SCB is too small a regulator for FTX, says due diligence expert

‘They just don’t have the resources of a US SEC, we can’t expect that level of oversight’

FTX had “I told you so” written all over it, Chief Executive Officer of Castle Hall Diligence Chris Addy said last week, adding that regulatory entities as small as the Securities Commission of The Bahamas (SCB) do not have the required manpower to maintain “a fully forensic and vigorously intrusive regulatory environment”.

Addy, who was part of a webinar last week that focused on what went wrong with FTX, said regulators the size of the SCB are typically not in a position to effectively police an organization with billions of dollars of assets under management and a million or so customers.

“There was no international regulation from the SEC (US Securities and Exchange Commission), from primary G7 regulators, be it the US, Canada, UK or the other primary EU (European Union) countries,” said Addy.

“It was registered and regulated by the Securities Commission of The Bahamas. I personally lived in Bermuda for ten years, so I’ve got an understanding and great sympathy for the ethics and efforts of individuals who work for the offshore regulatory regimes. But realistically they’re small. They just don’t have the resources of a US SEC, we can’t expect that level of oversight.”

He suggested the size of the SCB is about 60 employees (based on information he extracted from LinkedIn), though the SCB’s websites puts its employment count at more than 80.

He compared the size of the SCB to the regulatory body in Cyrus, where he said FTX began operating.

“We can’t expect that organization [SCB] to be able to discharge a fully forensic and vigorously intrusive regulatory environment, particularly around something as complex as FTX,” he said.

Addy, whose company has a team of almost 100 professionals conducting operational, ESG (environmental, social and governance), and risk assessments, as well as cyber due diligence for more than 200 asset owners across the world, added that the jurisdictional fight to land a firm like FTX might have been too good to pass up despite certain inherent structural problems within the company.

“I do think it’s notable here, we’ve got robust regulation [in The Bahamas] embracing innovation,” Addy said.

“Of course, the problem in the offshore jurisdictions is they’re all competing to attract business. Various jurisdictions have set themselves up as being open for business and appealing for newly emerging crypto businesses. I imagine there would be an awful lot of political pushback in this jurisdiction if the commission said ‘hey, we’ve got problems with FTX’,  because obviously FTX was a superstar in the Bahamian economy.”

Addy said he would have like to see a company like FTX audited by one of the big four accounting firms or some of the firms just below them, in order for the company to have more credibility.

He also questioned how some large venture capital firms could have invested their money into a company that has now been found to have very lax cash management systems and no “appropriate disbursement controls” as pointed out by new FTX Chief Executive Officer John J. Ray, who is overseeing the Chapter 11 bankruptcy proceedings of the company.

Ray explained in his court documents last week that many of the companies in the FTX Group, especially those in Antigua and The Bahamas, did not have appropriate corporate governance.

“I understand that many entities, for example, never had board meetings,” he said.

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Chester Robards

Chester Robards rejoined The Nassau Guardian in November 2017 as a senior business reporter. He has covered myriad topics and events for The Nassau Guardian. Education: Florida International University, BS in Journalism

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