FTX implosion threatens perfect ‘40 of 40’ in financial crime fight

• Bahamas set to be upgraded on digital assets regulation....

• Nation was hailed for ‘sound understanding of sector risks’..

• But that was two months before crypto exchange’s collapse


Tribune Business Editor


The Bahamas’ bid to achieve full compliance with all global anti-financial crime standards before year-end may have been endangered by the implosion of the FTX crypto currency exchange, it can be revealed.

For one of the two outstanding standards, on which The Bahamas was hoping to achieve fully “compliant” status this month after remedying previously-identified deficiencies in its supervisory regime, relates directly to regulation of the digital assets industry.

A Caribbean Financial Action Task Force (CFATF) discussion paper, dated September 20, 2022, recommended that The Bahamas be upgraded from “partially compliant” to “compliant” on both its anti-money laundering/counter terror financing regulation of both the digital assets sector and non-profits (charities, advocacy groups and the like) when the body meets to ratify such a move at its end-November meeting.

The CFATF paper, produced less than two months before FTX’s spectacular collapse into provisional liquidation in The Bahamas and Chapter 11 bankruptcy protection in the US, even hailed this nation’s digital assets regulatory regime. Of the improvements made, it said: “All of which would suggest that The Bahamas has acquired a very sound understanding of the digital assets/ digital asset services providers sector and its associated risks.”

Part of The Bahamas’ efforts to enhance its regulatory regime involved a “risk assessment” undertaken by the Securities Commission on the digital assets space. “The Commission notes that the risk assessment finding is that the risk of fraud and scams was low,” the CFATF document noted.

That verdict could soon be subject to reappraisal given the ongoing criminal (police) and regulatory probes in The Bahamas and elsewhere into whether “misconduct” was involved in FTX’s spectacular week-long collapse. No such findings have been made yet, but the crypto currency exchange’s implosion - and presence of its international headquarters in The Bahamas - is likely to shine a fresh spotlight on the strength of the country’s regulatory regime.

And, while there is nothing yet to suggest money laundering or terror financing offences have been committed at FTX, recent developments may give other Caribbean nations who make up the CFATF’s membership alongside The Bahamas pause for thought before giving this nation a clean bill of health when it comes to combating financial crime.

Thus achieving perfect “40 out of 40” compliance with all recommendations by the CFATF’s parent, the Financial Action Task Force (FATF), could be delayed beyond the former’s end-November plenary meeting in the Cayman Islands given FTX’s ill-timed woes and the connection to digital assets regulation.

Ryan Pinder KC, the attorney general, has repeatedly said achieving “40 out of 40” compliance with the FATF’s crime fighting standards would place The Bahamas among a small select group of countries to achieve such status. And that ambition, as at September 20, 2022, was very much in The Bahamas’ grasp as the CFATF discussion paper recommended that delegates “confirm the conclusion to upgrade the rating from ‘partially compliant’ to ‘compliant’ in both areas.

“Based on the information provided by The Bahamas, it is concluded that recommendation eight (non-profits) and 15 (digital assets) should be upgraded from ‘partially compliant’ to ‘compliant’,” concluded the CFATF, the FATF’s Caribbean regional affiliate.

The report, which has been obtained by Tribune Business, said the previously-identified deficiencies in The Bahamas’ digital assets regulatory regime included the absence of “specific provisions for licensees and registrants of the Securities Commission to assess money laundering/terror financing risks of new business practices, including new delivery mechanisms or the use of new or developing technologies for both new and pre-existing products.

“Additionally, there were no measures for Securities Commission licensees and registrants to assess associated risks prior to launch or use of new products, or to take measures to manage and mitigate the risks. Adequate guidance should have been provided to the insurance, securities and investment fund industries.”

The CFATF added that The Bahamas as a country also previously lacked the procedures to identify money laundering and terror financing risks posed by the digital assets sector, and there were no mechanisms for identifying rogue persons and operators who conducted digital assets business without being licensed and registered.

However, prior to the FTX saga, the CFATF report said upgrades to The Bahamas’ flagship Digital Assets and Registered Exchanges (DARE) Act and other reforms to its regulatory infrastructure had sufficiently addressed the deficiencies to enable the country to be re-rated upwards. It put significant store in the Securities Commission’s risk assessment of the industry, completed on May 25, 2022, which concluded the “overall assigned risk rating to the sector is low”.

At that time, The Bahamas was said to have just three DARE Act registrants - one of which was almost certainly FTX, which moves its international headquarters to The Bahamas from Hong Kong in September 2021 - as well as eight licensees and a further eight applications under consideration.

“The Bahamas reiterates that the risk assessment concluded very recently on May 25, 2022, and will continue to regularly risk assess the digital assets/digital assets services provider sector, and take measures to address any threats identified in the risk assessment reports,” the CFATF said of this country’s response.

“As at May 18, 2022, there were three registrants under DARE, which were all licensed and are operating in the jurisdiction since September 2021 (eight months or less). They were initially risk rated at the application stage, which included a fit and proper assessment, review of operational risk as well as anti-money laundering, counter-terror financing and nuclear proliferation risk.”

FTX will have been among the entities to undergo such processes, which would have assessed verification of client beneficial owner identities; volume of transactions; client typologies; and products and services. “Based on the initial risk rating, two registrants were assessed as low risk and one registrant assessed as medium risk,” the CFATF report said.

“Currently, one of the three digital asset service providers registered with the Commission is scheduled for examination in the third quarter of 2022.....During the process to select registrants to be examined for the 2022 calendar year, the risk assessment scores and profiles were taken into account and a digital assets provider was selected based on the determination of its risks relative to the others. The Commission is currently onsite conducting the examination of the registrant.”

Again, it is unclear whether this was FTX. If so, it would mean the crypto exchange would have been subject to regulatory examination by the Securities Commission just before it fell apart. The regulator’s FinTech (financial technology) hub, which provided a focal point for all digital assets-related matters, received 75 inquiries in 2021 with 64 percent of those relating to DARE Act policies.

“Through responding to these policy queries related to practical cases, the Securities Commission is better able to understand the risks of digital assets and apply mitigating measures where appropriate,” the CFATF report added. 

“There has been a considerable amount of training undertaken by staff at the Securities Commission in the area of digital assets. As of May 31, more than 50 percent of the staff and 100 percent of supervision staff attended training programmes on crypto currency, block chain or regulation of digital assets and digital assets services providers delivered by credible, academic institutions.....

“In 2021, four officers of the Royal Bahamas Police Force received training on crypto currency investigations and five attended the fifth global conference on crypto currencies. All of which would suggest that The Bahamas has acquired a very sound understanding of the digital assets and digital assets services provider sector and its associated risks.” 


KapunkleUp 4 months, 1 week ago

"There has been a considerable amount of training undertaken by staff at the Securities Commission in the area of digital assets." - like what? FTX did not even have a real board of directors. This is a self inflicted wound by government and our international reputation is suffering because of it.


ThisIsOurs 4 months, 1 week ago

They need to have some really tough questions put to them. Did they let Sam get away with that because it was Sam? Because I've heard Darcy Rahming of ArawakX talk about his company's requirements for onboarding firms wanting to offer shares to the public and one of the things he stresses as a MUST is a proper governance structure. So how could Rahming demand this but the Securities exchange doesnt??? It doesnt make sense. Then there's the pic of the CEO of the exchange next to Sam at the groundbreaking for his headquarters, it's all too cozy. I think people lost all their perspective when Sam started giving out money. The emperor has no clothes on but nobody dares tell him, beautiful outfit your majesty!


Porcupine 4 months, 1 week ago

This is a lesson, which we will not likely heed. The lesson is this: All of the financial experts, including business reporters are clueless. The whole financial industry is a puffed up bunch of false claims and hopes. The value of the stock market and digital assets are based on clueless faith in their product by supposedly smart people. Do the realities not prove this over and over?. How many Bahamians own stock, or crypto currency? In a country of price control? These companies sway and outright bribe the politicians and regulators here, and everywhere. They provide no value to a nation's economy except the few tenuous jobs they provide to justify their rape of the economy. Will we ever learn? Was the bible not fairly explicit about this love of money and the money changers? So, where are the real Christians now? When people are more prone to believe, than accept knowledge and evidence, this is where we end up. For the Bahamian people, this FTX scandal means little. Yet, as many commenters have pointed out, it is merely one of a long list of scams and scandals which our politicians seem to have a penchant for. The real scandal is that we spend between $1,000,000.00 and $2,000,000.00 each and every day paying interest only, for the loans The Bahamian political establishment has taken out in our name. Each day this money leaves our shores merely to pay interest. Trust me, every prominent Bahamian politician has an exit strategy. Property and bank accounts elsewhere. Why? Because they are well aware of how they have compromised the future of this country. Take a close look at the financial status of each and every important Bahamian government department. The Bahamas is nearing a 100% debt to GDP ratio. This is not sustainable for a country like The Bahamas. We do understand what happens to a country when they start defaulting on their loans, don't we? They start taking our national assets. Our Central Bank governor and Finance ministers are not just smart. They are also nearly silent on the very real predicament The Bahamas is in. Their job security comes about by the continued obscuring of reality and the need for radical political change.


ThisIsOurs 4 months, 1 week ago

The only part I have an issue with is "nearing" 100% debt to GDP, a financial expert yold me 8 years ago we were over 100% debt to GDP. fancy accounting


Porcupine 4 months, 1 week ago

You are right. I am taking what is being told to us. As you say, fancy accounting is what the best accountants are paid handsomely for doing.


DDK 4 months, 1 week ago

Exceedingly well put, Prickly One!


TalRussell 4 months, 1 week ago

I'm sorry comrades, but as stickler for why calendar dates which have even been the key evidence have kept many a defendant from wrongful imprisonment can become important evidence weighing tool.

What we're led believe are the dates on the September 2021 calendar, referencing the setting up Sam Bankman-Fried Bahamian FTX headquarters, well, placed under microscope, they just aren't exactly lining up — Yes?


ThisIsOurs 4 months, 1 week ago

From cnn.com today:

"CZ, as he’s known, was speaking at a conference in Indonesia on Monday. He said last week that comparing the current crypto turmoil to the 2008 global financial crisis is “probably an accurate analogy.”


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