Financial Crime World

Palau’s Banking Supervision: A Review of Technical Shortcomings

A recent report has shed light on the technical shortcomings in Palau’s banking supervision, highlighting concerns over compliance with international standards.

Governance Issues

The Financial Institutions Commission (FIC), established in February 2002, is responsible for regulating and supervising Palau’s financial institutions. However, the governing board lacks a critical fifth member, leading to concerns over conflicts of interest and operational paralysis.

The FIA does not provide legal protection for the FIC’s governing board and staff when acting in good faith within their authority. This lack of protection is causing uncertainty in the banking industry, with some licenses set to expire soon.

Regulatory Powers

The report highlights weaknesses in the regulatory and supervisory powers of the FIC. The commission’s ability to issue regulations and enforce prudential standards is severely limited by provisions in the FIA, which require external approval from the OEK and Supreme Court.

Recommendations

To address these technical shortcomings, the review recommends:

  • Amending Section 16 of the FIA to remove the ineligibility of government employees to serve on the governing board, while preserving the Chamber of Commerce’s right to choose nominees
  • Including a provision granting legal protection to the FIC’s governing board and staff

“We believe that the FIC should have the power to issue and enforce prudential regulations without external interference, provided it operates within the scope of the FIA,” said a spokesperson for the review team.

Conclusion

The report concludes by emphasizing the importance of addressing these technical shortcomings to ensure the stability and integrity of Palau’s financial sector. The government has been urged to take immediate action to address these concerns and ensure the effective regulation and supervision of the country’s financial institutions.