Regulatory reforms for securities market operations

Following is a letter to Ministry of Finance Secretary Dr. Harshana Suriyapperuma, Central Bank Governor Dr. Nandalal Weerasinghe, and SEC Chairman Prof. Hareendra Dissabandara, urging essential regulatory reforms to minimise securities market risks

Dear Sirs,

Essential regulatory reforms for securities market operations to minimise money laundering and other securities market risks

Media reports published over the last nine months have reported significant investments made by high net worth local and foreign investors in Government securities, the stock market and as Board of Investments approved private investments. 

These high-profile news making investments raise questions as to whether essential and optimum regulatory reviews and controls are in place, to ensure compliance with ‘know your customer’, and ‘source of funds’ legitimisations under the existing regulatory framework. Similar questions also arise as to whether effective regulatory processes are in place mitigating risks of round tripping, insider dealings, proxy investments via trusts where ultimate beneficial ownerships are not duly declared and other risks under securities market offenses.

A collective, prima facie risk review carried out by an accredited team of regulators together with law enforcement agency representatives has thus become a priority in eliminating any residual risks due to regulatory systems weaknesses to prevent potential significant money laundering and other securities market offenses which may be embedded within the current operational and regulatory compliance validations. 

The regulatory compliance validation framework must recognise that higher value transactions must be subjected to stronger, more comprehensive and wider in scope anti-money laundering compliance validation processes conducted by capable and competent officers. These validations must expand in scope as the value at risk enhances. For example, cumulative transactions over a defined period (say any 2-4 weeks) by a single person/business entity/group, exceeding successive step-up limits of transactions say above Rs. 500 million, Rs. 1 billion, and Rs. 5 billion should be subjected to compliance validations which expand in scope as the value at risk increases.

In pursuit of the above objective, it is evident that newly expanded and wider regulatory validation process requirements are issued binding effective enforcement of the following market participants:

1. All primary dealers

2. All stockbrokers

3. All banks and financial services institutions

4. All fund managers and unit trust managers

5. All investment companies 

These newly expanded regulations should in addition bind the following associated regulatory Institutions to set up appropriate compliance validation processes, which will reduce significantly the risks of money laundering and securities market offences:

1.Securities Exchange Commission

2. Public Debt Department

3. Colombo Stock Exchange

4. Board of Investments

The effectiveness of the compliance validation processes will be further strengthened if the regulatory institutions specified above, enter in to network support arrangements with the following State Institutions, preferably to be activated by information/intelligence/surveillance facilitation and sharing memorandums, with specific objectives and terms of reference for continuing network support:

1. Central Bank

2. Financial Intelligence Unit

3. Inland Revenue

4. Accounting and Auditing Standards Monitoring Board

It is hoped that the accredited team of regulators and law enforcement agency representatives undertaking the prima facie review will form in to a committee and develop the expanded in scope new regulations to enhance the effectiveness of the regulatory compliance validations by the listed market participants. These regulations can be published and market participants must be made aware of the essential need for same within a control regime committed to minimise corruption and enhance transparency of market operations.

A review suggestion note is attached, setting out a potential draft framework for the new expanded compliance validations processes to be enforced by banks and financial institutions, who are considered the primary accountability pillar supporting the regulatory institutions in enforcing effective regulatory control validations post investments with the objective of strengthening the systems currently in place.

Yours Sincerely,

Chandra Jayaratne

cc. President and Minister of Finance, Planning and Economic Development

Minister of Justice and National Integration

 Attorney General

Secretary, Ministry of Public Security

Director FIU,

Director Public Debt Management Department

Chairman, Colombo Stock Exchange

Chairman, Board of Investments

IMF Diagnostics Team

Editor, Daily FT for media publication