## _wp09168

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---

### Introduction and context
- G-20 view: “Achieving the objectives of the regulatory framework requires not only sound regulation but also effective enforcement.” (G-20 Working Group 1 Enhancing Sound Regulation and Strengthening Transparency Final Report, March 25, p. 45).
- Objectives of the paper:
  - Explore elements of enforcement, why enforcement is important, and whether enforcement effectiveness can be measured.
  - Examine operational realities of enforcement around the world.
- Methodology:
  - Analysis of data gathered in the World Bank/IMF Financial Sector Assessment Program (FSAP).
  - Authors’ technical assistance experience.
- Key high-level findings:
  - A good legal framework alone is insufficient without credible potential for enforcement.
  - Enforcement is central to regulator credibility and supports investor protection, fair and liquid markets, and financial stability.
  - The most significant obstacles are capacity issues (political will and resources) and institutional and political support requirements; supportive legal environment is necessary but often not the binding constraint.
- Intended use: practical diagnostic tool for jurisdictions to identify weaknesses in enforcement programs and support G-20 recommendation discussions.

### Definition of enforcement and relationship to supervision and legal framework
- Three essential elements: the legal framework, the supervision program (ex ante), and the enforcement program (ex post).
- Supervision: licensing standards, reporting requirements, on-site examinations; generally collaborative and prevention-focused.
- Enforcement: disciplinary function; investigates entities, brings enforcement actions, applies penalties, may require disgorgement and return of ill-gotten gains.
- Interdependence:
  - Legal framework must be well designed.
  - Supervision develops practice that enforcement builds upon.
  - Enforcement provides deterrence supporting law and supervision.
- Common obstacles to compliance:
  - Low skills/resources or poor governance within regulated entities.
  - Lack of skills, resources, or political will within the regulator; lack of legal authority.
  - Lack of regulator credibility when consequences are not imposed.

### Illustrative case evidence and systemic effects
- Enforcement failures have produced systemic and market-confidence failures across jurisdictions:
  - Bernard Madoff Ponzi scheme: estimated at US$50 billion; undetected by U.S. authorities for more than two decades.
  - Brazil (1989): market declined 89 percent over the next 20 months; seven brokers and many investors defaulted; Rio de Janeiro stock exchange forced to cover losses and went bankrupt.
  - India (1992): fraud using fake securities led to losses of more than US$800 million; several banks became insolvent.
  - India (2001, Ketan Parkeh): resulted in defaults, runs on small local banks, and UTI required a government bailout of US$2 billion.
  - Société Générale (January 2008): losses in excess of US$1.7 billion.
  - Enron: investors lost US$65 billion in market capitalization.
  - Refco (2005): falsified transactions about US$10 million; stated assets of US$48.8 billion; collapse and bankruptcy within days.
  - Unregulated schemes examples:
    - Romania (1994): collapse left a debt of US$450 million.
    - Russia (1994 MMM): took in an estimated US$1 billion from 1–2 million investors.
    - Serbia (1993, Dafina Banka): wiped out deposits of about US$650 million.
    - Albania (1996): Ponzi schemes took in an estimated US$1.2 billion; two-thirds of the population participated; collapse led to rioting, government fall, anarchy, and some 2,000 people killed.
    - Jamaica (early 2000s–2008): proliferation of unregulated investment schemes.
  - Australia (2005, Giuseppe Marcolla): sold investors $A215 million of worthless securities; liquidation recovered and returned two-thirds of investors’ losses.
- Cross-case lessons:
  - Failures often combined market abuse, weak settlement rules, loose margin/credit terms, and weak surveillance.
  - Enforcement actions often brought only after significant damage; detection slow, deterrence insufficient, punishment delayed.
  - Even well-resourced regulators face significant enforcement challenges.

### IOSCO Principles related to enforcement — findings (Box 1)
- Principles cited:
  - Principle 8: comprehensive inspection, investigation and surveillance powers.
  - Principle 9: comprehensive enforcement powers.
  - Principle 10: effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
- Implementation findings:
  - Roughly 65 percent of countries were assessed as having fully implemented or broadly implemented Principles 8 and 9.
  - 35 percent of countries exhibited weaknesses considered critical (partly and non-implemented ratings).
  - In roughly 55 percent of countries regulators have a wide range of investigatory powers vis-à-vis regulated entities.
  - In a little over 50 percent of countries regulators have compulsory powers vis-à-vis third parties.
  - As of June 2009, 52 countries have become signatories of the IOSCO MMOU, representing 46 percent of IOSCO membership; twenty countries have committed to sign but must change legal frameworks first.
- Observed correlation between income level and legal framework robustness: high-income countries generally showed higher implementation; upper-middle-income countries showed similar or even lower levels of implementation than lower-income countries (timing of assessments cited).

### Powers and practical gaps
- Broad investigatory powers required (Principle 9): enter premises without prior notification; require copies of information and documentation (including electronic); require verbal information from employees/officers/directors and other persons; access bank and telephone records.
- Noted gaps:
  - Inability to enter premises without prior notice; limitations on seizing documents without court order.
  - Lack of authority to access bank records due to secrecy provisions (examples: Brazil and Peru).
  - Access to phone and internet service provider records often problematic.
  - Where powers exist only to criminal authorities, regulators rely on criminal prosecution with higher burdens and differing priorities (example deficiency: Brazil — no penalties for providing false statements to the CVM despite obligation to testify).

### Precautionary measures and sanctions
- Immediate precautionary measures: injunctions, suspension of trading or activities, cease-and-desist orders, freezing of assets.
- Many regulators lack key authority to take immediate action; freezing of assets almost always requires a court order.
- Examples of direct regulatory authority:
  - Ontario Securities Commission (OSC) can impose cease-and-desist orders and freeze assets directly for a limited period before court order.
  - Superintendencia General de Valores in Costa Rica can directly issue cease-and-desist orders.
- Sanctions and remedies:
  - Effective enforcement uses both noncriminal and criminal sanctions; important remedies include monetary penalties, disgorgement, bans from industry, emergency relief.
  - Example: ASIC secured an ‘enforceable undertaking’ to repay US$33 million dollars to investors in 2006.
- Common deficiencies:
  - Lack of authority to impose monetary penalties (example: Jamaica).
  - Serious breaches sanctionable only by government ministries (example: Spain).
  - Insufficiently calibrated fines (example: Finland — maximum fine of EUR100 regardless of offence).
- Settlements:
  - U.S. SEC settles roughly 90 percent of its cases prior to litigation.
  - Many regulators lack settlement authority (examples: Costa Rica, Mexico, Peru); Brazil’s CVM has been given settlement power.

### Criminal enforcement and international cooperation
- Criminal proceedings important for very serious cases (prison, extradition, deportation).
- IOSCO assessments show criminal authorities often do not prioritize financial crimes; lack of convictions can undermine perceived enforcement (example: Canada).
- Coordination challenges: need to share information, avoid conflicting proceedings; constraints include resources, expertise, and legal restrictions on sharing confidential information.
- Practical MMOU obstacles:
  - Confidentiality laws limiting sharing of banking information.
  - Restrictions on passing information to criminal enforcement (assurances required that information not used for criminal purposes).
  - Requirement of dual criminality in many jurisdictions, contrary to MMOU expectations.

### Enforcement capacity (Principle 10) — assessment and drivers
- Principle 10 measures enforcement effectiveness and combined supervisory/disciplinary functions.
- Implementation results:
  - In only about 50 percent of countries assessors considered that the country had developed and implemented a credible enforcement program; the other 50 percent had critical problems.
  - Only high-income countries (OECD and non-OECD) were able to develop credible enforcement programs, with roughly 80 percent in implemented or broadly implemented categories.
  - In remaining countries, less than 30 percent received implemented or broadly implemented grades.
- Key capacity drivers and constraints:
  - Independence and political will:
    - Enforcement is highly visible and politically risky; many regulators lack political independence.
    - Principle 2 (independence) exhibits the lowest level of implementation of all Principles.
    - Senior management support for active enforcement is essential.
  - Staffing and resources:
    - Enforcement is resource-intensive and requires investigators, analysts, and legal counsel with market knowledge and litigation skills.
    - Chronic underfunding undermines enforcement, particularly in emerging market countries.
  - Technology:
    - Many developing and some emerging market regulators lack automated surveillance tools; surveillance often done manually.

### Organizational structure, courts, and SROs
- Organizational structure:
  - Separate enforcement divisions foster specialization; when enforcement is part of larger divisions staff may have multiple roles preventing specialization.
  - Trend toward establishing separate enforcement divisions (examples: Brazil, Chile, Portugal).
  - Specialized enforcement units: ASIC (Australia), OSC (Canada), U.S. SEC.
  - Adjudication approaches vary (independent tribunal vs. internal commission).
- Courts and judiciary:
  - Effective enforcement depends on court expediency, expertise, and reliability.
  - Common judicial problems: lack of judge expertise in financial matters and lack of timeliness due to case volume.
  - Example: Peru developing judge training programs; some jurisdictions creating judges specializing in white-collar crime.
  - Timeliness failures can prevent convictions and allow continued wrongdoing (example: 1992 repo scandal in India).
  - Corruption in some developing countries cited as a challenge.
- Self-Regulatory Organizations (SROs):
  - SRO roles vary from rule setting to full enforcement; examples: FINRA (U.S.), Japanese Securities Dealers Association.
  - IOSCO assessments show weaknesses in SRO actions due to lack of authority or conflicts of interest.
  - In some cases SROs were more effective than statutory regulators; statutory regulator oversight of SROs (Principle 7) is often weak.

### Measuring enforcement effectiveness
- First-generation metrics (inputs and outputs):
  - Input metrics: level of resources (number of staff and salaries).
  - Output measures: nature of actions, type of sanction sought, number and amount of sanctions imposed, years of imprisonment, amount of monetary penalties.
  - Efficiency: time from investigation to adjudication; success rates (cases opened vs. concluded).
- Second-generation metrics (outcomes/perception):
  - Perception surveys (example: U.K. FSA measures investor and market participant perception of enforcement effectiveness).
  - Market “cleanliness” studies: U.K. FSA studies price changes ahead of corporate announcements as a proxy; findings show markets not entirely clean but have limitations.
- Assessment practice:
  - IMF and World Bank FSAP assessments combine input (resources, legal framework, number of cases, resolution and timeliness) and output (market perception, responsiveness of regulated entities) measurements.
- Academic observations:
  - Jackson and Roe: public enforcement associated with financial market development; causality not proven and may be bi-directional.
  - Coffee: U.S. relies more heavily on enforcement than most countries; intensity likely contributes to lower cost of equity capital and valuation premium for cross-listing firms.
  - Debate: input/output measures alone do not prove that supervision-focused systems cannot achieve equivalent outcomes to enforcement-focused systems.
- Practical observation: jurisdictions that do not enforce rules have a failed regulatory system and suffer lack of market confidence; Madoff highlighted reputational damage when enforcement is perceived as not timely.

### Implications and policy recommendations
- Enforcement must be integrated with supervision and a well-designed legal framework; enforcement alone cannot substitute for adequate supervision.
- Essential elements for an effective enforcement program:
  - Sufficient legal authority to investigate and prosecute.
  - Political commitment to uphold enforcement authority.
  - Supportive, competent, and timely court systems.
  - Adequate human and technological resources and ability to attract and train skilled staff.
  - Institutional independence to resist external pressures.
- Specific recommendations and priorities:
  - Ensure regulators have powers envisaged under IOSCO Principles 8, 9, and 10, including investigatory and sanctioning powers and precautionary measures.
  - Strengthen criminal enforcement capability and coordination between regulators and prosecutors; develop criteria for passing cases to prosecutors.
  - Facilitate cross-border cooperation; address legal impediments to information sharing and promote MMOU adoption.
  - Strengthen staffing, funding, and technological capacity; consider budget and staffing independence linked to political support.
  - Improve judicial capacity (training, specialization, timeliness) to support enforcement.
  - Strengthen oversight of SROs and clarify SRO roles in enforcement.
  - Provide technical assistance and capacity-building to developing and emerging market countries to strengthen legal and regulatory enforcement frameworks.
- G-20 recommendation: national financial regulators and oversight authorities should ensure appropriate resources are available and that the enforcement function is independent from other activities or external influences.

*Source: IMF Working Paper content unit _wp09168 (sections II–III and related boxes as provided).*

### 1. Clear mandate ..............................................................................................14

### _wp09168 - 1. Clear mandate ..............................................................................................14

### Introduction and context
- The G-20 has highlighted enforcement of financial regulations as essential for financial stability, stating that “Achieving the objectives of the regulatory framework requires not only sound regulation but also effective enforcement.” (G-20 Working Group 1 Enhancing Sound Regulation and Strengthening Transparency Final Report, March 25, p. 45).
- The G-20 recommended that effective enforcement be a priority for all financial regulators and recognized that addressing regulatory gaps must be accompanied by commitment to enforcement.

### Illustration of enforcement failures
- The 2008 Bernard Madoff Ponzi scheme is cited as an example of enforcement failure:
  - The scheme is estimated at US$50 billion.
  - It went undetected by U.S. authorities for more than two decades.
  - The episode damaged the reputation of the U.S. SEC and illustrates both the difficulty and importance of securities law enforcement.

### Purpose, scope, and approach of the paper
- Objectives:
  - Explore the elements of enforcement, why enforcement is important, and whether enforcement effectiveness can be measured.
  - Examine operational realities of enforcement around the world.
- Methodology:
  - Analysis of data gathered in the World Bank/IMF Financial Sector Assessment Program (FSAP).
  - Leverage the authors’ experience in providing technical assistance.
- Intended use:
  - Provide a cross-country analysis to help countries identify weaknesses in enforcement programs and support G-20 recommendation discussions.

### Key conclusions and findings
- Existence of a good legal framework alone is insufficient without credible potential for enforcement.
- Enforcement is central to regulator credibility and supports the achievement of securities regulation objectives: investor protection, fair and liquid markets, and financial stability.
- Regulators worldwide face significant challenges implementing credible and effective enforcement programs.
- The most significant obstacles identified:
  - Capacity issues, including political will and adequate resources.
  - Institutional and political support requirements.
  - Supportive legal environment is necessary but often not the binding constraint.
- The study finds that capacity issues (political will and resources) have proven a stronger challenge than gaps in the legal and regulatory framework in many jurisdictions.

### Intended contribution
- Serve as a practical tool for jurisdictions to:
  - Diagnose weaknesses in enforcement programs.
  - Inform discussions and actions to address G-20 recommendations on enforcement.

*Source: IMF/World Bank FSAP analysis and related discussion in the chapter "1. Clear mandate" of the referenced IMF working paper.*

### Section III discusses the importance of enforcement; Section IV provides an overview of the

### _wp09168 - Section III discusses the importance of enforcement; Section IV provides an overview of the

### What is enforcement? — definition and relationship to supervision and legal framework
- Three essential elements of securities regulation: the legal framework, the supervision program, and the enforcement program.
- Supervision:
  - Ex ante; seeks to prevent and/or identify problems early.
  - Methods include licensing standards and review processes, periodic and exceptional reporting requirements, on-site or field examinations and inspections, and good corporate governance standards.
  - Generally collaborative and non-confrontational; compliance units within regulated entities are integral.
- Enforcement:
  - The disciplinary function; ex post; seeks to detect and punish noncompliance and deter future wrongdoing.
  - Requires the regulator to investigate regulated and unregulated entities, bring enforcement actions, and apply penalties if successful.
  - May include a remediation role where the regulator can require disgorgement and return of ill-gotten gains.
- Interdependence:
  - Legal framework must be well designed for supervision and enforcement to work.
  - Supervision develops the practice that enforcement is built upon.
  - Enforcement provides the deterrence mechanism that supports law and supervision.
- Common obstacles to compliance (as noted in the source):
  - Low levels of skills and resources or poor management and governance within regulated entities.
  - Lack of skills, resources, or political will within the regulator; lack of legal authority to require information or carry out inspections.
  - Lack of credibility of the regulator (a regulator that never imposes consequences will not be taken seriously).

### The importance of enforcement — systemic effects and evidence from cases
- Core proposition:
  - Enforcement gives the regulatory system credibility; ineffective or perceived ineffective enforcement undermines the system’s ability to achieve desired outcomes.
- Enforcement extends beyond investor protection to broader objectives of market confidence and system-wide stability.
- Case evidence (selected, preserved verbatim where numeric):
  - Brazil (1989):
    - Massive market manipulation across cash and derivatives markets led to a chain reaction of defaults when settlement default occurred.
    - The market declined 89 percent over the next 20 months.
    - Seven brokers and many investors defaulted; the Rio de Janeiro stock exchange was forced to cover losses and subsequently went bankrupt.
  - India (1992):
    - Fraud using fake securities led to losses to investors and banks of more than US$800 million; several banks became insolvent.
  - India (2001, Ketan Parkeh):
    - Collusion, false disclosures, multiple accounts and shell companies; exposed lax settlement and financing practices (reference to ‘badla’ and deferral of cash settlement).
    - Resulted in major market turbulence, defaults, runs on small local banks, and exposure that put the Indian mutual fund UTI under stress; UTI required a government bailout of US$2 billion.
  - Société Générale (January 2008):
    - One trader circumvented internal controls, leading to losses in excess of US$1.7 billion.
    - Comparable to Barings Bank scandal in terms of circumvention of internal controls and potential systemic risk.
  - Enron:
    - Accounting fraud by senior management created false profits; investors lost US$65 billion in market capitalization.
  - Refco (2005):
    - Falsified transactions totaling about US$10 million; stated assets of US$48.8 billion; collapse and bankruptcy within days.
    - Exposure caused major financial problems for a large Austrian bank requiring government support.
  - Unregulated investment schemes:
    - Romania (1994): collapse left a debt of US$450 million.
    - Russia (1994 MMM): took in an estimated US$1 billion from 1–2 million investors.
    - Serbia (1993, Dafina Banka): wiped out deposits of about US$650 million (offered 15 percent per month).
    - Albania (1996): Ponzi schemes took in an estimated US$1.2 billion; two-thirds of the population participated; collapse led to uncontained rioting, government fall, anarchy, and some 2,000 people killed.
    - Jamaica (early 2000s–2008): proliferation of unregulated investment schemes; lack of enforcement played a role in growth.
  - Australia (2005, Giuseppe Marcolla):
    - Unregistered asset management company sold investors $A215 million of worthless securities; liquidation recovered and returned two-thirds of investors’ losses.
  - U.S. (2008, Madoff):
    - Fraud estimated at US$50 billion; U.S. SEC criticized for failing to detect red flags and ignoring tips (e.g., Harry Markopolos); investigations by U.S. SEC and U.S. Congress noted.
- Cross-case lessons:
  - Failures often combined market abuse, weak settlement rules, loose margin or credit terms, and weak surveillance and controls.
  - In many cases enforcement actions were brought only after significant damage had occurred.
  - Detection was slow, deterrence insufficient, and punishment delayed in multiple examples.
  - Even well-resourced regulators (e.g., U.S. SEC) face significant enforcement challenges.

### Key challenges for effective enforcement (constraints and required conditions)
- Legal authority:
  - Regulators must have sufficient legal authority to investigate and bring actions (authorities may be controversial, e.g., ability to require phone or internet provider records, ability to levy meaningful fines).
  - Political commitment to regulation is required to establish and defend such authority.
- Courts and broader justice system:
  - Enforcement requires support from effective court systems; corrupt, inexpert, or extremely slow courts undermine enforcement.
- Resource intensity:
  - Enforcement is resource-intensive and highly visible; the hurdles for proof are high.
  - Most regulators face resource constraints: shortages of personnel, lack of appropriate technology, inability to pay or train staff sufficiently.
  - The industry often has far greater resources than the regulator, creating an uneven contest.
- Independence and political/commercial pressure:
  - Regulators need sufficient independence from commercial and political interests to withstand intense pressure against strong enforcement.
- Even robust regulators find enforcement challenging:
  - Example: The U.K. Financial Services Authority concluded that an increased enforcement effort is required after reviewing causes of the financial crisis.

### Implications for regulatory design and practice
- Enforcement must be integrated with supervision and a well-designed legal framework; enforcement alone cannot substitute for adequate supervision.
- To create an effective enforcement program, regulators need:
  - Sufficient legal authority to investigate and prosecute.
  - Political commitment to uphold enforcement authority.
  - Supportive, competent, and timely court systems.
  - Adequate human and technological resources and the ability to attract and train skilled staff.
  - Institutional independence to resist external pressures.
- Timely detection and credible deterrence are essential to limit damage; delayed enforcement often means harm cannot be fully remedied.

*Italic source: IMF Working Paper content unit _wp09168 (sections II–III as provided).*

### conclusions are based on an analysis of the findings and results of the IOSCO assessments

### _wp09168 - conclusions are based on an analysis of the findings and results of the IOSCO assessments

### Basis of conclusions
- Conclusions are based on an analysis of the findings and results of the IOSCO assessments.
- The IOSCO assessments were carried out in roughly 80 jurisdictions.

### Citation and page markers
- U.K. Financial Services Authority, “A regulatory response to the global banking crisis,” Consultation Paper SP09/2, p. 91.
- 15
- 12

*Source: _wp09168 - conclusions are based on an analysis of the findings and results of the IOSCO assessments*

### Box 1. IOSCO Principles Related to Enforcement

### Box 1. IOSCO Principles Related to Enforcement

### IOSCO Principles Cited
- Principle 8: The regulator should have comprehensive inspection, investigation and surveillance powers.
- Principle 9: The regulator should have comprehensive enforcement powers.
- Principle 10: The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

### Framework for Enforcement — overall findings
- A robust framework that provides securities regulators with enough powers to investigate and sanction misconducts is key to enforcement.
- The IOSCO Principles (Principles 8 and 9) set out necessary elements of the legal framework for enforcement; Principle 8 addresses powers vis-à-vis regulated entities, Principle 9 addresses powers with respect to third parties.
- Roughly 65 percent of the countries were assessed as having fully implemented or broadly implemented Principles 8 and 9.
- 35 percent of countries exhibited weaknesses considered critical, leading to partly and non-implemented ratings under Principles 8 and 9.
- Correlation observed between income level and robustness of legal framework; high-income countries (OECD and non-OECD) generally showed higher implementation.
- Upper-middle-income countries showed similar or even lower levels of implementation than lower-income countries, attributed to timing of assessments for many Eastern European countries.

### A. Clear Mandate — observations
- Most securities regulators have been given a clear mandate to enforce securities laws and regulations.
- Many regulators also have additional objectives that might conflict with enforcement (e.g., market development, maintaining competitive markets), which can weaken enforcement if enforcement is perceived to impede those objectives.

### B. Broad Authority to Investigate and Obtain Evidence — powers and gaps
- Investigatory authorities required (Principle 9) include the ability to:
  - enter premises of a regulated entity, without giving prior notification;
  - require the regulated entity to provide copies of all information and records and documentation (including electronic) relevant to the investigation;
  - require employees, officers, and directors to give verbal information related to the investigation;
  - require any person with information related to the investigation to give verbal information;
  - require any person to provide records or documentation relevant to the investigation, including bank and telephone records.
- Findings on powers vis-à-vis regulated entities:
  - Most regulators have explicit authority to open investigations.
  - In roughly 55 percent of the countries assessed, regulators have a wide range of investigatory powers vis-à-vis regulated entities.
  - Gaps exist, notably in some emerging and developing countries, including inability to enter premises without prior notice and limitations on seizing documents without court order.
- Findings on powers vis-à-vis third parties:
  - In a little over 50 percent of the countries, regulators do have compulsory powers vis-à-vis third parties.
  - Common deficiency: lack of legal authority to access bank records due to strict secrecy provisions; in some cases procedures to obtain access via banking regulators or courts are cumbersome (examples cited: Brazil and Peru).
  - Access to phone records and internet service provider information is frequently problematic but critical to enforcement (illustrated by Martha Stewart case).
  - Where powers are granted only to criminal authorities, regulators often rely on criminal prosecution, which poses challenges (different priorities, higher burden of proof, limited expertise).
  - Example deficiencies: Brazil — no penalties for providing false statements to the Comissão de Valores Mobiliários (CVM) despite obligation to testify.

### C. Ability to Act Immediately — precautionary measures and limitations
- Immediate precautionary actions that minimize investor and market damage include injunctions, suspension of trading or activities, cease-and-desist orders, and freezing of assets.
- Assessments show many regulators lack key authority to take immediate action (Principles 8 and 9); laws often reference only a subset of powers and usually apply only to regulated entities.
- Examples of direct regulatory authority:
  - Ontario Securities Commission (OSC) in Canada can impose cease-and-desist orders and freeze assets directly (freeze for a limited period before court order).
  - Superintendencia General de Valores in Costa Rica can directly issue cease-and-desist orders.
- In almost all countries, freezing of assets requires a court order.
- Practical difficulty: where a court order is needed, slow or inexpert courts can severely delay actions.

### D. Authority to Bring Charges and Impose a Wide Range of Sanctions — structure and shortfalls
- Effective enforcement uses both noncriminal and criminal sanctions; noncriminal sanctions may be administrative or civil depending on jurisdiction.
- Relying solely on criminal sanctions presents problems: regulator usually lacks prosecutorial jurisdiction; criminal authorities prioritize differently; higher burden of proof; potential lack of specialized prosecutorial skills.
- Different systems observed:
  - Some regulators have direct authority to impose administrative sanctions on both regulated and nonregulated entities (examples: OSC in Australia, Canada, Costa Rica, France, and Peru).
  - More commonly, regulators can impose administrative sanctions on regulated entities and bring civil cases against nonregulated entities (examples: United States, Hong Kong, Singapore).
- Important remedy types: monetary penalties, disgorgement, bans from industry, emergency relief (temporary injunctions, asset freezes, receivers).
  - Example: ASIC secured an ‘enforceable undertaking’ to repay US$33 million dollars to investors in 2006.
- Common deficiencies:
  - Lack of authority to impose monetary penalties (example: Jamaica — only cease-and-desist and limited court relief).
  - More serious breaches may be sanctionable only by government ministries (example: Spain).
  - Monetary penalties sometimes not calibrated (example: Finland — maximum fine of EUR100 regardless of offence).
- Settlements:
  - Authority to settle cases allows efficient disposal; U.S. SEC settles roughly 90 percent of its cases prior to litigation.
  - Many regulators lack settlement authority (examples: Costa Rica, Mexico, Peru), though situation changing (Brazil’s CVM given this power).

### E. Active Criminal Enforcement — role and coordination
- Criminal proceedings are crucial for very serious cases given sanctions available (prison, extradition, deportation).
- IOSCO assessments (Principle 10) show criminal authorities often do not prioritize financial crimes; lack of convictions can undermine perceived enforcement (example: Canada).
- Good coordination between regulator and criminal prosecutor is required to share information, avoid conflicting parallel proceedings, and allocate resources.
- Practical challenges: constrained resources, limited expertise, legal constraints on sharing confidential information.
- Regulators should develop criteria for passing cases to prosecutors; most serious and damaging cases generally passed to criminal prosecutor.

### F. Ability to Provide Cooperation to Foreign Regulators — MMOU and obstacles
- Cross-border information sharing is integral due to the transnational nature of markets and wrongdoing.
- IOSCO Multilateral Memorandum for Information Sharing (MMOU) sets best-practice standards; IOSCO required members to sign or commit to sign by 2010.
- As of June 2009, 52 countries have become signatories of the IOSCO MMOU, representing 46 percent of IOSCO membership; twenty countries have committed to sign but must change legal frameworks first.
- Main impediments to international cooperation:
  - Lack of authority to obtain/share banking information due to confidentiality laws.
  - Rules restricting passing of information to criminal enforcement (assurances that information not used for criminal purposes).
  - Requirement of dual criminality in many jurisdictions (misconduct must be sanctionable in both requesting and requested jurisdictions), contrary to MMOU’s expectations.

### Enforcement Capacity — assessment (Principle 10) and drivers
- Principle 10 evaluates enforcement effectiveness and combining supervisory and disciplinary functions; it measures the effectiveness of enforcement programs.
- Implementation results:
  - In only about 50 percent of the countries did assessors consider that the country had developed and implemented a credible enforcement program; the other 50 percent had critical problems.
  - Only high-income countries (OECD and non-OECD) were able to develop credible enforcement programs, with roughly 80 percent in implemented or broadly implemented categories.
  - In remaining countries, less than 30 percent received implemented or broadly implemented grades.
- Capacity issues (often greater challenge than legal framework gaps) include:
  - Independence and political will:
    - Enforcement is highly visible and politically risky; political independence and legal protections are critical.
    - Many regulators are not politically independent; some rely on ministries to license/revoke or are subject to commercial influence.
    - Principle 2 (independence) exhibits the lowest level of implementation of all Principles.
    - Senior management support for active enforcement is essential; reluctance can weaken enforcement, particularly in emerging markets where leniency is justified by market development concerns.
  - Staffing and resources:
    - Enforcement is resource-intensive and requires skilled investigators, analysts, and legal counsel with market knowledge and litigation skills.
    - Constraints in funding, staffing, and specialized expertise impede credible enforcement.

*Source: Box 1. IOSCO Principles Related to Enforcement, extracted from the provided IMF document content.*

### conclusions have been hotly debated. We are unaware of any definitive academic research on the issue.

### _wp09168 - conclusions have been hotly debated. We are unaware of any definitive academic research on the issue.

### Staffing, Funding, and Technology
- Skills required for enforcement are often difficult to recruit because securities regulators generally are unable to compete with the private sector on remuneration.
- In emerging market countries, public sector pay scales are even more at odds with the private sector, making recruitment and retention an acute problem.
- IOSCO assessments reveal chronic underfunding of many securities regulators, particularly in emerging market countries, undermining effective enforcement.
- Underfunding has affected both human and technological resources:
  - Human resources: salary disparities impede hiring and retention; regulators are understaffed and often cannot hire personnel with expertise comparable to that of regulated entities.
  - Technology: many developing and some emerging market regulators lack effective tools for surveillance; in many cases surveillance is still done manually without access to automated tools.
- Understaffing or lack of skilled staff affects the ability of a regulator to take enforcement actions in a timely manner and impedes building successful cases.

### Adequate Organizational Structure
- How the enforcement function is organized (separate division versus function within a larger department) significantly impacts effectiveness and efficiency.
- When enforcement is part of a larger division, staff may have multiple roles preventing specialization in investigation and prosecution.
- Creating a separate enforcement division can foster specialization but requires effective coordination with other divisions (for example, those in charge of supervision).
- There is a strong trend among countries reforming enforcement toward establishing separate enforcement divisions; examples of countries that have recently made changes to create specialized enforcement divisions include Brazil, Chile, and Portugal.
- Regulators with specialized enforcement units include ASIC in Australia, the OSC in Canada, and the U.S. SEC.
- The position of the adjudication function varies with jurisdictional approaches to due process:
  - In some jurisdictions (Autorité des Marchés Financiers in Quebec, Canada, and CONASEV in Peru), adjudication has been assigned to an independent tribunal.
  - In others, due process is considered satisfied when adjudication is carried out by a different body/division than that in charge of investigation and prosecution (example: OSC in Canada—separate divisions conduct investigation and litigation, while adjudication is done by the Commission itself).
- Organizational structure should support a fair and transparent process vis à vis the public and the regulated industry, requiring development of system controls for the enforcement function to ensure consistent and fair application.

### Effective Court System
- Enforcement requires court involvement at different levels and stages: courts are arbiters in criminal and civil cases and normally serve as the appellate body in administrative matters.
- The effectiveness of a country’s enforcement framework cannot be judged in isolation from its judicial system, including expediency and reliability of court decisions.
- Most assessors cited the quality and effectiveness of the judiciary as an important challenge for implementing the IOSCO Principles.34
- Common judicial problems: lack of expertise of judges in financial matters and lack of timeliness, often due to case volume.
  - Example responses: Peru—financial regulators developing training programs for judges; some jurisdictions developing a cadre of judges who specialize in white-collar crime or complex commercial matters.
- Timeliness problems can have serious effects: example—the 1992 repo scandal in India: none of the alleged fraudsters charged was ever given a final conviction (some are still under appeal); the main figure died in 2002 with an appeal still pending and was involved or accused of several major frauds in the interim; while barred by regulators, slow courts allowed additional financial crimes.
- Corruption in a few developing countries was mentioned as a challenge for effective enforcement.

### Role of Self-Regulatory Organizations (SROs)
- SROs are private or semi-private organizations carrying out regulatory functions ranging from enforceable codes of conduct to full-service regulators of the investment firm industry (examples: Financial Industry Regulatory Authority (FINRA) in the United States and the Japanese Securities Dealers Association).
- The SRO role in enforcement varies: rule setting only; market surveillance and reporting to the regulator; conducting investigations and sanctioning.
- In most jurisdictions, SROs are integral to the enforcement process and must be considered when assessing system effectiveness.
- IOSCO assessments show significant weaknesses in SRO supervisory and enforcement actions, often hindered by lack of authority over members or conflicts of interest in bringing disciplinary actions.
- In a few cases, SROs were more effective enforcers than the statutory regulator.
- Effective incentives for enforcement require the statutory regulator to have strong oversight of the SRO; IOSCO assessments (Principle 7) have shown that oversight is often weak.
- Case illustrations:
  - Nahas case: exchanges did not act in coordination, information was fragmented, exchanges were not sufficiently aggressive in shutting down manipulative practices, and supervisor failed to impose high standards on exchanges through oversight.
  - Bombay Stock Exchange failed to detect and deter manipulation in the Indian equity market in 2001, leading to regulatory reform in India and demutualization of the exchange.
  - 1994: U.S. SEC brought enforcement action against the National Association of Securities Dealers for failing to adequately police its markets and allowing market makers to maintain artificially wide spreads.

### Measuring the Effectiveness of Enforcement
- Goal of enforcement: ensure compliance with securities regulation, which is designed to foster fair, liquid, and stable markets.
- Measuring enforcement effectiveness should link to achieving compliance and market fairness, liquidity, and stability, but operationalizing measurement is complex.
- Challenges:
  - Difficulty of decoupling supervision and enforcement functions.
  - Lack of a body of work measuring regulatory success in terms of contribution to fair, liquid, and stable markets.
  - Inherent subjectivity in many indicators and numerous variables affecting measurements.
- First-generation measurements focused on inputs and outputs:
  - Input metrics: level of resources (number of staff and salaries) assigned to enforcement.
  - Output measures: nature of actions taken (criminal or administrative), type of sanction sought (prison, monetary penalty), number and amount of sanctions imposed (years of imprisonment, amount of monetary penalties).
  - Efficiency measures: time required from investigation to adjudication.
  - Success rates: number of cases opened versus number successfully concluded.
- Regulators use these metrics to evaluate performance and report to the public and government; IOSCO assessors use this information to determine adequacy of an enforcement program.
- Academic findings and debates:
  - Jackson and Roe conclude public enforcement is clearly associated with financial market development, acknowledging causality cannot be proven and assuming bi-directional causation.36,37
  - Coffee concludes the United States relies more heavily on enforcement than most countries (possible exception: Australia); this intensity likely contributes to the U.S.’s lower cost of equity capital and valuation premium for cross-listing firms, and explains reluctance of many foreign issuers to enter the United States.38,39
  - However, input/output measures alone do not prove that a system relying more on ex ante supervision cannot achieve functionally equivalent results to one relying more on ex post enforcement.40
- Second-generation metrics focus on outcomes:
  - Example: U.K. FSA uses surveys to measure investor and market participant perception of enforcement effectiveness (perception of credibility), though this approach is incomplete.
  - U.K. FSA measures market “cleanliness” by studying price changes ahead of corporate announcements as a proxy for compliance with fair disclosure and insider trading rules; commissioned independent “cleanliness” reports show price movements indicate the market is not entirely clean.41
  - Limitations of market cleanliness studies: they measure the entire compliance program's effect (not only enforcement), focus on one regulatory aspect (market transparency related to material information), and have difficulty distinguishing insider trading from diligent investment research and intelligent speculation.
- IMF and World Bank FSAP assessments: measuring enforcement effectiveness is difficult for expert assessors; assessments use a combination of input (quality and amount of resources, legal framework, number of cases, resolution and timeliness) and output (market perception, responsiveness of regulated entities) measurements.
- Observation: jurisdictions that do not enforce rules have a failed regulatory system and suffer lack of market confidence; the Madoff case highlighted reputational damage when enforcement action is perceived as not timely.

### Conclusion
- The recent financial crisis has highlighted the need to strengthen financial sector regulatory frameworks worldwide, including analysis and monitoring of financial stability issues.
- The G-20 has emphasized the role of enforcement in achieving financial regulation goals, including financial stability, and recommended that financial regulators worldwide prioritize developing effective and credible enforcement programs.42

*Source: _wp09168 - conclusions have been hotly debated. We are unaware of any definitive academic research on the issue.*

### Box 2. The Great Debate: U.S. Versus U.K. Model of Regulation

### Box 2. The Great Debate: U.S. Versus U.K. Model of Regulation

### Regulatory models and emphases
- The U.S. SEC refers to itself as a ‘law enforcement’ agency. Its regulatory model is based on aggressive enforcement and a significant portion of its resources are devoted to enforcement activities.43
- Other models do not emphasize enforcement. The contrast is usually drawn between the United States and the United Kingdom, where until recently the U.K. FSA applied a model placing greater emphasis on work done in ‘prevention’ rather than ex-post enforcement efforts.
- The U.K. FSA explicitly moved away from the philosophy of “not being an enforcement-led regulator” toward a philosophy of “credible deterrence,” including greater use of its power to prosecute insider dealing and other offenses identified in the FSMA as criminal offences.45

### Enforcement mechanisms and scope
- The United States maintains an extensive program of criminal enforcement involving states attorneys general and the Department of Justice, and there is widespread use of private enforcement through class actions.
- Private enforcement through class actions has been criticized as unduly costly to companies (and therefore detrimental to market competitiveness) but has also been championed as a means of keeping management focused on shareholders’ interests.
- The U.S. SEC commits significant resources to cross-border enforcement and has taken actions in foreign courts (example: brought an action to U.K. courts, successfully freezing financial assets in the United Kingdom of a U.K. resident allegedly violating U.S. securities laws), indicating an international reach when required.

### System-wide consequences and case examples
- Violations of securities law can have very serious system-wide implications beyond individual investor losses.
- Examples cited:
  - The Nahas case had a far-reaching and long-lasting impact on the Brazilian market.
  - Market scandals in India have prevented market growth and led to financial institution failures.
  - The Madoff scandal caused individual investor losses and may have lasting impacts on confidence in private wealth management and markets generally.
  - Albanian ponzi schemes and the Nahas case are cited as instances where lack of authority impeded earlier or more robust enforcement.46

### Explanations for cross-jurisdictional differences
- Coffee suggests the intensity difference may be because of more dispersed ownership of U.S. companies; less-concentrated ownership makes owners less able to apply direct pressure to management, increasing reliance on external enforcement.44
- Cultural differences (use of the legal system and regulated industry culture) also inform these differences in enforcement approach.

### Interdependence: law, supervision, and enforcement
- There is an interdependence between:
  - the legal framework (must be well designed for supervision and enforcement to work),
  - supervision (implements the legal framework, prevents problems, and develops practice that enforcement builds upon),
  - enforcement (ensures consequences when rules are violated).
- Each of the three elements is crucial:
  - Enforcement alone is unsatisfactory because it is ex post and cannot fully restore losses.
  - Without enforcement, law and supervision remain unsupported and compliance suffers in the absence of deterrence.
  - Enforcement appears the most challenging element for regulators.

### Capacity constraints, international assessments, and recommendations
- IOSCO assessments show many countries face significant challenges implementing credible and effective enforcement programs; a dominant finding is that weakness in capacity rather than gaps in the legal framework is at the core of the problem.
- Specific capacity issues include lack of broad powers to investigate, litigate, or sanction breaches of securities laws and regulations, particularly in developing countries.
- Factors affecting capacity:
  - independence of the regulator from political or industry resistance,
  - level of staff skill,
  - extent of resources dedicated to enforcement.
- Key elements in capacity—budget and staffing independence—are linked to political support for the regulator; political support is the first step to addressing enforcement challenges.
- The G-20 recommends that national financial regulators and oversight authorities ensure appropriate resources are available and that the enforcement function is independent from other activities or external influences.47
- Technical assistance and capacity-building assistance to developing and emerging market countries to strengthen legal and regulatory frameworks for enforcement are recommended priorities for international institutions, regulators, and international standard setters such as IOSCO.

*Source: Box 2. The Great Debate: U.S. Versus U.K. Model of Regulation (from _wp09168).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09168.pdf_