on income over $50,000 will then be reduced again to 28.5% on January 1st 2020. To gain a greater appreciation of the tax savings from this change, pay slips prior to July should be compared with those after. Tax changes can either reduce or increase the disposable income which is the income available for consumption and savings; therefore, a budget must be appropriately adjusted to accommodate these changes.

Consumption spending represents the largest use of income and can range from miscellaneous spending such as parties, accessories and travel to spending on essentials like electricity, water and food. Spending on miscellaneous items should be monitored as these costs accumulate and can result in an opportunity cost given that these funds could have been otherwise saved. For as Benjamin Franklyn said “Beware of the small expenses, a small leak will sink a great ship”. Another aspect of consumption relates to spending on loans and advances and these commitments are harder to manage once started. Therefore, loans should only be obtained when necessary and mainly as a means of generating further income such as rental income, expanding assets such as obtaining real estate or reducing current expenditure which usually takes the form of debt consolidation. Financial institutions have imposed ratios such as the debt service ratio and the total debt service ratio to assess the financial viability of applicants and these ratios can also be used for personal assessment. The debt service ratio analyzes the percentage of income spent on loan payments and is usually capped at 40% of gross income. Meanwhile the total debt service ratio assesses the percentage of total income spent on consumption and is usually capped at 80% of total income. Therefore individuals can use these ratios to review their current spending habits.

The final component of the use of income relates to savings. Although savings represents the smallest component of income it is one of the most important. Essentially savings represents any funds not used for consumption. Savings allows for additional income generation through interest earned, wealth to be passed on through generations so that descendants become better off and also provides a buffer against negative unanticipated occurrences such as repairs, sickness or death. Therefore, a core component of a healthy budget requires structured and consistent savings. Interestingly, some areas of our society are designed to promote savings, for instance, Barbados Protection of Wages Chapter 351 9. (3) states that the total amount that can be deducted or stopped shall not, in any pay period, exceed one-third of the wages of the worker in that pay period. While the financial institutions in imposing the debt service and total debt service ratios have innately left 20% of the income earned untouched. These conditions can allow individuals to save a portion of their income.

Step 2: Detailing and Analyzing Spending Habits

The next step is to chart and detail all earnings, consumption and savings over a 6-month period. This provides an understanding of current spending. Total each column at the end of each month during the period and calculate each as a percentage of income. An example can be shown below:

Disposable Income (Income after taxes) Loans Spending on Essentials (food, water and electricity) Miscellaneous Spending Savings
$4,553.54 $1,800.00 $1,500.00 $353.54 $900.00
Percentage of income 39.53% 32.94% 7.76% 19.77%

Finally, compare the percentages with the thresholds previously outlined to determine if your current spending and savings mix corresponds to industry norms. After this assessment is completed, identify any areas of concern that must be addressed.

Step 3: Chart Your Ideal Budget

Based on the findings of the exercise in Step 2, map your ideal budget composition by calculating the percentage of your income that should be made towards expenditure and savings. For instance, if you believe an appropriate budget consists of 30% savings and 70% consumption, then, using the table as an example, calculate the portion of each category and that would serve as your budget. Also, aim to find ways in which these percentages can be maintained.

For instance, miscellaneous spending should be planned for and monitored to ensure effective control over funds. To assist in budgeting for miscellaneous spending, a cap should be placed on the amount of income used in this regard. For example, if miscellaneous spending should be on a trip then the amount of funds required should be determined and the funds needed should be prorated monthly until the date of the trip arrives. Meanwhile, spending on utilities can be managed by monitoring the usage patterns and making adjustments such as using more energy efficient products. For assistance on how to manage energy consumption, the Barbados Renewable Energy Association can be contacted to connect with companies offering energy audits and efficient products.

The Importance of Managing and Mitigating Conflicts of Interest

Credit unions as cooperative organisations are governed by elected directors who are volunteers, and are involved in various business or professional activities, sometimes independent of those offered by the credit unions which they serve. This dynamic has the potential to create conflicts of interest, which must be carefully managed to preserve accountability and transparency, and to ensure that the best interest of the credit union is not compromised.

A conflict of interest is generally defined as a situation where one or more persons or entities have competing interests, and where serving one may cause detriment to the other. Therefore, it is in the best interest of credit unions and their membership that all persons acting on their behalf use independent judgment and are not influenced by any facts, which may give rise to a conflict of interest.

There are three types of conflicts of interest:

  1. Actual – you are being influenced by a conflicting interest
  2. Potential – you could be influenced by a conflicting interest
  3. Perceived – you could appear to be influenced by a conflicting interest

A useful way to identify conflicts of interest is by using the “impartial observer test” which asks:

  • Are you are a member of a credit union board?
  • Do you have personal interests?
  • Would an impartial observer think that you are likely to be, or may likely be improperly affected by these personal interests?

Good Governance

Good governance is a central part of ensuring that a credit union is effectively working towards achieving its objectives and meeting its obligations under the law. The board member who may have a conflict of interest, as well as all other board members, are equally responsible for managing such conflict.

Failing to manage conflicts of interest affects a credit union’s governance in a number of ways, including:

1. Failing to act in its best interests

The most important responsibility of any board is to ensure that it always acts in the best interest of the organisation it governs. Failure to manage conflicts of interest indicates that the credit union board, or a member of it, is not acting in its best interests. This can seriously impair the board’s ability to make decisions that benefit the credit union and can ultimately undermine its viability.

2. Risking accountability and transparency

There can be no accountability without transparency. If board members fail to disclose a conflict of interest, they are not being frank about their personal interests before the board. Appropriately identifying these conflicts of interest is essential to the practice of good governance by a credit union.

3. Negatively affecting board dynamics

A board’s ability to function effectively as a group can be undermined if conflicts of interest are not managed. One hallmark of effective governance is a board’s ability to have impartial and open discussions, as part of a thorough examination of a credit union’s affairs. If a board member has failed to disclose a personal interest, or if it isn’t appropriately managed, then good governance is hampered.

Charities may use a process to identify a conflict of interest - including identifying a conflict, notifying the board and determining an outcome
Managing and mitigating conflicts of interest – A Model

Conflicts of interest and the law

Section 70 of the Co-operative Societies Act Cap. 378A states that

“Every director and officer of a society in the exercise of his powers and discharge his duties shall;

(a) act honestly and in good faith with a view to the best interest of the society, and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

The Financial Services Commission, through Guidelines 1 & 2: Safety and Soundness, established requirements for credit unions to develop policies to govern issues of conflicts of interest. These Guidelines require that the policies must:

  • establish standards of business conduct and ethical behaviour, including a code of conduct and ethical behaviour for directors, management, committee members and employees
  • provide for an annual review of the code of conduct and ethical behaviour, with a requirement that it be signed annually by all those to whom it applies; the code of conduct and ethical behaviour should include the following:
  • the duty to comply with Legislation
  • the duty of confidentiality of information, respecting the credit union and its members
  • conflicts of interest and restricted party transactions; the latter being defined in the Guidelines as meaning an officer, director, member of the credit committee, member of the supervisory committee or employee of a society or a member of their immediate families.

Conflicts of interest are often inevitable, but how a credit union responds determines the impact these conflicts will have on its operations and sustainability. It cannot be sufficiently stressed that it is the duty of all officers, directors, committee members and employees to fully disclose to the board, any situation where they may have a potential conflict of interest. It is, therefore, requisite for all credit unions to establish board-approved conflict of interest policies, which are reviewed at least annually and updated as appropriate. These policies should, at a minimum, address:

  • guidance as to what constitutes actual, potential and perceived conflicts of interest
  • requirements for the disclosure of such conflicts of interest
  • procedures for recording and determining all declared instances of such conflicts of interest
  • guidance for the resolution of instances of all conflicts of interest

Corporate Governance in the Credit Union Context

The Importance of the Supervisory Committee & Member Participation

Many who don’t understand the unique fabric of credit unions tend to misconstrue the designs in place. It must be acknowledged that credit unions are owned by their members (shareholders / investors). That fact must be understood because it is a common misconception that the Board of Directors has uncontrollable power. However in the credit union context, when the rights of the supervisory committee and more importantly the rights of members are examined, it is clear that that is not the case.

Corporate governance has been defined by the Cadbury Committee in 1992 as the system by which companies are directed and controlled. It should be taken seriously by every financial institution because good corporate governance plays a critical role in improving investor confidence, and it also reduces the risk of financial crises and scandals.

In the credit union movement, the Board of Directors is mandated by law to direct the business and affairs of the credit union, the supervisory committee keeps the board in check and members indirectly control the business and affairs of the credit union. Therefore, it can be said that the Board of Directors, Members and the Supervisory Committee, are three (3) necessary pillars needed to ensure good corporate governance exists in credit unions. Like a house built on stilts, if any pillars are weak there’s a possibility that a collapse can occur.

The notorious Hindu credit union’s (Trinidad & Tobago) collapse is one which should be remembered whenever looking at corporate governance in the credit union context. The Commission of Inquiry’s investigations highlighted amongst other things that the Board of Directors’ mismanagement led to its demise. Some may say that that credit union’s collapse could have been avoided if their members were more critical at Annual General Meetings (AGMs).

Professor Burgess (as he then was), emphasized “shareholder meetings (AGMs) are an important mechanism for shareholders to exert control in corporate decision making.” At Annual General Meetings members have the right to voice their concerns as it relates to the management of the credit union, make recommendations, request information and examine the credit unions’ financial statements. Such power may lead one to wonder, “Why is the Board of Directors accountable to the members?” The answer to that question is simple; the Board is elected by the members to direct the business and affairs of the credit union and to take their interest into account.

The legislation makes it clear, that the Board of Directors’ duty is to act in the best interest of the credit union and when exercising that duty, they must consider the interests of members. Since the Board is accountable to members, it is understandable why the law plainly states that they must consider their interests. Moreover, it is understandable why the law implies that directors should not act selfishly when exercising their duty, they must “act in the best interest of the credit union.”

The Board of Directors must understand the nature of their duty and cooperate with members because it helps to ensure good corporate governance. That in addition to having analytical members and a strong supervisory committee can aid in reducing the possibilities of financial scandals & collapses. The Supervisory Committee and members can help to keep the Board on track so that they can remember the main mission of credit unions, which is to operate “not for profit, not for charity but to serve their members’ needs.”

The Supervisory Committee must make certain that the Board of Directors complies with the law. The law gives them the power to examine the books of the credit union, confirm cash instruments, property and securities of the credit union and confirm the deposits of the members. If they are of the opinion that there has been a misappropriation of the credit union’s cash instruments, property & securities or members’ deposits and the investigations show that it is true, the Supervisory Committee has the power to suspend the Board of Directors.

When the Board of Directors has been suspended because of misappropriating or misdirecting the credit union’s funds, securities or other property, the supervisory committee must request the Board to summon a general meeting of the members to inform them. The mere fact that the members must be informed further highlights how important they are as a pillar of corporate governance. The Supervisory Committee and member participation are critical as they help to ensure good corporate governance.

Disclaimer: This article has been created for educational and information purposes only. It is not intended to constitute legal advice and must not be relied upon as such.

Authorities:

  1. Akira Kawamura Anderson Mori & Tomotsune “Corporate Governance International Series 2nd Edition.”
  2. Suzanne Ffolkes- Goldson, “Commonwealth Caribbean Corporate Governance” (first published 2016, Routledge)
  3. Barbados Co-operative Societies Act CAP 378A
  4. Report of the Commission of Enquiry into CLICO and HCU
  5. Andrew Burgess, Commonwealth Caribbean Company Law ( first published 2013, Routledge 2013) 282

Crowdfunding and Venture Capitalism: Tools for A Better Barbados

Crowdfunding

The world is currently facing a trying period where a pandemic has disrupted our normal way of life. However, during this time we have proven our resilience. We have discovered how much we care about our fellow man, as we stayed indoors and social distanced to ensure the health of our society. We have also discovered the talents and creativity we previously hid going about our everyday tasks, and have mastered and displayed them on social media for the world to see. The one downside to our efforts is that our economy has begun to suffer as noted by the high unemployment, pummeling stock prices, bankruptcy and business closures. On a macro-level, these developments are magnified, due to reductions in productivity resulting in a lower GDP with which to service our sovereign debt. Therefore, we must identify ways in which to jump-start our economy and begin the road towards recovery and that is possible through our entrepreneurs. The problem however, relates to access to financing in order to raise capital, as traditional means of funding through financial institutions can be hard for start-ups to access. In these instances, alternative means of financing would be needed. Two alternatives are crowdfunding and venture capitalism, which would aid in the development, growth and sustainability of our small and medium-sized enterprises (SMEs). This means that, amazingly enough, we have the tools to harness the talents we have discovered, save our country and continue to help our fellow man. 

The need to support SMEs, is exemplified in an extract from IMF paper Financial Inclusion of Small and Medium-Sized Enterprises in the Middle East and Central Asia as follows, “Small and medium-sized enterprises’ (SME) financial inclusion, in particular, is at the core of the economic diversification and growth challenges many economies are facing…” The paper continues, “Improving SME financial inclusion can help increase economic growth, job creation, and the effectiveness of fiscal and monetary policy and could also contribute to financial stability.”  This extract indicates that in order to support these enterprises it is important that they have access to financing. The issue occurs where businesses are deemed too risky to obtain the level of financing needed. It is important in these instances, that an alternative is available to give these businesses a chance, and crowdfunding is one of the best tools. Following the Economic Recession of 2008, an article entitled What Is Crowdfunding and How Does It Benefit The Economy was published on Forbes.com. In this article it states, “A great additional benefit to crowdfunding is its economic helping hand. Anything that aids in generating revenue is desperately needed in our sluggard economy, and crowdfunding has proven to be a powerful force. Not only is it pumping small businesses with desperately needed lifeblood, but it is also encouraging entrepreneurs to continue creating even in the face of these slow times.” Crowdfunding is perfect for Barbados, even before the onset of this pandemic; there were thousands of Barbadians with great ideas and no knowledge of how to get started. For instance, given our focus on the tourism industry, businesses such as restaurants and taxis, which are currently in financial difficulties, could raise much needed capital through crowdfunding. In exchange, investors can receive discounts, coupon cards, special trips or special rates for their “investment”. This not only fortifies the businesses’ ability to continue as a going concern, but also allows Barbadians to have a sense of belonging and appreciation for their contribution to the sustainability of the businesses. This would also give businesses the start they need to then approach traditional financial sources for capital needed for expansions after the business has recovered. By keeping these businesses open or able to expand, this allows for an overall improvement in the economy.

Venture Capitalism

To quote Warren Buffett, “Investing in yourself means tackling areas you aren’t good at and learning new skills…Address whatever you feel your weaknesses are, and do it now.” It is with this inspiring quote that our country should look towards venture capitalism to allow firms to support SMEs, by equipping them with the knowledge and resources necessary for growth. This requires a commitment by SMEs and financial institutions towards the common goal of development. Most small enterprises lack the innovation, experience and business intelligence required for optimal functioning, financial institutions through a venture capital arrangement could provide this knowledge. A venture capitalist as defined by Investopedia is “a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. This could be funding startup ventures or supporting small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to risk investing in such companies because they can earn a massive return on their investments if these companies are a success.” In essence, the VC can support a business’ growth, once potential has been detected, by actively advising, guiding and supporting the business to ensure that growth is achieved. Given the investment that the VC has made, there is a greater commitment to the business’ success than would have existed in the traditional financing channels. In addition, as stated in the definition, VCs take on riskier businesses that traditional financial institutions would normally decline. This has greater implications for the economy, as more businesses would ‘start up’ because of the VC arrangement. This can also lead to a more robust stock market as VCs on the Barbados Stock Exchange can sell shares in growing businesses. 

Altogether, the use of Crowdfunding and Venture Capitalism fosters improvements in the economy through the development of innovative and creative new businesses allowing for decreased unemployment, increased money creation and a definite turnaround for the Barbados economy. By creating the channels to invest more in our people, we create the perfect environment to discover new avenues for Barbadians and more opportunities for Barbados. No longer must we be slaves to the current system or be forced to accept only what is available. We can chart a new path and highlight our greatest resource- our people; we can finally be “Firm craftsmen of our fate”.

Credit Union – Fitness and Propriety

What you need to know

In March 2017, the Financial Services Commission (Commission) updated its fit and proper assessments of persons holding key positions in the organizations which it regulates. This was done to ensure that the financial institutions under the purview of the Commission comply with the relevant sections of the Financial Services Commission Act, the Cooperatives Societies Act Cap. 378A, the Money Laundering and Financing of Terrorism (Prevention and Control) Act, 2011-23. These sections establish that appropriate fitness and propriety of officers is mandatory for the registration and continuing operations of all financial institutions regulated by the Commission.

What is a Fit and Proper Regime and why is it important for the Credit Union Sector?

A fit and proper regime mainly fulfils a gatekeeper role by ensuring that the individuals holding key roles have the required levels of competence and integrity. It is a benchmark that is used to assess whether the individual is suitable to perform the relevant function. The implementation or a robust fit and proper regime protects the members of the credit unions and their savings through improved governance standards at the Board, Committees and Management levels. The regime also ensures that these key persons have the appropriate skills, experience and knowledge required to manage and govern the credit unions for the benefit of all stakeholders.

To whom does a fit and proper assessment apply?

The fit and proper assessment applies to the Board of Directors, members of the Supervisory and Credit Committees and Senior Management. These individuals are the persons responsible for the oversight and implementation of the overall strategy of the credit union. They are also expected to meet high standards of competence commensurate with the scale and complexity of the credit union and should demonstrate a commitment to the values and the principles of the credit union.

What does the Commission look for when performing a Fit and Proper Assessment?

There are three main areas that are evaluated when trying to determine whether an individual holding a key role is fit and proper. These are:

  • Competence and Capability
  • Reputation and Character
  • Financial Soundness

What is meant by competence and capability?

This is where the Commission makes a determination of whether individuals holding key roles within the credit union are competent and possess the skills necessary to undertake the relevant functions. This assessment determines whether the individual has the qualifications, experience, skills, knowledge and soundness of judgement to properly undertake and fulfill the particular duties and responsibilities of the position.

What is meant by Reputation and Character?

Put simply, an individual who sits on the Board of Directors, Committee or is a Senior Manager must be a person who is honest, fair and acts with integrity. Having key persons with such attributes is essential to the good reputation and trustworthiness of the credit union sector. When evaluating the reputation and character of an individual holding a key position, the Commission considers the responses to a number of various questions, some of which are provided in the Table 1.

Table 1: Questions related to Reputation and Character

Have you ever, in any jurisdiction, been dismissed or asked to resign and resigned from any profession, vocation, office or employment, or from any position of trust or fiduciary appointment, whether or not remunerated?

Have you ever, in any jurisdiction, been convicted of an offence, involving money laundering, terrorist financing, fraud, misrepresentation, dishonesty, breach of trust, or an offence which would be relevant to your ability to perform the relevant function?

Have you been or are you being investigated, disciplined, censured or suspended by a regulatory or professional body, a court or tribunal or any similar body, whether publicly or privately, in any jurisdiction?

Have you ever, in any jurisdiction, been found by a regulatory or equivalent body to have perpetrated or participated in any negligent, deceitful or otherwise discreditable business or professional practice?

What is meant by financial soundness?

Financial soundness is a very important element in determining the fitness and probity of key credit union officers. In determining the financial soundness of an individual in a key role, the Commission assesses whether the individual can maintain personal solvency and has prudential financial control. When assessing the financial soundness holding a key position, the Commission considers the response to a number of questions included those listed in Table 2.

Table 2: Questions related to Financial Soundness

Have you ever defaulted upon payments due arising from a scheme of arrangement with your creditors or made an assignment for the benefit of your creditors?

Have you ever, in any jurisdiction, been subject to a judgement debt which is unsatisfied, either in whole or in part?

Were you ever, or are you currently the subject of a bankruptcy petition in any jurisdiction?

Have you ever, in any jurisdiction, been adjudicated as bankrupt and the bankruptcy is undischarged?

When is the Fit and Proper Assessment of and individual conducted?

The fit and proper assessment is conducted as an initial test undertaken during consideration of the application process or appointment to the position. The assessment is also a continuing test in relation to the conduct of the business and the person’s relationship with the credit union.

What happens if an individual holding a key role is no longer considered Fit and Proper?

Individuals holding key roles within a credit union are expected to remain suitable for the position that they hold. If the individual is no longer considered fit and proper then they will no longer be able to continue to hold the position in the credit union.

The Financial Services Commission (FSC) is an integrated regulatory body, established on April 1st, 2011 by virtue of the Financial Services Commission Act (2010), responsible for supervising and regulating non-bank financial institutions in Barbados

Compliance Is Not A Choice!

First of all, let’s get this straight- Compliance Is Not A Choice! In this current environment where legislation is constantly being revised, money laundering activities are becoming more complex and good corporate governance seems to be absent; it is imperative that a Compliance function is present in every Financial Institution (FI). There are several reasons why a Compliance Function has become increasingly important such as:

  1. Setting the “Tone at the Top”,
  2. Handling the Increased Complexity of Money Laundering Activities and,
  3. Ensure Legislation is Adhered To.

1- Setting the “Tone at the Top”

Simon Mainwaring said, “Many corporate leaders and employees have the right intentions but it can be overwhelming when you consider how everything is affected”. This statement can be used to describe the conflict management faces weighing the desire for profitability against compliance requirements at each stage. In management’s aim to achieve their targets, they may become complacent or even dismissive as it relates to fundamental checks and controls to the detriment of the company. This tone can essentially be filtered down through the company with staff adopting the same approach to legislation and best practices. One example of the effect of the “tone at the top” was found in The Nation Newspaper article on 19th September 2010 “Counting the cost” referencing the case of Trade Confirmers Barbados Ltd., where the Directors were overriding internal controls, policies and procedures and in some instances, did not have the appropriate controls in place, all to the detriment of the company. The end result was the demise of the company, a substantial financial loss to stakeholders and an overall loss of confidence in the country.

In some cases this may just be an oversight, while in others it may be the prospect of getting a bonus or recognition for the speed in which the projects were executed. In any regard, the target-driven aspect of management’s role can lead to bias and regulatory negligence. This is why an unbiased function is needed, ensuring that shortcuts are not taken in the company’s operations.

The Compliance Function is an unbiased arm of the organization which reports directly to the Board of Directors of the company thus removing any influence that management can have on assessments conducted. This function continuously assesses the business’ current operations and future initiatives certifying that policies and procedures are developed and that operations are in-line with the applicable regulations and best practices. This adds value to the company by ensuring the soundness of business decisions and company processes by conducting due diligence checks and presenting Compliance Risk Assessments to the Board.

2- Increased Complexity of Money Laundering Activities

Another important reason for Compliance arises from the level of sophistication used by money launderers to integrate illegal funds into the system. Gone are the days when money launderers were persons who deposited over $10,000.00 and withdrew the funds quickly afterwards. The new money launderers are now more intelligent, patient structured; willing to use any means and wait to “clean” the funds. Financial institutions are especially vulnerable as loan and deposit facilities can be used as tools to engage money laundering activities. For instance, there have been cases of money launderers receiving loan proceeds- clean money and then using illegal funds to clear loan balances in a time frame that is not too soon to arise suspicion but still well before maturity. Meanwhile, as it relates to deposits, money launderers would deposit funds to savings accounts over time and then request a cheque for the savings balance, once again cleaning the funds. The level of complexity of these persons makes it important for a team of experts to constantly monitor the activities of the client base as there are several risks such as financial risk, reputational risk and regulatory risk that companies are exposed to.

As it relates to financial risk, clients charged and imprisoned due to money laundering activities can impact the company’s bottom line as the chances of recovering outstanding loans are significantly low. Another risk is reputational as we are in the era where information is always readily available and details are shared across media sources. This makes it easy for money launderers to be linked to the organization and can cast a negative view of its operations and thus impact on clients’ and shareholders’ confidence in its operations. Finally there is the regulatory risk, as the company and its employees may be fined for harboring the activities of money launderers and not reporting it to the relevant authorities.

The Compliance Function mitigates these risks by conducting due diligence checks on new clients and ongoing monitoring on the existing client base ensuring that the risk of onboarding a money launderer is reduced and protecting the company’s reputation. This Function also satisfies the regulatory requirement to report suspected suspicious activity to the Financial Intelligence Unit protecting the company from fines.

3- Increased Legislation

In an effort to protect economies from money laundering activities while providing guidance to the financial institutions, regulatory bodies have been increasing the requirements for businesses to complete Compliance checks to detect and deter these activities. Recently, institutions such as Western Union and Wells Fargo have been fined for having ineffective Anti Money Laundering practices in place making their companies vulnerable to these activities.

Despite these recent cases, many institutions in Barbados still have the perception that the regulatory bodies will not fine them for non-compliance and therefore, are more reserved in their approach to Compliance. This way of thinking is flawed as regionally there have been more aggressive efforts to deter non-compliance within the financial institutions. This increased attention to anti-money laundering requirements and legislative compliance may be a result of heightened cases of de-risking between the Caribbean and their correspondent bankers. The result has been increased supervision and stiffer penalties enforced by regulators. For instance, the Eastern Caribbean Central Bank recently revised their Banking Act issuing stiffer fines for regulatory breaches and causing FIs within the union to be more diligent in satisfying their regulatory requirements.

Having a Compliance Function in place allows the FI’s policies, procedures and processes are in accordance with the legislation and areas where deficiencies are identified are addressed and indicated to management for corrective action. A Compliance Function also allows for a more proactive approach to be adopted by the organization using industry best practices to improve operations and have a head start on future legislation.

Compliance- Looking to the Future

As we look to the future of FIs, there will be a growing need for internal supervision ensuring internal controls and legislation are being followed. The numerous cases highlighting lax internal controls and processes have already increased the supervision and legislative requirements from regulatory bodies in an effort to safeguard the economy. Further to this, the future role of Compliance would include setting Compliance Risk Tolerance Levels for companies as presently business-to-business relationships are being severed or “de-risked” when business relationships are deemed too risky. These increased risks, which are now attributed to the company’s internal controls and processes would cause an evolution in the economic environment making the role of the Compliance Function more complex and important. Compliance would encompass more activities both at the customer level- providing feedback on the customer base and indicating customers whose activities are too risky for the company and at the business level-verifying that legislatively all requirements were met.

With the growing importance of this Function, it becomes increasingly important that the company’s operations allow the Function to operate without restrictions. Therefore, this Function should have access to information on the organization, be involved in potential business projects and clients and have their assessments acknowledged and recognized by the Board of Directors and by extension the company. As important as the Compliance Function is and will become, it can only be effective if the organizational conditions are in place to allow the Function to operate.

Why Keep Records for Anti-Money Laundering

This year (2016), Barbados will engage in an exercise to assess its Money Laundering and Terrorist Financing (ML/TF) risks in order to adhere to the Financial Action Task Force’s (FATF) International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation. This National Risk Assessment (NRA) process includes a review of Barbados’ key sectors which will aid in developing methods to reduce domestic ML/TF risks.

Why Retain Records?

Retaining and securely storing records generated or acquired by an entity during business operations enables the entity to provide evidence that it meets its legal obligations under the Money Laundering and Financing of Terrorism (Prevention and Control) Act (MLFTA).

Record keeping also enables entities to identify the strengths and weaknesses of the organisation, which in turn, allows them to manage the risks of being misused for ML/TF purposes.

Keeping records allow the entity to manage changes and improvements within the organisation and assists in developing appropriate policies and procedures for mitigating ML/FT.

Keeping comprehensive records in a format that facilitates reconstruction of individual transactions is vital, as this provides evidence for prosecution of criminal activity. It also enables entities to swiftly comply with information request from the Financial Intelligence Unit and other regulators as is the case with the current NRA.

Keeping of Records

To aid the NRA steering committee in deepening its awareness and understanding of ML/TF risks in Barbados, and developing methods to reduce and mitigate these risks, all entities in key sectors must establish a document retention policy that provides for the maintenance of a broad spectrum of records.

The entities’ document retention policy must capture information relating to; customer identification, business transactions, training, and internal and external reporting. Section 18 (2) (a) of the MLFTA requires entities to maintain these records for a minimum of five (5) years. In particular instances, entities may be required to retain these records for longer periods, as instructed by the Financial Intelligence Unit or the High Court.

As Barbados continues to prepare its NRA, entities must be cognisant of their obligation to gather, maintain, and report relevant information on ML/TF, as this will assist in the development of policies to improve the anti-money laundering and terrorist financing framework in Barbados.