SSL debacle could land blow to country’s ratings
Jamaica's ranking from international rating agencies and the international banking system could take a hit, as reports of a massive fraud at Stocks & Securities Ltd (SSL) rocks the financial landscape. Financial and security experts agree that the coming months could be difficult to navigate as watchers assess the systemic implications of the multibillion-dollar fraud.
Taking a dim view, chartered accountant Dennis Chung said the situation is made worse by the possibility that the Financial Services Commission (FSC), which regulates non-deposit-taking institutions, may have been caught asleep at the wheel.
“It doesn't look good, and the reason why is not that there was the failure of a financial institution; this happens the world over. It's just that, by all appearances, the regulator seems to be at fault for not having taken action as they should have,” Chung told The Sunday Gleaner.
The FSC was created in 2001 to oversee the regulation of Jamaica's insurance, pension and securities industries. The self-financing body was given wide-ranging powers to supervise, investigate and sanction entities falling under its jurisdiction.
The FSC is one side of the financial sector supervisory coin, the other being the Bank of Jamaica, which regulates deposit-taking institutions, which include banks, building societies and trust companies.
The efficient regulation of the financial system is critical to how Jamaica is viewed internationally.
International rating agency Standard & Poor's credit rating for Jamaica currently stands at B+ with stable outlook. Moody's credit rating for Jamaica was last set at B2 with stable outlook, while Fitch's last credit rating for the island was a B+ with stable outlook.
Jamaica recently completed its National Risk Assessment (NRA), according to the Bank of Jamaica, “to identify the vulnerabilities and threats to the country's anti-money laundering (AML) and counterfinancing of terrorism (CFT) regime, to inform policy measures to address areas of risk that require attention”.
The NRA, which assessed the period 2016 to 2019, observed that the 2017 Mutual Evaluation Report concluded that Jamaica was a jurisdiction with strategic deficiencies in its AML/CFT frameworks.
“Jamaica's publication on the Financial Action Task Force's grey list in February 2020 further signalled that there were gaps in the country's framework, although it should be noted that Jamaica's addition to the list was due in part to a redefinition of the financial assets threshold,” the NRA said.
Jamaica's overall country money laundering risk was assessed as medium high, with remittance companies being fingered in this regard. Deposit-taking institutions, securities dealers, cambios and lawyers are rated at medium risk.
STRENGTHEN THE OVERSIGHT
Security and intelligence expert Robert Finzi-Smith is giving a dire warning, noting that international rating agencies and those that oversee the operation of the Jamaican financial system internationally may not be very kind to the country in subsequent months.
“Our ratings could fall dramatically because if our regulatory bodies are shown to be as incompetent as this thing has shown, then our international credit rating will go through the floor,” Finzi-Smith told The Sunday Gleaner.
Financial analyst Ralston Hyman believes there are sufficient institutions in place to do the necessary regulation and protect the public's interest.
“Certainly, there are sufficient institutions, and we have enough regulations. What we need to do is to implement the laws correctly and strengthen the oversight,” Hyman said.
He is charging that there might have been political interference in the affairs at SSL, as he outlined a series of missteps at the institution dating back as far as 2007.
“Questions should be asked about [the SSL directors], especially where there are connections right back to the days of Paul Chen-Young,” Hyman said.
SSL founder Hugh Croskery had a close association with Chen-Young of the failed Eagle financial empire. He was rated as the go-to person and key dealmaker at Eagle.
A February 2017 FSC report on SSL indicated that there was a qualified June 2016 auditor's opinion from KPMG, pointing to “capital deficiency” and doubt that the business could be regarded as a going concern - auditors' speak for whether or not the company had enough money to continue doing business.
Chung believes that searching questions need to be asked about the level of governance in place to give operational oversight at SSL.
“My understanding is that there was a qualified audit opinion and, if that was so, why was the company allowed to go so long? The board must have known and it means that there might not have been any action on the management letter?” Chung said, adding that FSC must have known also.
“If that were so, then it means that there are many people who have messed up their fiduciary duty to the public, in my opinion,” Chung charged.
'REAL PROBLEM IS ENFORCEMENT'
There have been several cases of alleged fraud at financial institutions popping up in recent years.
A week ago, a National Commercial Bank (NCB) wealth adviser was arrested and charged in relation to a reported $21-million fraud scheme. The defendant, Khadene Thomas, was remanded when she appeared in court on January 20, with her bail hearing set to continue on February 2.
That case follows a $65-million fraud probe of Sagicor Bank branch manager Tricia Moulton and personal banker Malika McLeod, and similar allegations against then Vice-President of Marketing Alysia Moulton White for $661,000.
In another incident, a senior NCB employee, Arsenio Johnson, was arrested by the Fraud Squad last July in relation to an alleged multimillion-dollar racket. And in May 2021, former NCB manager Andrea Gordon admitted to swindling $34-million from the bank and was sentenced to seven years and six months in prison.
The Sunday Gleaner asked whether there was an increase in fraudulent activities or if it was simply a matter of Jamaica getting better at detecting it.
Hyman, Chung and Finzi-Smith agreed that there are enough systems in place, emphasising that doing what is necessary on the part of regulators is the critical element.
“There is an increase, and that is why they have to ensure that there are sufficient controls in place to detect these instances. The laws are there. What the FSC needs to do is to be more vigilant,” Hyman said, adding that the proposed revamping of how state boards are appointed is a welcome development, as there is always the danger of political interference and incompetence hampering their proper running and functioning.
Chung agrees, and goes on further to say that there may be too much regulation.
“I think the regulatory framework is very strong. In fact, the Financial Services Commission Act is very strong, giving them a lot of power. The real problem is one of enforcement,” Chung said, comparing the current regulatory environment to that in 1996 at the height of the financial meltdown.
“In fact, I think it may, at times, go overboard, but comparatively, there was not an effective regulatory environment in place at that time,” Chung added.
He stressed that, as it stands, the public is well protected, but the authorities need to enforce the laws.
“In a similar vein, there is the Road Traffic Act, where many things are on the books but not enforced,” Chung said, adding that the public order laws and those covering illegal vending are other examples.
He added that the move to regulate microfinance institutions in recent times was a good one, since it seemed to be the only unregulated area of the financial system.
Hyman said he was satisfied that the mechanisms were in place for proper regulatory oversight.
“As far as I know, all these entities that trade in securities, do business in the financial and insurance sector, they are regulated by the FSC,” he said.