Flexibility is the key to tackling financial crime: New international study edited by Cass Business School financial regulation

The study revealed that whilst financial crime is now recognised as a global concern, there are serious dangers in dictating so-called ‘international standards’ to different countries with different cultures and institutions.

For Western economies, the major concern is that the costs of legislation designed to fight financial crime will outweigh the benefits. In Australia, finance industry actors are worried about the associated costs of proposed regulatory reforms and the USA is significantly burdened by the Sarbanes-Oxley Act of 2002.

The research shows that whilst new procedures and controls may help prevent more financial crime in the future, it will always be necessary to balance the effectiveness of government measures with their associated costs. Harmonised and inflexible international standards will arguably make it more difficult for policymakers to adapt to changing local circumstances, with the danger that regulations will become increasingly costly and ineffective.

In South Africa, “international template solutions” were initially applied instead of the country formulating its own responses to the problems concerned. The unintended result of this action was the exclusion of poorer sections of the population from access to financial services. Dr Nakajima said: “a wholesale transplant of foreign measures is destined for failure even though it is often the approach of governments when faced with external pressures.”

At the same time it is essential that adequate controls are in place to control serious financial crime in order to ensure the credibility of the financial services industry and government jurisdictions. A study of Jamaica claimed investors who are apprehensive about the integrity of the jurisdiction and its financial markets will lose confidence and simply send their wealth abroad.

Balancing effective financial regulation with cultural issues is particularly important in Islamic regions. The research suggests that Muslim countries currently suffer significant damage as a result of financial crime and corruption. It calls for scholars of Islam to develop their legal system to provide greater recognition of financial crimes and to allow a degree of harmonisation with international agreements in this area.

To download Dr Nakajima's editorial, please visit: http://www.iea.org.uk/record.jsp?type=economicAffairs&ID=331