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Azerbaijan: Financial market regulator succeeds globally, falls short locally

Azerbaijan’s Financial Market Supervisory Authority was scrapped in November, with its powers vested back to the former regulator. While the agency had contributed to a positive impact on the financial industry at the global level, its work at ground level may give hints on why the decision was taken.

The move came when several ministries and government agencies shrank and merged, in line with the new economic vision of the government aimed mainly at the simplification of administrative procedures and boosting investments.

The Financial Market Supervisory Authority or FIMSA had been established in early 2016. The goal was to improve licensing, regulation and supervision of securities markets, including investment funds, insurance, credit organizations, and payment systems operations. In addition, FIMSA was initially tasked with improving the supervisory system for money laundering and terrorism financing, but later this function spun off to the separate Financial Monitoring Service.

FIMSA was effective in creating a regulatory and supervisory framework that increased confidence among international partners. But while the legislative framework for the regulation of the activity of financial institutions was brought in line with the international standards, implementation on the ground remained a challenge, specifically in the field of compliance.

FIMSA presumably underperformed in its efforts to promote the culture of integrity and ongoing analytical work on dismantling patterns of irregular behavior through continuity of effort and a systemic approach in general. So while FIMSA achieved some advances — such as segregation of duties, risk management and developing monitoring framework — its overall effort didn’t measure up.

Some of the shortcomings were evident with the winding up of a few banks. Among the irregularities that led to substantial losses were failure to exert timely oversight over the destined investment of loans, handing over of payment cards without proper customer identification, collusion among employees whose task were to watch over each other, and lack of back up tools in case of the failure of “the human factor.”

Since FIMSA’s formation in 2016, Azerbaijan improved its global position in a number of important ways. The World Bank Group’s DB-2020 indicator report ranked Azerbaijan 34th in the overall ranking and number one among in terms of Getting Credit, mainly due to increasing the SME credit availability and introduction of a state collateral registry of movable assets. The Global Competitiveness Report (2019) saw Azerbaijan advancing 11 points to the 58th position among 141 countries. The Economic Freedom Index ranked Azerbaijan at the 60th position globally. FIMSA could be credited among other factors for the overall Fiscal Health score of Azerbaijan reaching 89.4 points.

And yet a series of criminal investigations in Azerbaijan’s financial industry, based on information received from financial institutions and from FIMSA itself, unveiled the weaknesses of the industry in developing coordinated monitoring infrastructure, pre-empting fraud, and implementing corruption detection mechanisms adequate to meet newly emerging challenges.

The three-year record of FIMSA that is now part of history should be analyzed carefully to help the agency’s successors better understand how to step up ground level compliance so that Azerbaijan can better position itself as a stable and attractive financial market,

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