Published On:Friday, October 01, 2010

By NEIL HARTNELL

Tribune Business Editor

A leading attorney yesterday expressed concern that the Bahamas was running "a real computational risk" because very few fraudsters and wrongdoers responsible for financial collapses in this nation had been brought to justice, while the regulators rarely failed to detect such problems in their infancy.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business that the Bahamas and its financial services industry "had to be concerned" about the message being sent to clients/foreign investors when it came to holding financial criminals and wrongdoers to account for their actions.

And he argued that Bahamian financial services regulators needed to take a more proactive approach and deal with problems as early as possible wherever they arose, detecting warning signs before situations got out of hand and became impossible to rectify.

"The regulatory oversight, in many instances, seems to be more reactive than proactive, and not always efficient in detecting when it should fraudulent activity or wrongdoing that ultimately leads to the collapse of investment funds, banks or some other entity," Mr Moree told Tribune Business.

He declined to cite specific situations, but one where the "writing was on the wall" from at least 2005-2006, prior to its eventual placement into Supreme Court-supervised liquidation in early 2009, was CLICO (Bahamas).

The sector regulator, the then-Registrar of Insurance, had been aware that CLICO (Bahamas) had been moving substantial funds (eventually totalling $73 million) out of the Bahamas for investment in Florida-based real estate projects since 2003-2004, and this newspaper since 2007 had been raising questions about the company's financial health, particularly why there was such a large concentration of its assets in a single, illiquid development.

Yet no regulatory action to protect policyholders and creditors was taken until CLICO (Bahamas) problems, and those of its Trinidadian parent, CL Financial, had become so terminal that they were impossible to correct.

Meanwhile, Mr Moree added: "Once the collapse occurs, we've not always been very good at bringing wrongdoers to account in a way that protects the overall integrity of the industry, so that the message goes out that if you're involved in fraudulent activity in the Bahamas, you run the real risk of being caught and brought to justice, rather than the Bahamas being seen as the 'Wild Wild West', where if these failures happen you can run off to other countries and nothing happens to you.

"The point is: How does the jurisdiction deal with the failure from the point of view of bringing wrongdoers to account, and how efficient is the court system and regulatory structures in offering the highest level of protection to investors in getting back their money?"

It was here, Mr Moree said, that the "reputational risk" lay for the Bahamas. Financial collapses and frauds took place throughout the world, he noted, even in the US, UK, Canada and major G-7 countries, but the key was what happened post-collapse and whether this nation was doing enough to give comfort to foreign investors/clients that their interests would be sufficiently protected and looked after.

The leading QC added: "That is something we have to take a look at - the regulators, the white collar crime prosecutors, and the directors of the police force responsible for commercial crime.

Record

"It seems to me that that they all have to look at their record for bringing people responsible for white collar crime, domestically and through cross-border activities, to justice."

Strong action, Mr Moree emphasised, would "act as a deterrent to those prepared to perpetrate fraud through activities and operations in the Bahamas.

"We've got to demonstrate through actions and regulatory structures that if you rip off investors in the Bahamas, you will be brought to justice and held accountable for your conduct. That is a very important aspect to maintaining our reputation as a first-tier international financial centre. It is only in that environment investors feel comfortable in Bahamian entities.

"It's easy to say that we have integrity, and the financial services industry is first-class and well-regulated, but we have got to demonstrate that is indeed the case when something happens."

One such example was the $25 million collapse of former broker/dealer Caledonia Corporate Management that the resulting fall-out, which has been covered extensively by Tribune Business.

This newspaper has regularly been contacted, via phone and e-mail, by Caledonia clients questioning what action the Securities Commission of the Bahamas will take in relation to the collapse, and whether it actually has any regulatory enforcement teeth.

Caledonia's $25 million collapse resulted from allowing a now-convicted fraudster to trade on margin as part of a 'Pump and 'Dump' stock manipulation, using other clients' assets - without their knowledge - as collateral for his activities. When the margin became unsustainable, the Canadian correspondent broker sold off innocent clients' assets to cover the hole, something that has been admitted by a former senior Caledonia executive in sworn testimony.

Yet the Securities Commission, at least publicly, appears to have taken no action in more than two years against the principals at Caledonia.

The Bahamas has also had to deal with its fair share of investment fund implosions over the past decade, such as the collapse of the Olympus Univest fund and potential loss to investors of an estimated Cdn$440 million.

The Securities Commission began investigating the fund's Canadian manager, Norshield, in 2004, but it is not known whether any enforcement action was taken. The collapse also appeared to play a major role in the closure of Bahamian fund administrator Cardinal International, although the company denied any wrongdoing and no findings have been made against it so far by the liquidators.