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The strategy to recover the proceeds of crime has proven to be problematic, but no better approach has yet been articulated. This should constitute an issue for further research. It is useful particularly to financial institutions who wish to protect the integrity of their system and promote stability.

Abdullahi Y. Emerald Group Publishing Limited. Please share your general feedback. You can start or join in a discussion here. Visit emeraldpublishing. Please note you might not have access to this content. You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account. If you would like to contact us about accessing this content, click the button and fill out the form. Contact us. In its recommendation, the Group has suggested that transparency on adverse supervisory action should be introduced in a phased manner, which would help all stakeholders.

The Advisory Group stresses that with predominant public ownership, it is important to avoid the pitfalls of regulatory capture and this would, to some extent, be avoided by disclosure of adverse action. In fact, with public ownership of banks, such disclosure reduces the risk of regulatory capture. Further, as the fact of public ownership provides an anchor against panic reactions, disclosures per se are unlikely to be dislocative; on the contrary, disclosures could have a salutary effect of strengthening the overall system by putting such information in the public domain.

To sum up, the Group emphasised the need to continue and deepen the reforms begun after the Report of the Working Group on the Money Market. The Advisory Group was of the view that for an effective transmission of monetary policy, the changes in the various segments of the financial markets should be allowed to traverse freely through different segments of the financial markets. Fiscal transparency is important because fiscal soundness is one of the core requirements for financial stability and transparency is needed for markets to be able to assess fiscal soundness accurately.

Further, fiscal and monetary policies are the two pillars of public policy. Ensuring transparency in the policy framework would require both systems to be in sync. The Advisory Group used this version as the benchmark against which the degree of fiscal transparency in India has been evaluated. The Code is based on four general principles, which are further elaborated into more detailed guidelines and practices. The four principles are:. Clarity of roles and responsibilities within government and between governments and the rest of the economy.

Assurances of integrity, including those relating to the quality of fiscal data and the need for independent scrutiny of fiscal information. The Group has examined the extent to which fiscal practices in India comply with each of the detailed guidelines on the Code keeping in mind the clarifications and elaborations in the Manual. Where the existing practices do not comply, or comply only partially, the Group attempted to assess whether full compliance is desirable and feasible, and if desirable, indicated a time frame for compliance. The position at the state government level is much less satisfactory with most states being well behind the standards achieved by the central government.

Resetting the financial system: A Bank for the Common Good - Christian Felber - TEDxBrussels

However, at present the Code as formulated is to be applied only at the national government level; non-compliance at the state level would not amount to non-compliance with the Code. But, in terms of policy, that is an area of concern that we need to address. A summary assessment of these issues highlighting the areas where current practice is deficient and the recommendations of the Group for necessary action are presented in the following paragraphs.

Most of the requirements of the Code in this area are fully met. The roles and responsibilities of the central and state governments are well defined and there is a clear legal framework governing the management of the budget and extra-budgetary funds. The division of expenditure and tax powers is complex, with areas of overlapping responsibility and multiple channels for resource transfers, but the basic requirements of transparency are met. In the interest of transparency, the Group recommended that the institutional table for India in the Government Finance Statistics, IMF, should be revised to make it comparably detailed with the entries for other countries.

For example, various central government institutions, which have their own budgets outside the central government budget, could be identified e. The Group observed that the most important deficiency relates to the prevalence of quasi-fiscal activities QFAs undertaken by the banking system and by non-financial public sector enterprises, which are not transparently identified and quantified.

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These included control over interest rates, and directed credit, etc. However, even with directed credit, it is not easy to quantify the extent of QFA involved since it is difficult to determine how far the directed credit requirement actually leads to lending, which would not take place otherwise because the directed credit target is only an aggregative target which the bank must meet, leaving the bank free to decide on individual credit decisions.

In the case of public non-financial sector, the scope for QFAs is large since they can deviate from commercially sound market practices for a variety of reasons. For example, non-financial public enterprises may suffer from inefficiency, poor work culture and poor management quality, all of which leads to certain types of 'non-market behaviour' which is reflected in lower profits or losses.

Such losses should not be viewed as QFAs. The Group, therefore, suggested a restricted definition of non-market behaviour, which is specifically mandated by the Government, by virtue of its ownership and control, with the objective of meeting an explicit fiscal purpose such as providing a subsidy to a particular Group in society. However, even this is not quantified and so is difficult to estimate. The classic example is of course that of the railways which engages in a substantial degree of cross-subsidisation of passenger traffic by freight and also engages in cross-subsidisation within freight categories by overcharging some categories and undercharging others.

Similar examples can be found in a number of other public agencies. The problem of lack of transparency about QFAs is even more important at the state level where there are many public sector organisations, which act in a non-commercial manner. The best example would be the state electricity boards. An area where current practice could be improved relates to the prescription that the basic principles of budget management should be embodied in a general budget system law, which should have constitutional, or near constitutional status.

Although the scope of the budget has been defined by the Constitution and clear budget procedures have evolved over time, India does not have a budget system law. Further, given the importance of State Governments in public expenditure, it would be desirable if we can move to a system of uniform budgetary practices at the state level as well. Another area of concern relates to the issue of transparency in tax laws.

Although the principle that taxes must be levied on the basis of explicit legal authority is strictly complied with, our tax laws are lacking in transparency. The complexity of the tax structure, especially the large number of exemptions, creates room for uncertainty and administrative discretion. Administrative procedures are archaic and involve direct interaction between the assessee and the tax administrator, which creates the possibility of case by case determination of tax liability. Therefore, the Group felt that a major effort at simplification, and greater use of information technology, especially electronic filing, is urgently needed.

Government involvement in the private sector through regulation and equity ownership is exercised on the basis of clear legal authority. However, the criteria to be used in the exercise of executive authority are not always very clear. The Group recommended that the recommendations of Organisation for Economic Co-operation and Development OECD relating to the characteristics of transparent regulations, be treated as indicators of best practices and existing rules and regulations be systematically reviewed in the light of these guidelines. There are significant gaps in this area between current practice and the requirements of the Code.

Indian practice complies fully with international standards regarding public availability of information for the year for which the Budget is presented and also for preceding years. However, forecasts of key fiscal magnitudes are not provided. Best practice as indicated in the Manual requires projections for years ahead, but this is not feasible in our conditions. However, a projection of major categories of expenditure and revenue two years ahead is feasible and should be implemented.

Therefore, the Group has recommended that the proposal should be implemented in the Budget for irrespective of whether the Bill is passed by then. Information provided on contingent liabilities of the central government is inadequate. The Budget documents provide information on loan guarantees but not on other contingent liabilities, e. Liabilities on account of letters of comfort, which fall short of legal guarantees but are effectively almost identical, are also not shown. The implicit burden on the government for recapitalisation of public sector banks is also not reported, nor is the potential liability associated with implicit government guarantees of other public financial institutions, such as the Unit Trust of India that received some support recently.

The Group recognized that explicit quantification of implicit liabilities might be counter-productive. However, ignoring these elements completely clearly understates the potential fiscal risk. Therefore, the Group recommended a review of the current policy on disclosure of contingent liabilities with the objective of moving to fuller disclosure.

In addition, the absence of data on forward projections is a major weakness and an impediment to any effort to assess fiscal sustainability. Thus, they recommend that a start should be made by giving a forward projection for two years ahead of the budget; again passage for the FRBMB Bill will address this lacunae. No information is provided on tax expenditures. While this is a difficult area, and practice varies considerably across countries, the Group recommended we could start by reporting the revenue loss from major existing and all new tax concessions.

The basic requirement of fiscal transparency is that a statement on QFA be included in the budget, which indicates the public policy purpose of each QFA, its duration and the intended beneficiaries. The Group recommended that a start may be made towards this objective by listing the major QFAs in the system. Initially, these estimates could be provided in the Economic Survey for earlier years. At present, the information presented in budget documents on the financial assets of the government is limited to the opening cash balance. No information is provided on government equity in public sector enterprises and outstanding loans to these enterprises.

The Group recommended that this information should be made available. Since the information typically becomes available with a lag, it may be appropriate to provide it in the Economic Survey presented just before the Budget. The guidelines on debt reporting are substantially met, though there are gaps that need to be filled. The external liabilities reported in the Receipts Budget are valued at historical exchange rates.

The Group hence recommended that the basis of reporting should be changed to the market exchange rate. Given the scale of fiscal activity and the size of state level fiscal imbalances, it is important to highlight the consolidated position at the time of discussion of the budget in the Parliament. The Group recommended that the Economic Survey should incorporate a fuller discussion of recent trends in the consolidated position of central and state governments especially regarding trends in capital expenditures and in the basic fiscal balance measures, fiscal deficit, primary deficit, revenue deficit, etc.

This part of the Code seeks to make the assumptions underlying the budget and the rationale of budget policy more open and available for scrutiny by the legislature and the public. There are significant deficiencies in current practice in this area, which need to be corrected though many of these will be substantially addressed once the FRBMB is enacted. However, until that is done, the Government should start providing the information on macroeconomic parameters and assumptions on a voluntary basis.

This part of the Code is substantially complied with. The institutional mechanisms for independent audit of fiscal data are very strong. The accounts of both the central government and the state governments are audited by the CAG, which has developed an enviable reputation for high standards of independent and strict scrutiny. Another area of non-compliance relates to assessment by independent experts. Here too, the FRBMB if passed or even if its provisions are voluntarily complied with, then the implied disclosure of information will ensure an adequate basis for an independent and open assessment through the academic and research community.

The passing of fiscal policy legislation currently before parliament would result in the publication of statements that address the current lack of background information and analysis in connection with the central government budget. However, there would still be need to pay more attention to reporting on general government finances, to providing information on contingent liabilities and QFAs, and to the analysis of fiscal risks'. Inter-governmental fiscal relations could be simplified and clarified, particularly with a view to clearly establishing the role of central government in enforcing fiscal discipline on the states.

The sharing of tax powers between central and state governments is also a source of complexity, and the expenditure framework needs to be strengthened by clearly distinguishing between current and capital spending and by placing more emphasis on performance audit. Fiscal practices at the state level are generally behind the standards achieved at the central government level and there are many gaps in comparison with the requirements of the Code. Since the Code is not being applied at present below the national level, non-compliance at the state level does not constitute non-compliance with the Code.

However, from a substantive point of view, it is obviously important that fiscal transparency should be extended to state government levels also, since the scale of fiscal activity at the state and local levels is very large. In the absence of full fiscal transparency at the level of states, it is obviously difficult to evolve a consistent approach to fiscal policy at the state level. Therefore, the Group recommended that the Finance Secretaries Forum could review the Report of the Advisory Group on Fiscal Transparency and determine a set of minimum standards on transparency which all state governments should achieve within a three year period.

In particular, the state governments should be encouraged to increase the extent of reporting on contingent liabilities and at least major tax expenditures and QFAs especially losses of State Electricity Boards. During the early s, free or near free movement of capital across the boundaries of nations accelerated the process of globalisation in financial markets. With the integration of different financial markets worldwide and with more and more new innovations, international financial activities took myriad shape.

The world economy, during this time, also experienced several crises. One of the major reasons behind the crises was identified as the lack of adequate, timely and reliable information in a standardised form, obscuring financial weaknesses and imbalances in countries. Internationally, an urgent need was, therefore, felt for introducing a standardised information and dissemination system to minimize the possibility of market participants acting on misinformation or misinterpretation of available information.

Though subscription to the SDDS was voluntary, India was one of its early subscribers with the subscription starting from January 1, The availability and quality of data dissemination in compliance with SDDS was considered a desirable aspect. The Advisory Group undertook a detailed study of the requirements of the IMF under SDDS, comparing the compliance of India and other subscribing countries as well as the problems encountered in complying with some of them. The Group observed that thanks to its more advanced information base built over decades, there were a large number of data categories under which India had been disseminating information more frequently and with a shorter time lag than those prescribed by the IMF under the SDDS.

However, the Group identified some grey areas. Among these, the Group observed that India had chosen to exercise the flexibility option available under the SDDS in respect of the following two categories:. The Group held the view that considering the complex structural features of the Indian economy, data presently generated and disseminated by India on its employment-unemployment trends were sufficiently scientific and well received.

Therefore, the Group concurred with the position taken by the official agencies in opting for the "flexibility" option pertaining to the data on labour market. Irrespective of its size, the Group felt that it would be necessary for the policy-making bodies as well as the public at large to have an insight into the overall size of the local body finances.

Therefore, the Group suggested the Government of India, the State Governments, RBI and the Central Statistical Organisation CSO to co-ordinate their data gathering activities in these respects, especially pertaining to public sector undertakings and local bodies. In this regard, the Group also suggested to put forward a time-table for the dissemination of data for general government operations or total public sector operations including the data for these two sub-sectors.

Further, in regard to Data template on international reserves and foreign currency liquidity, the steps taken by RBI, after the Groups report, have ensured compliance. Besides the above areas, the Group also pointed out a few other minor limitations in the Indian data dissemination standard. The Group suggested that forward-looking indicators should be disseminated in certain areas viz.

The Group recommended that hyperlink from the DSBB to the NSDP of India should be established quickly and the system of hyper-link should be further extended to take care of the links with more disaggregated information. The Group also noted that SDDS prescribed that subscribing members would provide a summary description of methodology for each data category on the DSBB, including statements of major differences from international guidelines.

The Group suggested that summary methodologies should be presented for all the data categories by the respective authorities. Accounting standards represent the grammar set of rules of accounting to be followed in preparation of the financial statements. The generally accepted accounting principles GAAP encompass conventions; rules and procedures necessary to define accepted accounting practices at a particular point in time. The discussion of standards refers to the work by standard setting entities, viz. The Group on Accounting and Auditing studied the present status of applicability, relevance and compliance in India of the relevant international standards and codes on accounting and auditing standards, reviewed the availability of various accounting standards in India and compared them with those of corresponding to International Accounting Standards IAS.

ASB of ICAI has so far issued 23 standards, which are on par with those of International Standards subject of course to differences arising from country specific characteristics. Nine standards are in the process of issuance. In addition, a number of Guidance Notes have been issued.

IAPC has issued 36 standards and 12 statements. As regards the general issue of harmonisation with International standards, it is important to note that the given divergence between domestic tax and other regulatory laws with those in other countries, there will always be difference in the corresponding accounting and auditing standards. But to enhance transparency, the Group recommended mandatory explanation as a note to the Indian standard giving the reasons for the departure from the international standard.

The report does a detailed assessment of a number of standards and this can be the basis for a more complete exercise. In addition, given that a number of companies are seeking to voluntarily comply with international standards for purposes of listing or issuing depositary receipts, it would be useful to provide a roadmap linking the differences. Further, the issuance of Indian standards in conformity with international standards needs to be speeded up. It should be emphasised that the standards in discussion are not fixed over time in either India or abroad.

Thus, convergence is a dynamic process where the relevant standards both domestically and internationally are continually evolving. With a view to speed up the convergence process and yet maintain quality, the Group had recommended a restructuring of the Accounting Standards Board with greater representation to regulators. The Group has identified a number of areas of concern which need to be discussed and addressed This would ensure both better compliance with the standards as well as lower levels of litigation.

The report gives a number of examples, but formally it would be desirable if a process can be set up to ensure consistency and necessary amendments made to Income Tax and Company Laws. While the amended Companies Act provides for disclosure of non-compliance of standards by the company, the DCA through the ROC remains weak in its ability to enforce compliance.

An appropriate way would require the creation of an empowered panel to which auditors can report violations. This committee monitors the existence of relevant accounting standards and their harmonisation with the corresponding International Accounting Standards. It also mandates the adherence to standards and enforces the same through the listing agreements between the companies and stock exchanges.

Therefore, at least in so far as listed companies are concerned, a better enforcement mechanism has been put in place. The Group recommended the creation of an emerging issues task force to deal with situations not covered in the IASC standards. The presence of such a Group could also reduce the time taken in issuing new standards. Bankruptcy Law is one area where the Indian situation is far from satisfactory when evaluated against the best practice norms. India at the moment does not have a comprehensive or satisfactory legal framework.

Further, there is considerable terminological confusion in the meaning and content of terms like bankruptcy, insolvency, liquidation, dissolution, etc. Bankruptcy as a system that encompasses restructuring and or liquidation of companies is virtually non-existent. In , a quasi-judicial body, the Board for Industrial and Financial Reconstruction BIFR was established to secure timely detection of sick and potentially sick industrial companies, and the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies.

However, the open-ended character of this process as well its poor integration with the liquidation aspects have implied considerable opaqueness and delays. Dissatisfaction with the current system has led to numerous calls for reform. Given this backdrop, the Advisory Group on bankruptcy law had to work somewhat differently from other Groups.

They, therefore, analysed international practise as well as draft guidelines being developed at the IMF and prepared a comprehensive report on the structure of desirable bankruptcy system. They also developed an illustrative code entitled 'Corporate Bankruptcy and Winding up Code, ' as an annexure to its report to highlight implementable characteristics.

Money Laundering and Financial Crimes

The salient features of this were:. Creation of a dedicated Bench of the High Court to deal with all sorts of bankruptcy matters. Substitution of the institution of official liquidator with professional trustees. Special procedure for banking companies and adoption of general bankruptcy proceedings in respect of non-banking financial institutions, public corporations and government companies. The illustrative code suggested by the Advisory Group was framed by fixing the objective of bankruptcy as asset protection and maximization of their value. The illustrative code and the report emphasises bankruptcy as a process rather than a condition and includes the possibility of restructuring as a vital and initial step.

The emphasis has been on timeliness, transparency, economic efficiency and predictability. The report also pointed out that preventive elements are associated with better corporate governance and have, therefore, been kept out of the formal purview of bankruptcy. Independently, the Government concerned about the same issue, had also constituted a high level committee on law relating to insolvency and winding up of companies under the chairmanship of Justice Shri V. The salient features of the provision of that Bill are:.

Comprehensive amendments proposed to the Companies Act, to deal with the liquidation and winding up of companies. A separate chapter in the Companies Act to deal with the sick industrial companies. Application of the Companies Act provision in the winding up of insurance companies. Exclusion of the Banking Regulation Act in redefining of sick industrial company. Levy and collection of cess on turn over or gross receipts of companies for the formation of a fund for rehabilitation, revival or protection of assets of the sick industrial companies. Provision for interim payment for dues of the workmen of the company, which has declared sick or is under liquidation.

Unlike other areas, the gap between India and the International best practise is so large that we will initially need to legislate a modern code. The proposed bill and the advisory group recommendations seek to do this in somewhat different ways. The comparison of these different approaches will be taken up in the next section. Corporate governance mechanisms differ between countries. The governance mechanism of each country is shaped by its political, economic and social history as also by its legal framework.

Despite the differences in shareholder philosophies across countries, good governance mechanisms need to be encouraged among all corporate and non-corporate entities. While a number of multilateral organizations and stock exchanges evinced keen interest in the subject of corporate governance, the OECD principles of corporate governance are internationally recognised as good reference benchmarks. The OECD corporate governance principles cover five major areas: i The rights of shareholders; ii The equitable treatment of shareholders; iii The role of stakeholders; iv Disclosure and transparency; and v The responsibilities of the board.

Globally, the process of convergence in corporate governance is gathering momentum due to growing international integration of financial and product markets. Foreign investors and creditors are more comfortable in dealing with economic entities that adopt transparent and globally acceptable accounting and governance standards. Companies that embrace high disclosure and governance standards invariably command better premium in the market and are thus able to raise capital at lower costs. The Companies Act primarily defines the detailed statutory framework of corporate governance.

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These provisions have been further supplemented by SEBI recently. The SEBI guidelines will eventually apply to all listed companies, though at present are limited to large companies. It may be noted in this context that, the main instrumentality through which SEBI seeks to ensure implementation is the listing agreement signed by the companies with the stock exchanges. This is a relatively weak instrument as compared to the Companies Act as its penal provisions in the event of non-compliance are not hurting enough and the threat of suspension or delisting may hurt investors even more.

The Group, therefore, recommended that the penal provisions of the listing agreement should be strengthened and the management of an erring company held responsible for all major violations in regard to the corporate governance norms. However, unlisted companies would not be covered by these guidelines; thus it may be desirable to incorporate the requirements of good corporate governance in the Companies Act. It is also necessary to have effective penal provisions in the Companies Act so that the management of a company does not have any incentive to violate the required corporate governance norms.

Most of the important rights of shareholders like right to ownership and conveyance of transfer, obtaining relevant information regularly, elect members of the board, etc. However, the rights of shareholders of banks and public sector undertakings stand considerably abridged. OECD principles emphasise that 'structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed'. In India, as of today, companies are not required to make any such disclosures about the aggregate holdings of the promoters and their group companies.

Companies are required to file details of their shareholding to the registrar of companies. Listed companies are required to file a return with the stock exchanges where they are listed. The disclosed information is such that it is difficult to make out as to what is the actual or effective level of shareholding of the promoters who are in the management control of the company. Several promoter groups exercise their control through a pyramid of subsidiary and holding companies.

It should be made mandatory on the part of the promoters to fully disclose their total direct holdings and indirect holdings in companies. In addition, it is important to improve standards of governance of institutional shareholders. The quality of disclosures by most of the Indian companies in regard to several key areas is rather poor. There is scanty disclosure regarding structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their known equity ownership.

Similarly, disclosures regarding intra-group company dealings, division-wise accounts, consolidated accounts, etc. Companies need to share their business goals and plans with the shareholders adequately. In short, the quality of financial reporting adopted by the companies in India needs to be substantially improved. The Group makes a number of recommendations to improve disclosure. To minimise the costs of disclosures and to make them less cumbersome, electronic filing of information should be encouraged.

Such information can be easily hosted on a web site so as to minimise costs of storage of information and its quick retrieval. The disclosure should cover aspects of financial health of the company, the ownership structures, risk factors, etc. India has adopted a unitary board structure. For unitary board structure to function efficiently, there should be a strong representation of non-executive independent directors who are capable of taking independent stand and are not cowed down by the full time directors or the promoters of the company.

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The board should be able to perform its task of monitoring performance of the full time directors satisfactorily. It should ensure that returns to the shareholders on their investments are maximised while not making any compromises with the provisions of law and the rightful interests of all the stakeholders. They need to be restructured in such a way that majority of the directors are truly independent.

It should be made mandatory that 50 per cent or more of the board members are really independent not merely non-executive and are under no obligations whatsoever either of the executive directors or the promoters. Unless there is a clear and unambiguous definition as to who really is an independent director, the term is likely to be misinterpreted conveniently by the promoter groups. SEBI recently has provided a definition as part of its listing requirements.

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We may consider implanting something like that through company law. Given the important place occupied by the public sector entities in the fields of industry and financial sector , any steps to improve corporate governance in the Indian economy would remain incomplete and half-hearted unless public sector units are also covered in this exercise.

Multiple layering of 'principal-agent' chains in the case of government owned entities has important consequences for the corporate governance mechanisms that will be adopted in them. Often, the accountability chain is very weak in public sector units. The first important step to improve governance mechanism in these units is to transfer the actual governance functions from the concerned administrative ministries to the boards and also strengthen them by streamlining the appointment process of directors.

The process of selecting directors should be made highly credible by entrusting the task to a specially constituted body of eminent experts with an independent and high status like the Union Public Service Commission. It is necessary that the rights of common shareholders should be recognised in the corporate governance mechanisms adopted by all the public sector entities. They should also adopt the system of setting up of the three important board committees viz.

While the body of the eminent experts prepares a panel of names, the appointment committees of the public sector entities should recommend to their boards the persons from such panels that could be considered for induction on their boards. Both government and RBI need to bring about significant changes in the corporate governance mechanism adopted by banks and other financial intermediaries. As a matter of principle, RBI should not appoint its nominees on the boards of banks to avoid conflict of interests. Although it is not feasible to have a free market for take-overs in respect banks, there is a strong case for recognising the rights of the shareholders, especially of public sector banks and financial institutions.

Today, the common shareholders are denied such basic rights as adopting annual accounts or approving dividends. They cannot also influence composition of the boards in any way. As per the Bank Nationalisation Act, the general superintendence, direction, and management of the PSBs vest with their boards. As a part of strengthening the functioning of their boards, banks should appoint a risk management committee of the board in addition to the three other board committees viz. Since banks and institutions are highly leveraged entities, their failure would pose large risks to the entire economic system.

Their corporate governance mechanisms should, therefore, be relatively much tighter. Current governance practices adopted by the PSBs have created an inequality among different types of directors. Special status amounting to veto powers given to government directors is not in the interest good corporate governance.

Banks should have clear strategies for guiding their operations and establishing accountability for executing them. Banks should maintain high degree of transparency in regard to disclosure of information. While a number of the basic concerns of market integrity are covered in other recommendations concerning transparency, information disclosure and regulatory standards, they are inadequate for the purposes of dealing with criminal activity. There are two distinct issues involved in so far as India is concerned.

The first relates to money laundering and related issues and the second to a clearer identification of criminal activity originating in the Financial Sector. In so far as money laundering is concerned, the G7 countries had identified a set of 10 principles. Maximum cooperation domestically among regulators and law enforcement authorities in matters of financial crimes.

Clear definitions of the role, duty and obligations of all national authorities involved in combating illicit financial activity. Accessible transparent channels for cooperation and exchange of information on financial crime and regulatory abuse at the international level. Improving the quality of national cooperation between law enforcement authorities and financial regulators to secure fast and efficient indirect exchange of information. Ensuring spontaneous provision of information by law enforcement authorities and regulators in response to requests at the international level. Provide for laws and systems to enable foreign financial regulators to share information for the full range of their responsibilities subject to limitations enunciated at the outset.

Provide for passing on the shared information on financial crimes or regulatory abuse, with prior consent to other such authorities in that jurisdiction. Provide for confidentiality on shared information and its use only for the purposes stated in the original request including observance of the limitations imposed on its supply. Ensuring that arrangements for supplying information within regulatory and law enforcement cooperation framework are fast, effective and transparent and also discuss reasons as appropriate with one another where information cannot be shared.

Ensure review of laws and procedures relating to international cooperation so as to allow improvements and appropriate response in changing circumstances. These are amplified in greater detail in the 40 recommendations of the financial action task force FATF , which provides a comprehensive blue print of the action required to counter money laundering and terrorist financing.

Many of the recommendations are similar to some of the principles contained in the Basel core principles for banking supervision and criteria in the methodology document of the IMF. The response to these principles will have to be multifaceted. Domestically, it would require laws to clearly define financial crimes and frauds, as also mechanisms to promote international cooperation. In the wake of September 11, these initiatives have taken on greater urgency.

A detailed review has been undertaken in the Technical note on market integrity. We will briefly review some of its key findings. Firstly, the existing Indian position in regard to the structure of controls and procedures for combating money laundering or regulatory abuse is contained in different Acts, regulations, policies and guidelines pertinent to both cross border and domestic financial transactions.

Necessary legal action to ensure compliance with international efforts will require passage of the Prevention of Money Laundering Bill. Secondly, we do not have as yet a well-articulated notion of criminal activity originating in the financial sector. The Government should develop laws and agencies to deal with these issues. L Mitra to suggest measures for countering the problem of bank frauds. The definition proposed is comprehensive and will cover a variety of financial crimes. The Committee suggested a two-pronged approach to handle bank and financial frauds focusing on both preventive and prohibitive measures.

In addition to these legislative measures, the existing framework against money laundering activities in India would need further strengthening by improving procedures and policies for preparing appropriate customer profiles. Further mechanisms for coordination and cooperation with regulatory and other authorities other than those that have search and seizure powers vested by law for sharing of information and reporting of suspicious activities would also need to be enhanced and strengthened.

The Advisory Group on Banking Supervision was constituted to study the present status of applicability, relevance and compliance in India of the international standards and codes relating to banking regulation and supervision, the feasibility of compliance and to chalk out a possible course of action for convergence to international standards. The advisory group had restricted its exercise to the commercial banking sector in view of its dominant role.

The issue of application of these standards to Cooperative banks, Regional Rural Banks and Local Area banks was not examined but in view of both the scope for regulatory arbitrage and contagion effects, they did, however, recommend that RBI should separately examine the coverage, applicability and gaps with regard to international standards vis a vis such non-commercial banking enterprises. The Group took into account seven important areas in which internationally accepted best practices are already in place.

These include i core principles, ii corporate governance, iii internal control, iv management of credit risk, v loan accounting, transparency and disclosures, vi financial conglomerates and vii cross-border banking. The recommendations of the Group are extremely detailed and do not lend themselves to easy condensation. However, we will briefly review some key issues, noting that this, as with other advisory groups, is not a substitute for the detailed report. The core principles comprise 25 principles relating broadly to i pre-conditions for effective banking supervision one principle , ii licensing and structure four , iii prudential regulations and requirements ten , iv methods of ongoing banking supervision six , and v formal powers of supervisors four.

In respect of i preconditions for effective banking supervisions and ii licensing and structure, the banking system in India is largely compliant with international best practices. However, the Group felt that certain changes in the year-old Banking Regulation Act, BR Act , which forms the statutory basis for regulation of banks in India, are imperative to help achieve the objectives with which the Act was put in place.

The group pointed a number of steps that RBI can put in place to improve effective supervision. The group also approved of the draft Prompt Corrective Action Framework proposed by the RBI and would recommend its implementation though they point out that the flexibility in the proposed framework must be exercised with care as 'misplaced flexibility could delay the positioning of corrective actions and in producing required results'. They also note that the framework cannot be viewed as permanent in nature and will need to be reviewed in light of developments in information technology, payments systems and in other such areas.

The minimum benchmarks in this area relate to i strategies and techniques basic to sound corporate governance, ii organisational structure to ensure oversight by board of directors and individuals not involved in day-to-day running of business, as well as direct line of supervision of different business areas and independent risk management and audit functions, iii sound corporate governance practices, iv ensuring an environment supportive of sound corporate governance, and v role of supervisors.

The quality of corporate governance should be the same in all types of banking organizations irrespective of the nature of their ownership. The Group felt that the major areas where practices in the Indian banking sector fell short of international best practices related to the constitutions of boards, their accountability, and their involvement in risk management. The Group also stressed on enhanced transparency in the constitution and structure of the board and senior management and public disclosures regarding the same.

The Group further suggested that Government ownership of banks is not conducive to serious and urgent corrective action against any one of them. Limitations of the legal system also prevent strict enforcement of norms of corporate governance. The core principles relating to internal control systems in banks are categorised under i management oversight and the control culture, ii risk assessment, iii control activities, iv information and communication, v monitoring activities and correcting deficiencies, vi evaluation of internal control systems by supervisory authorities and vii role and responsibilities of external auditors.

In respect of management oversight and the control culture, the Group noted that the systems of periodic discussions by the board with the management or follow-up of evaluation and review reports are not very well established in India. The attention paid at the board level to evaluation and review reports on internal control systems in banks is mostly routine and receives limited attention. Such reviews and evaluations are generally not used as important tools of management information and control. In-depth discussions on periodic reports on internal control systems of banks between the management and their boards should be institutionalised.

Systemic risk assessment, which constitutes an important component of internal control, is still at the initial stages in most Indian banks and this is one of the areas where Indian banks fall short of international best practices. The availability of adequate and comprehensive internal financial, operational and compliance data as well as external market information about events and conditions that are relevant to decision making is an essential criterion for effective internal control.

Quality and timeliness of management information systems is another area where Indian banks fall short of international best practices. The core principles for management of credit risk relate to i establishing an appropriate credit risk environment, ii operating under a sound credit granting process, iii maintaining an appropriate credit administration, measurement and monitoring process, iv ensuring adequate controls over credit risk and v the role of supervisors.

With regard to measurement and monitoring of credit risks, the Group highlighted certain aspects of risk management practices in Indian banks requiring urgent review, as the gap between these practices and the corresponding international benchmarks is substantial. The highlighted aspects are as follows:. This denotes a certain degree of unpreparedness and lack of strategy on the part of the banks for managing such risks.