• 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

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

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.”