Financial Crime World

Strengthening Banking Regulation in Palau: Key Recommendations

The Financial Institutions Act (FIA) of Palau requires attention to several major outstanding issues that impact the effectiveness of the Financial Institutions Commission’s (FIC) regulatory and supervisory powers. This article outlines these issues and provides key recommendations for improvement.

Outstanding Issues with Palau’s FIA

1. Composition of the FIC’s Governing Board

The current composition of the FIC’s Governing Board provides excessive influence from the banking industry, leading to potential conflicts of interest and operational paralysis. To address this issue:

  • Designate an additional voting member from outside the banking industry as soon as possible.

The absence of legal protection when acting in good faith within their authority is contrary to international best practices, causing concern and uncertainty in the banking industry. This situation is particularly pressing given that current licenses are set to expire on April 30th.

3. Regulatory and Supervisory Powers of the FIC

Various provisions in the FIA militate against effective regulation and supervision by the FIC. These provisions make it almost impossible for the FIC to exercise its regulatory and supervisory powers, significantly impinging on its autonomy and authority.

Key Recommendations

  1. Amend Section 16 of the FIA: Remove the eligibility restriction for government employees to serve on the FIC’s Governing Board while preserving the Chamber of Commerce’s right to choose nominees.
  2. Include Legal Protection Provision: Amend the FIA to grant legal protection to the FIC’s Governing Board and staff when acting in good faith within their authority.
  3. Reform Regulatory and Supervisory Powers: Revise provisions (Sections 79(a), 62(b)(3), and 33(b)) to allow the FIC to exercise its regulatory and supervisory powers without external interference, while operating within the scope of the FIA.

By addressing these issues, Palau can strengthen its banking regulation and supervision framework, ensuring a more stable and secure financial environment for its citizens.