Compliance ‘Fatigue’ Hits CFOs. Could OFCs Be Next?

1,700 executives, including Chief Financial Officers (CFOs) in 43 countries admitted in an Ernst & Young (EY) survey on corporate bribery to “a certain degree of fatigue about anti-corruption and compliance initiatives”

In addition, 15% of the 400 CFOs interviewed in this year’s instalment of the ‘global fraud survey’ said they would make cash payments to win or retain business. Another 5% confirmed that they would misstate financial statements, up from 2% last year.

EY surmises that based on the responses, companies are increasingly willing to make cash payments and misstate results to survive the economic downturn.

The survey does not however indicate whether the reported lassitude is because of the failure of initiatives designed to stem the growth of institutionalised bribery and corruption; or the lack of enforcement within the corporate structure, as 44% of executives believe that employees haven’t been penalised for violating company policies.

Certainly there is support for the view that ‘lip-service’ to the ‘politically correct’ missives of the corporate hierarchy is increasingly widespread because of reticence to penalize wrong-doing thereby suggesting that rule-breaking in this area is, at best , to be condoned and at worst, encouraged.

Perhaps the executives are ‘tired’ of their global competitiveness being compromised by a slew of new anti-corruption and bribery legislation or the robust enforcement of existing ones.

Dodd-Frank Act

Case in point, the Dodd-Frank Wall Street Reform and Consumer Protection Act, described by some as the most sweeping financial law enacted since the Great Depression. S.1504 of the Act  would require resource companies listed on the U.S Stock Exchange to make timely and detailed disclosures of the tax and royalty payments they make to governments worldwide.

Anti-poverty groups like Oxfam and Publish What You Pay hope that such transparency can help reduce corruption in thievery-plagued countries by giving local media and civil society the data they need to make their governments accountable for the payments.

Although so-called ‘Big Oil’ is already part of a voluntary regime, the proponents of Dodd-Frank what tougher rules for large oil and mining companies.

The worry, as explained by ExxonMobil Vice President and Controller, Patrick Mulva, in a letter to the U.S Securities and Exchange Commission,  is that s. 13504 is excessively burdensome and would have a detrimental effect on the global competitiveness of U.S companies. It would also allow their Chinese, Russian, Brazilian ad Indian rivals, unbridled by the requirements of Dodd-Frank, to exploit their financial disclosures to outbid them and potentially persuade the developing world to avoid doing business with U.S companies altogether.

What about OFCs?

Once it was clear that the ‘onshore’ sub-prime market failure was the source of the financial contagion that brought economic system to a near standstill, a raft of compliance measures (national and international) was unleashed targeting offshore financial centres (OFCs) and not the onshore centres whose institutional (public and private) created the problem. In typical fashion rather than look within, the G-20 looked outward in an effort to distort the message of culpability, albeit unsuccessfully.

Nonetheless they have managed to place ‘compliance’ at the centre of their ‘rebuilding’  agenda with rules – buttressed by threatened collective sanction – governing transparency, tax information exchange, anti-money-laundering, solvency, and terrorist financing to name just a few.

OFCs, especially the smaller island financial centres several times removed from the epicentre of the problem have been inundated with a steady stream of mandatory assessments, peer reviews, country reports, supplemental reports and progress reports by the IMF, Financial Stability Board, the Financial Action task Force, the World Bank, and the OECD Global Forum, to monitor and assess compliance with the plethora of rules that together comprise an industry of international compliance. This industry has, in turn, provided work for a growing network of private sector consultants and international technocrats.

Whether borne out of ‘fear’ or in exchange for ‘favour’, OFCs have welcomed the opportunity to demonstrate their willingness to support global efforts to improve the financial system. In fact for the better part of four years OFCs have focussed almost exclusively on ensuring that they meet and exceed what has become the ‘shifting sands’ of international compliance.

Compliance ‘fatigue’ by OFCs is inevitable if the dogma of a ‘one-size fits all’ is not abandoned by international regulatory agencies which cause the unnecessary diversion of country resources away from programmes aimed at improving competitiveness in support of development  and towards setting up systems to guard against still unproved risks to the global economy by these economies.

Indifference will mount as it becomes clear that the rules are a deliberate attempt to reduce the market share of established OFCs involved in the legitimate provision of cross-border business and financial services.

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