Financial supervisory unification and financial intelligence units
| Pages | 354-370 |
| DOI | https://doi.org/10.1108/13685200510620858 |
| Date | 01 October 2005 |
| Published date | 01 October 2005 |
| Author | Donato Masciandaro |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control Ð Vol. 8 No. 4
Financial Supervisory Uni®cation and
Financial Intelligence Units
Donato Masciandaro
INTRODUCTION
In recent years the design of the regulation and super-
vision of the banking, ®nancial and insurance markets
has been in¯uenced by two phenomena. On the one
hand, to safeguard ®nancial stability, supervision has
undergone a uni®cation process, with rationalisation
of the controls and a reduction in the number of super-
visory authorities. On the other, to ensure economic
and ®nancial integrity, ®nancial intelligence units
(FIUs) have been instituted in several countries, to
make the national and international ®ght against
organised crime and terrorism more eective.
What relationship exists between these two ten-
dencies? The question is relevant, as it is important
to proceed in the same direction to safeguard stability
and integrity. The two phenomena are not automati-
cally synergetic, however. In fact, the institution of a
unit specialised in the collection and processing of
information to combat money laundering could be
an obstacle to the consolidation of ®nancial supervi-
sion. Furthermore, the institutional nature of the
unit might also lend it importance: the creation of an
independent unit might run counter to the need to
rationalise and unify ®nancial supervision. Therefore
it is important to investigate the consistency between
the supervision uni®cation trend and the establish-
ment of ®nancial intelligence units.
The objective of this paper is precisely to analyse
from an economic and empirical point of view the
relationship between the uni®cation of ®nancial
supervision and the creation of ®nancial intelligence
units in the world. The paper is organised as follows.
The second section illustrates the phenomenon of the
international tendency to consolidate ®nancial super-
vision; the third section explains, from the standpoint
of economic analysis, the reasons for instituting an
agency specialised in the collection of information
useful for combating money laundering and the ®nan-
cing of terrorism; the fourth section analyses the
phenomenon of the creation of FIUs in the world;
the ®fth section studies the possible relationship
between the uni®cation of ®nancial supervision and
the creation of FIUs through empirical analysis; the
sixth section draws the conclusions.
FINANCIAL SUPERVISORY
ARCHITECTURES
Financial supervisory regimes vary signi®cantly from
country to country. A review of the ®nancial supervi-
sory architectures indicates a trend toward a gradual
concentration of supervisory powers.
1
In Europe
2
this trend seems to have gained momentum in recent
years: in addition to Norway Ð the ®rst country to
establish a single supervisor in 1986 Ð and Iceland,
®ve other countries, members of the European
Union (Austria, Denmark, Germany, Sweden and
the UK), have assigned the task of supervising the
entire ®nancial system to a single authority dierent
from the central bank. Recently in Ireland, the super-
visory responsibilities were concentrated in the hands
of the central bank. Four countries involved in the
2004 EU enlargement process Ð Estonia, Latvia,
Malta and Hungary Ð have also reformed their struc-
tures, concentrating all the powers in a single auth-
ority,
3
while outside Europe a uni®ed agency was
established in Korea, Japan and Nicaragua.
In reality, the emergence of a single authority is only
the most striking aspect of a more general and gradual
phenomenon: rationalisation, from country to
country, in the degree of centralisation of ®nancial
supervisory power. What has occurred is that, com-
pared to the traditional model of control by sectors,
some countries have con®rmed that model, others
have radically changed it by adopting a single auth-
ority, while others have taken or con®rmed inter-
mediate choices. This raises the problem of
measuring the degree of concentration of powers,
country by country, in order to attempt the quantitat-
ive description of a qualitative phenomenon.
But how to measure the degree of concentration of
®nancial supervisory powers?
4
To this end use is made
of a Financial Authorities Concentration Index (FAC
Index).
5
The creation of the index is based on an anal-
ysis of which and how many authorities in 68 countries
are empowered to supervise the three traditional sec-
tors of ®nancial activity: banking, securities markets,
insurance (Table 1).
6
To transform the qualitative information into
quantitative indicators, a numerical value is assigned
Page 354
Journalof Money Laundering Control
Vol.8, No. 4, 2005, pp. 354± 370
#HenryStewart Publications
ISSN1368-5201
to each type of authority, in order to highlight the
number of the agencies involved. The rationale with
which the values are assigned considers the concept
of concentration of supervisory powers: the greater
the concentration, the higher the index value.
7
The
FAC Index for the 68 countries is shown in Table 1.
THE FIU: AN ECONOMIC ANALYSIS
To evaluate the phenomenon of the creation of ®nan-
cial intelligence units (FIUs), it is appropriate to begin
with a model of economic analysis. In general, an FIU
stands between the lawmaker (or policymaker) and
the intermediaries. To study this situation from the
economic standpoint, the most natural scheme of anal-
ysis is a hierarchical principal-agent model.
8
The choices of the lawmaker, the FIU and the inter-
mediary must be considered simultaneously. The law-
maker works in the public interest, optimising the
social objective function; the FIU, thanks to the infor-
mation advantages obtained through the relationship
with the banking and ®nancial system, acts as an
agent of the lawmaker, with the task of collecting
and processing relevant information. The intermedi-
aries, because of their activities in the markets and
their systematic, privileged relations with the business
Table 1: Supervisory authorities
Countries Banking
sector (b)
Securities
sector (s)
Insurance
sector (i)
Rating Weight FAU
INDEX
1Albania CB S I 1 0 1
2Argentina CB S S 1 0 1
3Australia BI BI,S BI 7 ±1 6
4Austria U U U 7 0 7
5Belarus CB S I 1 0 1
6Belgium BS BS I 5 0 5
7Bosnia CB,B1,B2 S I 1 ±1 0
8Brazil CB S CB,I 1 1 2
9Bulgaria CB S I 1 0 1
10 Canada BI Ss** BI 3 0 3
11 Chile B SI SI 3 0 3
12 Colombia BI S BI 3 0 3
13 Croatia CB S I 1 0 1
14 Cyprus CB S I 1 0 1
15 Czech Republic CB S I 1 0 1
16 Denmark U U U 7 0 7
17 Ecuador BI S BI 3 0 3
18 Egypt BC S I 1 0 1
19 Estonia U U U 7 0 7
20 Finland BS BS I 5 0 5
21 France BC,B1,B2,B3 BC,S I 1 ±1+1 1
22 Georgia CB S I 1 0 1
23 Germany U U U 7 0 7
24 Greece CB S I 1 0 1
25 Hong Kong CB S I 1 0 1
26 Hungary U U U 7 0 7
27 Iceland U U U 7 0 7
28 India CB,B S I 1 ±1 0
29 Ireland CB CB CB 7 0 7
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Financial Supervisory Uni®cation and Financial Intelligence Units
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