Financial Crime World

Palau’s Banking Sector Faces Technical Shortcomings

A recent assessment of Palau’s banking supervision has revealed significant technical shortcomings that could jeopardize effective regulation and supervision in the sector. The Financial Institutions Commission (FIC), responsible for overseeing Palau’s financial institutions, lacks permanent staff and faces numerous challenges in implementing its mandate.

Key Issues

The assessment identified several critical issues that need to be addressed promptly:

Composition of FIC Governing Board

  • The current composition of the FIC’s Governing Board, dominated by representatives from the banking industry, raises concerns about potential conflicts of interest and operational paralysis.
  • The mission urges the addition of a non-industry representative to ensure a balanced perspective.
  • The FIA lacks provisions granting legal protection to the FIC’s staff when acting in good faith.
  • This omission creates uncertainty and hinders the Commission’s ability to perform its duties effectively.
  • The President has submitted an ad-hoc Bill to Congress, which the mission fully supports.

Regulatory Powers of the FIC

  • Sections 79(a), 62(b)(3), and 33(b) of the FIA restrict the FIC’s ability to exercise regulatory powers without external interference.
  • These provisions significantly impinge on the Commission’s autonomy and authority, making it challenging for the FIC to conduct effective banking regulation and supervision.

Recommendations

To address these shortcomings, the mission recommends:

Amend Section 16 of the FIA

  • Remove the ineligibility of government employees to serve on the FIC’s Governing Board.
  • Include provisions granting legal protection to the FIC’s staff when acting in good faith within the scope of their authority.

Revise Sections 79(a), 62(b)(3), and 33(b) of the FIA

  • Allow the FIC to exercise regulatory powers without external interference, while ensuring that it operates within the scope of the FIA.

Conclusion

The Palauan banking sector faces significant challenges in its efforts to ensure effective regulation and supervision. Addressing these technical shortcomings is crucial to maintaining stability and confidence in the financial system. The mission urges prompt action to address these issues and ensure the FIC’s ability to perform its duties effectively.