Financial Crime World

Palau’s Banking Supervision Lacks Teeth: Prudential Regulations Stuck in Development

A recent assessment of Palau’s compliance with international banking regulations has revealed significant shortcomings in its prudential supervision, leaving the country’s financial institutions vulnerable to regulatory gaps.

Key Findings

  • Palau is compliant with only one core principle and largely compliant with six others.
  • The country is materially non-compliant with seven principles and non-compliant with 11.
  • Major outstanding issues include weaknesses in the Financial Institutions Act (FIA) that threaten effective banking regulation and supervision.

Concerns with the Financial Institutions Commission’s Governing Board

  • The board consists of four voting members chosen by the President from a list submitted by the Chamber of Commerce, with two representatives from the business community and two bankers.
  • This composition may lead to conflicts of interest and operational paralysis, as noted by some bankers during meetings with the mission.
  • Recommendations include adding an outside member to the board and amending Section 16 of the FIA to allow government employees to serve on the governing body.
  • The commission has refrained from taking adjudicatory action, including deciding on banking license applications, due to the absence of a provision granting legal protection to its members when acting in good faith within their authority.
  • This situation has caused concern and uncertainty in the banking industry.

Limitations on the Financial Institutions Commission’s Regulatory and Supervisory Powers

  • Provisions in the FIA require external approval for regulations and limit the conditions that can be imposed on financial institution licenses.
  • The report urges the amendment of these provisions to allow the FIC to exercise its powers without interference.

Recommendations

  • Address outstanding issues promptly to ensure effective banking regulation and supervision in Palau.
  • Amend Section 16 of the FIA to allow government employees to serve on the governing body.
  • Add an outside member to the Financial Institutions Commission’s Governing Board.
  • Strengthen legal protection for the commission’s governing board and staff.

Conclusion

While some non-compliant principles may eventually be brought into compliance through prudential regulations and technical assistance, it is essential to address the outstanding issues promptly to ensure effective banking regulation and supervision in Palau.