Litmus test for effective enforcement of laws and regulations

Background

Foreign and local investors, law abiding businesses, administrators and civil servants, investing public, journalists, professionals and rule of law and justice committed citizens have been shocked and dismayed by news reports alerting that perceived well run public and private sector leading entities, during the past 9 months of having reported massive losses of national resources, especially scares external resources. 

The extent of these losses was unheard of in relation to past reported similar incidents. 

Most of them are perceived to be due to frauds, scams, IT hacking, involving mostly local citizens, aided by some external parties and scammers. 

In addition, Sri Lankan authorities have during the same period failed to diligently follow Sri Lanka’s claim for environmental and other massive damages to the ecology, marine environment and people by the Express Pearl disaster.

The most shocking revelation was that these frauds and associated losses were due to systemic failures, indicating serious flaws in the overall structure, policies, or procedures, human interventions/behaviours, that caused cascading issues across the entire network/institutions. 

Systemic failures envelop key regulators and public institutions

The biggest surprise was that expected professional oversight and systems of internal control, compliance with regulations failed not only at entity level; but more importantly at all levels of secondary regulatory reviews, independent practitioner’s reviews and including even the break down in corporate culture of integrity, transparency and commitment to diligent, good faith driven requirements of acting in the best interests of the institutions by acknowledged and accountability endowed Professionals in Governance.

These massive frauds, scams and lackadaisical control mechanisms in force reflect that the weakest links in the chain of management with transaction flows being executed without expected lack of care and commitment though exercised by capable and competent professionals. The lack of oversight supervision by the leadership executives alongside a breakdown in cultures of integrity and embedded best fit good governance practices are clearly visible.

Most strangely these massive leakages have happened within a governance regime committed to maintain a strict “zero-tolerance” policy on corruption, asserting that no one is above the law.  Current administration views combating systemic fraud, bribery, and organised crime as the essential foundation for the country’s long-term economic and democratic governance recovery. The President has firmly asserted that the full force of the law will apply without exception and declared that no offender will receive political protection, and that the corrupt will face strict justice with the law taking its course irrespective of political status or relationships, noting that the era of political patronage shielding drug lords, the corrupt and the traffickers has ended. 

In pursuit of these commitments the Clean Sri Lanka”, a flagship program touted as the operational arm of a new social contract grounded in anti-corruption, transparency, and the rule of law has been initiated.

Most professionals, including members of the Institute of Chartered Accountants, are committed to upholding a practice of reporting all instances of Non-Compliance with Laws and Regulations (NOCLAR).

Under the Financial Transactions Reporting Act, (FTRA) financial institutions and designated non-finance businesses are legally mandated to report suspicious transactions, unlawful activities as well as non-compliance with Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT). 

Mandated institutions are required to conduct ongoing due diligence and continuously scrutinise customers (know your customer rule) and their transactions and note, review and report on any inconsistencies infecting transactions with customer profile being regularly assessed. They are required to report suspicious transactions, strictly enforce and report transactions above set thresholds, including those via electronic fund transactions, telegraphic transfers and letters of credit and cash transactions exceeding specified thresholds. These institutions are required to appoint Compliance Officers to manage their accountability under the Act.

The Act further requires regulatory and supervisory institutions like the Central Bank, Bank Supervision, Exchange Management Department, Import Control, Customs, and FIU to exercise diligent oversight over transactions above set thresholds. 

The recently enacted Proceeds of Crime Act mandates designated institutions, including financial institutions, designated non-financial businesses, and virtual asset providers to disclose information, conduct due diligence, and report suspicious transactions to combat money laundering and illicit wealth acquisition and repatriating such wealth out of the country. 

Proceeds of Crime Investigation Division is authorised to coordinate with, seek information, and assistance of specified state and private institutions to trace, freeze and recover assets related to proceeds of crime. (Important to recognise the binding of Sate Institutions under Section 33. (1) Notwithstanding any provision of any law which requires a person or an institution to maintain confidentiality of certain information, the officers specified in subsection (2) shall, upon information pertaining to any one or more of the following coming to his knowledge, provide such information in writing to the Designated Officer under whose purview the investigation of the relevant proceeds of crime or the offence has been vested by this Act:- (a) the possible existence of proceeds of crime; (b) the identity of persons who may be possessing, having custody, exercising dominion or control of proceeds of crime; (c) the possible committing of an unlawful activity and the person who had been complicit in such offence; or (d) the committing of an offence under this Act) This binding, along with the commitments under Financial Transactions Reporting Act, applying as an accountability of persons leading State Institutions, Regulatory Bodies, Public authorities/entities and even on Business and Civil Society leaderships including Directors and Officers of Companies, appear not recognised, prioritised with commitments to uphold.

Primary path to assure good governance under “Clean Sri Lanka”

In the light of the above, State commitments, legal empowerments and regulatory controls must embed in systems and processes their effective implementation, to assure and enforce, an expanded scope of application of laws and regulations. Under such  a governance regime, all parties who have directly or indirectly participated or facilitated or even by their gross negligence aided and abetted the above frauds, scams or professional actions with gross negligence or have acted without good faith, diligent application of their expected executive functions, knowingly and willfully or otherwise, and have thus caused losses of vital national resources, (here importantly including Regulators and Public Institutions) should be investigated and if guilty prosecuted and penalised. 

It must be recognised that the above implementation framework whether effectively in place, will be assessed under the APG review due at the end of this year, where failure to do so will lead to catastrophic consequences of a downgrade to the “GREY LIST”, due to strategic deficiencies in countering money laundering, terrorist financing, and proliferation financing.

Passing the buck for lapses in effective governance, regulatory controls and systems supervision, with associated inactions with arrogance and uncaring governance and communications, as seen in the case of the significant value frauds, scams, systemic failures and ineffective enforcement of the laws and regulations will certainly culminate with Sri Lanka being downgraded to the Grey List.

Recommendations

The President and Cabinet must resolve and require following immediate actions:

1.  Require law enforcement and the prosecutors of the Attorney General›s Department to expedite investigations, which must be conducted professionally and with diligence under best advice.

2.  Require all leaderships in charge of Regulatory Institutions and Public Authorities connected with these reported frauds, scams and lackadaisical enforcements, to immediately inquire, reform and upgrade enforcement action to be pursued with commitment, transparency; thus, mitigating risks of repetitive systemic failures assured under effective change management initiatives.

3.  Any lacunae in the laws and regulations along with recommended best practices of risks, controls and compliance processes must be reformed, embedded in the legal framework early and effectively enforced

4. Public Administration, Finance Ministry, Central Bank, FIU, Bank Supervision, Exchange Management Departments, and Key Revenue Agencies must issue new good governance assurance requirements for management compliance ensuring effective best practices of risks and controls and compliance processes are embedded and are effectively embedded; with compliance officers specifically required ensure they are in force along with processes for whistle blowing and reporting of non-compliance with laws and regulations (NOCLAR)

5. Law Enforcement and Attorney General’s Department must ensure that any institution and any key leadership persons failing to discharge their accountability for effective governance, regulatory controls, oversight supervision with best practices of risks mitigation, control and compliance, including all associated parties who have directly or indirectly participated or facilitated or even by their gross negligence aided and abetted the any frauds, scams or professional accountability actions with gross negligence or have acted without good faith, diligent application of their expected executive functions, knowingly and willfully or otherwise, and have caused losses of vital national resources, (here importantly including Regulators and Public Institutions) should be investigated and if guilty prosecuted and penalised. 

6. All directors and officers, entrepreneurs, professionals and public practitioners, including External Auditors, Professional Accountants, Lawyers, Valuers, Consultants etc associated with or have failed in the due discharge of their professional accountability or have by their negligence  caused or have aided and abetted the fraud, scam or money laundering or other offenses with proceeds of crime and wealth accumulation must also be investigated and if guilty prosecuted and penalised.

7. All professional bodies (eg. Institute of Chartered Accountants, Chartered Financial Analysts, BASL, OPA, Bankers Institute, Institute of Engineers, Computer Society), must strictly enforce Codes of Conduct and Ethics, and Professional Standards and enforcement of disciplinary actions against the errant. 

8. Auditor General must be required to review all such instances of fraud, scams and money laundering by the conduct of a post audit and make recommendations with lessons learnt based reform measures essential for effective management and supervision with implementation surcharge provisions against errant parties

9.   Revisit the Express Pearl Claim Processes and associated illegal actions of any of the involved parties and local authorities, local agents and officials of public institutions and enforce effective action to recover damages assessed.