New rating agency ranks EM banks by financial crime risk

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By:
Lucy Fitzgeorge-Parker
Published on:

Barclays backs MIT start-up Sigma Ratings; CEO promises universal emerging-markets coverage.

A former US Treasury official and a corporate lawyer are launching a rating agency that will rank banks in emerging markets based on their corporate governance and exposure to financial crime.

Sigma Ratings, which is due to go live later this year, will use artificial intelligence (AI) to produce country and entity level ratings from publicly available data, as well as more detailed ratings for institutions that provide internal information on their controls, procedures and systems.

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Stuart Jones Jr,
Sigma

Stuart Jones Jr, Sigma’s chief executive, helped set up the National Counterterrorism Centre in Virginia before serving as a Treasury financial attaché in Afghanistan and the Middle East. The inspiration for the project, however, came from his five years at EY advising emerging market banks on how to defend their organizations against threats such as money laundering and cybercrime.

“The institutions we worked with wanted to do the right thing,” he says. “They would bring in external consultants and invest in putting in place the right procedures, but from the perspective of London or New York they would be painted with the same brush as everyone else in their country.

“I wanted to create a platform that would allow institutions that are taking demonstrable steps to be leaders in this space to highlight their efforts in a way that is quantifiable and identifiable.”

To do this he teamed up with Gabrielle Haddad, whom he met on the MIT Sloan Fellows Programme. Haddad started as an M&A lawyer in New York and subsequently worked as legal officer at a non-profit fund manager in Geneva.

“She faced the problem I identified from an operational perspective from an investor’s perspective,” says Jones. “It was very difficult for her to get normalized risk data on banks to assess their attention to managing illicit finance risk. This was a particular problem in more opaque markets.”

Impressive

Haddad also brought impressive technological skills to the table. During her time at MIT she won the IBM AI hackathon.

Together, she and Jones set up Sigma with initial backing from MIT. In early July the firm announced that it had raised $2.4 million in a series seed funding round from investors including TechStars and Barclays. The latter participated through its fintech Accelerator programme.

Sigma’s platform is currently in beta testing and it plans to release version one in the autumn. Initially, it will provide ratings for 16 countries and 500 financial institutions, although the firm’s aim is to expand its coverage to include all emerging markets.

At an entity level, it has also already issued full ratings for institutions in Panama, Malta, Latvia, Bahrain, Kuwait and the United Arab Emirates.

Jones says the initial choice of markets – which also includes Turkey, Egypt, Saudi Arabia, Mexico and Argentina – was mainly driven by customer demand but also by the accessibility of data.

“Collection is more complex in countries such as Russia and China – but it’s nothing we can’t overcome,” he says. “The objective is universal coverage. We just have to work out where to prioritize.”


This is a very serious issue at a sovereign level 
 - Stuart Jones Jr, Sigma

He notes that one anomaly thrown up by the first round of ratings has been the relatively low scores of countries in Latin America.

“Most of the Gulf countries have much better ratings than Latin America, which has surprised some people,” says Jones. “It’s mainly to do with transparency. We’ve even found that quite a lot of Africa is more transparent than Latin America.”

Sigma does not yet cover Africa at a country level, but Jones says the firm is working on behalf of client institutions in 12 jurisdictions, including Ghana, Kenya, Nigeria and South Africa.

For banks, he adds, the cost of participating in the ratings process will be relatively low. “We think of that as a data integration cost,” he says. “We want to say to institutions: ‘If you’re really doing the right thing, then we want to tell the world about it. Let us get you rated.’

“Then on the other side we will be working with everyone from global banks to journalists, researchers and asset managers. Basically, anyone who wants to better understand the non-credit risk of a counterparty will want to be on and using our platform.”

Benchmark

Jones adds that one of the key strengths of Sigma’s model is that it will provide a benchmark for the comparison of individual institutions within countries.

“We can’t tell you which bank will necessarily have a regulatory event, but we can say that on average one institution is five times more exposed to risk than another one,” he says. “That is powerful information for banks, investors and the market in general.”

Sigma is already seeing interest from a wide range of potential users, including international financial institutions (IFIs) that work with banks on anti-money laundering and terrorism financing.

“I see what we’re doing as very collaborative with IFIs,” says Jones. “They spend tens of millions of dollars a year on capacity building in emerging market banks but until now have lacked a metric they can use to measure what progress has been made.”

He adds that the response from banking regulators in emerging markets has also been positive. “This is a very serious issue at a sovereign level,” he says. “We see what we’re doing as a way to provide more tools and options to domestic regulators in these countries.”