Financial Crime World

Palau’s Banking Regulation and Supervision Lacking Key Elements, Report Finds

A recent report has evaluated Palau’s compliance with international banking standards, revealing significant gaps in its regulatory and supervisory framework. While Palau has made progress in some areas, major issues remain unresolved, posing a threat to the effectiveness of banking regulation and supervision in the country.

Critical Concerns

The report highlights three critical concerns:

  • Composition of the Financial Institutions Commission (FIC) governing board: The assessment found that the current composition provides excessive influence to the banking industry, potentially leading to conflicts of interest and operational paralysis.
  • Legal protection for FIC staff: The lack of legal protection has hindered the commission’s ability to take adjudicatory action, making it essential to amend the Financial Institutions Act (FIA) to include a provision granting legal protection to FIC staff when acting in good faith within their authority.
  • Regulatory and supervisory powers of the FIC: Certain provisions in the FIA limit the commission’s ability to exercise its powers, making it difficult for it to conduct effective banking regulation and supervision.

Assessment Findings

The report found that Palau is:

  • Compliant with only one core principle
  • Largely compliant with six principles
  • Materially non-compliant with seven principles
  • Non-compliant with 11 principles

Recommendations

To address these outstanding issues, the mission recommends:

  • Amend Section 16 of the FIA: Remove the ineligibility of government employees to serve on the FIC governing board.
  • Include a provision granting legal protection to FIC staff: In the FIA.
  • Reconsider provisions in the FIA: Limiting the regulatory and supervisory powers of the FIC.

Timeline

Palau should prioritize addressing these issues to ensure effective banking regulation and supervision. The Financial Institutions Commission (FIC) should develop adequate implementation capabilities, including through an intensive technical assistance program.

Next Steps

The international community will be closely monitoring Palau’s progress in addressing these concerns. A thorough review of the country’s regulatory framework is necessary to ensure that it meets international standards and promotes financial stability.