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Special Report: Caribbean countries entangled by U.S. financial crackdown

Burdened by chronic back pain, Belize Prime Minister Dean Barrow avoids traveling abroad, his colleagues say. But in January, he flew to Washington and visited one government agency after another on a singular mission: reconnecting his country to the U.S. financial system.

A U.S.-educated lawyer, Barrow made his case before agencies with chief oversight of American banks, including the Federal Deposit Insurance Corporation and the U.S. Treasury's Office of the Comptroller of the Currency.

His Belizean delegation described how their country had been shunned over the last year by large, reputable American banks, a trend that threatens its tiny economy.

As banks scrub their books of potentially risky businesses amid a tightening regulatory noose, major U.S. financial institutions have ended relationships with regional banks across the Caribbean in the last four years, Caribbean officials and bank executives say.

This so-called "de-risking" or "de-banking," in which banks pull out of certain lines of business and even parts of the world, has intensified. Enhanced scrutiny on financial fraud and new regulations to stem money laundering and terror finance are all at play.

Yet the de-risking movement has triggered a collision of interests: As banks tighten controls, small, poor countries most dependent on trade say they're being unfairly cut off from global finance, a case made by Barrow.

"The regulators all agreed that absent a solution, our economies, our societies would go belly up," he recounted in a speech in February. But in the end, his group left Washington with little more than "tea and sympathy."

Just two banks in Belize maintain "correspondent banking relationships" with U.S. banks, Atlantic Bank and Scotiabank, each of which have international affiliations. Such bilateral links allow banks to finance trade, settle credit card payments and clear the U.S. dollar-denominated transactions that underpin global commerce.

De-risking threatens the fragile economy of Belize, a country the size of New Jersey with a population of 375,000, a 40 percent poverty rate and an economy based on farming and tourism. Businesses now must set aside weeks to make routine payments to suppliers abroad that used to take moments. Desperate to pass muster with American banks, Belizean banks have dropped customers carrying potential risks, including cash remittance services used by many people working abroad.

Every day, Belizeans struggle to surmount trade barriers.

In south Belize City on a June weekday, Yvonne Williams visited a Western Union agent, tucked inside a Chinese-owned grocery, with her two granddaughters. The nursing assistant lives near Boston and is building a home in Belize for her retirement.

It is becoming harder to send money to Belize, Williams said. She tried to send $700 from the United States to Belize about three months ago for construction on her home, but the transaction was delayed, and she couldn't pay her workers. She believes the size of the transfer attracted attention.

"The last couple times I tried to send, Western Union said they couldn't send it," said Williams, 63. "They had to wait a couple days � and it affected my work here."

Santander Group, a Guatemalan company with a major investment in Belize, has had trouble bringing cash in and out of the country and closing financing from international banks for its sugar mill, which employs around 700, said director Edgar Hernandez.

"Ten banks have been willing to lend us money, but not us in Belize," Hernandez said. "We are exporting everything that we produce, so every time you have commercial activity and you don't necessarily have the proper network banking-wise to channel those funds, that creates transactional costs."

What's happening in the Caribbean is part of a larger saga, in which tighter banking controls are prompting the world's top financial institutions to avoid not just known terrorist groups but also cash remittance services, charities, foreign embassies, and other classes of customers, many of whom have no role in criminal activity. That conflict threatens global goals of providing financial access to the world's poor.

"The devastation that this can cause to the economies in the islands is horrific," said John Beale, the Barbados ambassador to the United States. "How does a hotel carry out their business in terms of credit cards? How do they get compensated?"

Caribbean countries are vulnerable because they depend on foreign trade to survive. Belize's currency is pegged to the U.S. dollar, and the United States is its most important trading partner.

It is too soon to trace broad economic impact to lost banking ties. In 2015, for instance, Belize received $82.4 million in remittances, compared to $78 million the previous year, according to the central bank.

Yet evidence exists de-risking is driving business to a hidden world of cash transactions that will make it harder for regulators and law enforcement to track money flows.

One Belize businessman, who declined to be named, said in order to pay a loan in Belize, he must travel to another Caribbean country to withdraw U.S. dollars and carry the cash back to Belize. "I do that every month," he said. "I can't send a wire from my bank to my loan account in Belize."

Regulators say the requirements prevent fraud. Banks must make their own decisions about their customers based on risk, they say, and the United States does not advocate broad de-risking.

Daniel Glaser, the Treasury's assistant secretary for terrorist financing, said the agency is working with Caribbean countries to better understand the challenges to correspondent banking, improve their banking supervision and clarify regulators' expectations. "We recognize how vital access to the U.S. financial system is for developing countries like those in the Caribbean region," Glaser said in a statement.

CRISIS SPARKS CRACKDOWN

The 2008 financial crisis shone a harsh light on banking misdeeds and stoked public anger at Wall Street, whose loose housing loans helped spark an economic collapse. It also provided an incentive for regulators to attack financial fraud.

Abuses were eye-opening. In 2012, HSBC agreed to pay nearly $2 billion in fines to U.S. authorities for allowing itself to be used by cartels to launder drug money flowing out of Mexico, among other lapses, and acknowledged it had failed to conduct basic due diligence.

One case in particular casts a long shadow today: a nearly $9 billion penalty levied on BNP Paribas in 2014 to resolve accusations it violated U.S. sanctions against Sudan, Cuba and Iran.

Banks reacted by ramping up compliance departments and poring through their books for any business that might invite extra scrutiny.

"There is a sense that for a period of time now, it's been open season on the banks," said Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute. "Nobody wants to be the next HSBC or BNP Paribas. You're not going to take a risk."

The Caribbean appears to be the worst-hit of all regions by the new scrutiny, a World Bank survey found last year.

Caribbean states - with their small populations and economies - offer miniscule profits for banks and are seen as hubs for offshore banking, susceptible to money laundering, tax evasion and the narcotics trade flowing from South America. Most banks simply do not see it as worth their while to do business against these risks, experts say.

"We were told by one large bank that if your bank does not have about $2 billion in assets, it is not feasible for us to do business with you," said Glenford Ysaguirre, Belize's central bank governor. Barrow declined an interview request.

Belize's entire financial system has assets of less than $3 billion, according to the International Monetary Fund.

Banks have good reason to be wary in the Caribbean, some say. Several Caribbean countries including Belize are on the State Department's 2016 list of countries that present a "primary concern" for money laundering. And the release of the Panama Papers, documents leaked from a Panamanian law firm this year with information on 214,000 offshore companies, has renewed regulatory focus on the region. More than 100 offshore companies registered in Belize were named in the documents.

"Let's be honest, everybody knows what the purpose of an offshore bank was. It's for you to hide your money somewhere else," said Arturo Vasquez, chief executive of the Port of Belize and former president of the Belize Chamber of Commerce and Industry. "Uncle Sam wants Belize to make a big arrest, and we have not been able to do that."

The Belize government "continues to encourage offshore financial activities that are vulnerable to money laundering and terrorist financing," the State Department concluded. In 2011, the Caribbean Financial Action Task Force, a regional body focused on money laundering and terrorist finance, noted Belize had few convictions for money laundering and no enforceable requirements for banks to verify customers' legal status.

By 2015, the task force said Belize had made significant progress in addressing the problems in its anti-money laundering regulations, citing "evidence of Belize's commitment to deal with the deficiencies."

Caribbean officials contend concerns over fraud are hypocritical. U.S. states including Delaware, Wyoming and Nevada are hotbeds for the formation of anonymous shell companies, which have legitimate purposes but also enable corporate secrecy.

U.S. officials say banking rules meant to target money laundering and terrorist finance do not mandate the wholesale abandonment of classes of customers. Risks should be managed rather than avoided, they say.

"The United States has never advocated a standard of perfection," Adam Szubin, Treasury's acting under secretary for terrorism and financial intelligence, told bankers in November.

BELIZE BANK: A CASE STUDY

For Belize Bank, the country's largest commercial bank by assets, disaster arrived November 20, 2014, in the form of a two-page letter, the contents of which were described to Reuters. Bank of America was ending its 35-year relationship.

"We were so shocked that immediately we called the central bank, immediately we spoke to the prime minister," said Filippo Alario, Belize Bank's chief risk officer. "We've never seen this happen anywhere."

Ysaguirre and Barrow visited Bank of America's executives in Miami shortly afterward.

Bank of America officials cited a "complex matrix of factors" in deciding whether to maintain a relationship, and said there was nothing Belize Bank could do, Ysaguirre recounted. "They were saying that they are compelled to do what they are doing because of the pressure from their regulators," he said.

Bank of America declined to comment.

The bank originally gave Belize Bank until January 2015 before the account would be closed, but agreed to an extension until the end of April. Shortly after, Bank of America dropped two other Belizean banks.

Bank of America gave little detail for its decision, Alario said, leaving Belize Bank scrambling to figure out what it had done wrong. "We asked them, 'Is there anything that you have seen that caused you concern?' And they said no," he recounted.

The shutdowns were just one corner of a larger trend across the Caribbean.

A bank in Antigua and Barbuda lost its relationship with Bank of America around March of this year, said Ronald Sanders, the country's ambassador to the United States. He declined to name the bank because it is trying to find another banking relationship.

Citibank ended its relationship with Belize's central bank in June, although the central bank still has correspondent relationships with other U.S. banks, Ysaguirre said. Citibank declined to comment.

Five financial institutions in the Bahamas, representing some 19 percent of the country's banking system's assets, have recently lost one or more correspondent banking relationships, an IMF report in June said. Disruptions can be temporary.

Across five Caribbean countries, at least 16 banks had lost all or some of their correspondent banking relationships as of this May, the IMF said.

In February, the Moody's rating service predicted that 80 percent of Belize's banking system was likely to lose correspondent and credit card settlement services by mid-year. Businesses are feeling the impact.

Belize Electric Company Limited, a Canadian-owned company and Belize Bank customer, hasn't been able to make a large payment to vendors abroad since February, said Chief Executive Officer Lynn Young. "Quite a few of our suppliers are kinda freaking out," Young said. The company is exploring options with Scotiabank.

Brett Feinstein, managing director of Benny's, a Belizean construction supplies retailer, said he has been forced to turn away new lines of revenue. One customer wanted Benny's to import a $150,000 excavator, but he declined. "If I divert the U.S. dollars to that business, it might affect my day-to-day, bread-and-butter business," he said.

With no clarity about why Bank of America dropped it, Belize Bank began its own de-risking campaign - closing accounts for remittance services catering to people with little access to traditional banks.

Migrants use the services to send earnings home, and cash transfers help keep families out of poverty. In Jamaica, remittances as a percentage of gross domestic product were 16.9 percent in 2015, the World Bank said. The figure was 7.7 percent in the Dominican Republic and 4.8 percent in Belize.

Caribbean states are both recipients and sources of remittances - Central American immigrants working in Belize, for instance, send earnings back home.

"It is really detrimental to the bottom-of-the-pyramid crowd," said Dilip Ratha, a World Bank economist. "Remittances were one simple form of financial transaction that often brought them to the periphery of the financial system."

LOBBY PUSH

Caribbean officials and executives are redoubling their efforts in Washington to encourage regulators to be clearer with U.S. banks about their expectations, while trying to make themselves more attractive to banks.

There has been talk of Caribbean states banding together to establish a commercial bank in the United States to serve their diasporas and provide correspondent services to banks in the region.

Caribbean officials have raised the de-risking issue during forums in Washington and the Caribbean region, pressing everyone from President Barack Obama on down. U.S. officials have expressed sympathy for Belize's plight, yet little action has followed.

For affected countries and the United States, new risks exist.

Belize Bank has cleared some U.S. dollar transactions and maintained a toehold in the United States by using a bank in Turkey, and previously used a Chinese bank, Alario said. The use of intermediate accounts to access the United States, or "nesting," can make transactions less transparent.

"We don't have a U.S. correspondent bank. We nest," Alario said at a de-risking panel in Belize City in June. "It's not ideal but that's all we have to do to continue."

In February, Moody's warned that Belize could face "significant disruptions" to tourism, trade and foreign investment after losing its banking links. About 60 percent of tourist spending in Belize involves credit card transactions settled by correspondent banks.

Historically, the Caribbean has cooperated closely with the United States, interdicting drug flows and hosting U.S. naval and air stations. Yet now some transactions that used to occur in U.S. dollars are being conducted in euros and Chinese yuan.

"What I don't understand is why the United States at the government level, diplomatic level, at the political level would not see the harm that this is doing to its relationship with countries that are on its doorstep," said Ambassador Sanders, of Antigua and Barbuda.

Reuters

Barrow Left Washington with Little More Than Tea and Sympathy, Says The Fiscal Times

The woes of correspondent banking continue to plague the Caribbean countries despite several efforts and meetings held to see how best the challenges can be mitigated. When the Caribbean Community met in February in Belize, a special financial task force was put together to see how best the issue can be addressed. Five months later, the community met again in Georgetown, Guyana with the issue of correspondent banking being tabled again. Foreign Minister, Wilfred Elrington attended these recent meetings; he spoke to Love News on the discussions had.

WILFRED ELRINGTON

"Progress has not been spectacular but we have been trying. It's a very difficult situation because what is really needed is for a change in the laws in the United States and to do that you have to have the United States Congress to get involved but you know the congress has been deadlocked on most things. We took the decision to try to see if we can do more political work, get our citizens abroad to intervene with the congress people in the United States to see whether we can get them to move on it. It's going to be a difficult thing to do especially given the election season but we can't give up, we've got to be persistent." Eyes from all around the world are looking at how the de-risking movement by the American banks is affecting businesses globally. Just yesterday, the Reuters News Agency did a news piece on the correspondent banking with a focus on Belize. Here is that news package.

The Fiscal Times online publication penned a similar article dated July 12, 2016. The lengthy article speaks of the challenges being faced by investors to Belize and Belizeans living abroad who send monies to Belize regularly. It reads, in part, quote, "This so-called "de-risking" or "de-banking," in which banks pull out of certain lines of business and even parts of the world, has intensified. Enhanced scrutiny on financial fraud and new regulations to stem money laundering and terror finance are all at play. Yet the de-risking movement has triggered a collision of interests: As banks tighten controls, small, poor countries most dependent on trade say they're being unfairly cut off from global finance, a case made by Barrow. "The regulators all agreed that absent a solution, our economies, our societies would go belly up," he recounted in a speech in February. But in the end, his group left Washington with little more than "tea and sympathy." Just two banks in Belize maintain "correspondent banking relationships" with U.S. banks, Atlantic Bank and Scotiabank, each of which have international affiliations. Such bilateral links allow banks to finance trade, settle credit card payments and clear the U.S. dollar-denominated transactions that underpin global commerce. De-risking threatens the fragile economy of Belize, a country the size of New Jersey with a population of 375,000, a 40 percent poverty rate and an economy based on farming and tourism. Businesses now must set aside weeks to make routine payments to suppliers abroad that used to take moments. Desperate to pass muster with American banks, Belizean banks have dropped customers carrying potential risks, including cash remittance services used by many people working abroad. Every day, Belizeans struggle to surmount trade barriers. In south Belize City on a June weekday, Yvonne Williams visited a Western Union agent, tucked inside a Chinese-owned grocery, with her two granddaughters. The nursing assistant lives near Boston and is building a home in Belize for her retirement. It is becoming harder to send money to Belize, Williams said. She tried to send $700 from the United States to Belize about three months ago for construction on her home, but the transaction was delayed, and she couldn't pay her workers. She believes the size of the transfer attracted attention. Santander Group, a Guatemalan company with a major investment in Belize, has had trouble bringing cash in and out of the country and closing financing from international banks for its sugar mill, which employs around 700, said director Edgar Hernandez. "Ten banks have been willing to lend us money, but not us in Belize," Hernandez said. "We are exporting everything that we produce, so every time you have commercial activity and you don't necessarily have the proper network banking-wise to channel those funds, that creates transactional costs." What's happening in the Caribbean is part of a larger saga, in which tighter banking controls are prompting the world's top financial institutions to avoid not just known terrorist groups but also cash remittance services, charities, foreign embassies, and other classes of customers, many of whom have no role in criminal activity. That conflict threatens global goals of providing financial access to the world's poor. Caribbean countries are vulnerable because they depend on foreign trade to survive. Belize's currency is pegged to the U.S. dollar, and the United States is its most important trading partner. It is too soon to trace broad economic impact to lost banking ties. In 2015, for instance, Belize received $82.4 million in remittances, compared to $78 million the previous year, according to the central bank. Yet evidence exists de-risking is driving business to a hidden world of cash transactions that will make it harder for regulators and law enforcement to track money flows. One Belize businessman, who declined to be named, said in order to pay a loan in Belize, he must travel to another Caribbean country to withdraw U.S. dollars and carry the cash back to Belize. "I do that every month," he said. "I can't send a wire from my bank to my loan account in Belize." End of quote. Tomorrow we will have more on the recent research done by the Fiscal Times on correspondent banking and the ramifications in Belize and the Caribbean, in general.

Belize, Correspondent Banking and Forecast

In the newscast for July 12, we brought back the issue of correspondent banking and we spoke with Foreign Affairs Minister, Wilfred Elrington who recently returned from a CARICOM session in Guyana where the matter formed a part of the meetings' agenda. Minister Elrington has conceded that not much progress has been made in getting the US Banks to restore relations with Belize or with the banks in the Caribbean. Reuters News Agency also highlighted the current challenges being faced by Belizeans living here and abroad when it comes to sending money via wire transfers or other forms.

A very extensive article was also published by The Fiscal Times with a keen look at the business sector of Belize and how transactions are being conducted subsequent to the de-risking movement. The entire movement began unfolding in 2008 with a financial crisis that brought to light many financial indiscretions in the banking sector and with that came the attack on financial fraud. That attack saw banks being fined for being used by Mexican cartels for the facilitation of money laundering with no due diligence being done. HSBC, a British-based multinational bank was fined two billion dollars for being used by cartels to launder drug money; meanwhile, BNP Paribas, a French multinational bank was fined nine billion dollars in 2014 in order to resolve accusations that it had violated US sanctions against Sudan, Cuba and Iran. The fines are steep and with that the banks began withdrawing their relations with other banks, particularly in the Caribbean. Tonight, we continue with the publication by The Fiscal Times in which several Belizean businessmen were interviewed.

The article quoted Lynn Young, Chief Executive Officer for the Canadian owned Belize Electric Company Limited as saying that quite a few of their suppliers are kinda freaking out as the company has not been able to make large payments to vendors abroad since February. Meanwhile, the Managing Director for Benny's Home Centre, Brett Feinstein was noted as saying that he has been forced to turn away new lines of revenue. He says, one customer wanted Benny's to import an excavator valued at one hundred and fifty thousand dollars but he declined, saying quote, "If I divert the U.S. dollars to that business, it might affect my day-to-day, bread-and-butter business." End of quote.

Belize, among other Caribbean nations, is on the US State Department's 2016 list of countries that present a primary concern when it comes to money laundering; this, coupled with the Panama Papers in which more than one hundred offshore companies in Belize were named in those documents, there has been a renewed focus on the Caribbean region when it comes to attacking financial indiscretions. According to a World Bank Survey done in 2015, the Caribbean appears to be the worst hit of all the regions since the profits we offer are on a very small scale compared to the possible fines that the US and European banks could face. The Fiscal Times quoted Belize's Central Bank Governor, Glenford Ysaguirre, as saying, quote, "We were told by one large bank that if your bank does not have about two billion dollars in assets, it is not feasible for us to do business with you."

Interestingly, the International Monetary Fund reported that Belize's entire financial system has assets amounting to less than three billion dollars. Former President of the Belize Chamber of Commerce and Industry, Arturo Vasquez was also contacted and as it relates to the local financial system and the country's due diligence, Vasquez reportedly stated, quote, "Uncle Sam wants Belize to make a big arrest, and we have not been able to do that." End of quote. With Belize being unable to do that, the State Department has concluded that the Belize Government, quote, "continues to encourage offshore financial activities that are vulnerable to money laundering and terrorist financing." End of quote.

But, the Caribbean Financial Action Task Force, a regional body focused on money laundering and terrorist finance has noted in 2015 that Belize is making significant progress in addressing the problems in its anti-money laundering regulations, citing evidence of Belize's commitment to deal with the deficiencies. Belize Bank was the first to be hit on November 20, 2014 when they received a 2-page letter ending its thirty five year relationship with the Bank of America. The bank had originally given Belize Bank until January 2015 before the account would be closed, but agreed to an extension until the end of April. Shortly after, Bank of America dropped two other Belizean banks. Citibank ended its relationship with Belize's Central Bank in June 2016, although the Central Bank still has correspondent relationships with other U.S. banks.

A recent IMF report had indicated that across five Caribbean countries, at least 16 banks had lost all or some of their correspondent banking relationships as at May. Meanwhile, Moody's Rating Service made a prediction in February 2016 that by the middle of the year Belize's banking system was likely to lose correspondent and credit card settlement services. Moody also warned that Belize could face significant disruptions to tourism, trade and foreign investment after losing its banking links. About 60 percent of tourist spending in Belize involves credit card transactions settled by correspondent banks. As we have told you, the Caribbean Community member states have come together to try to have some normalcy restored to the banking sector whilst looking at the idea of banding together to establish a commercial bank in the United States that would serve their diaspora and provide correspondent banking in the region.

LOVEFM

Citibank announced they will close the account for Venezuela's Central Bank within 30 days.
For this embattled economy it could be the last straw.

I have yet to hear anything sensible from any US candidate about the importance (to the US and the world) of a healthy Latin American/Caribbean economy.

wait until Putin makes an overture............

Maybe they should fix Delaware before they come after the Caribbean...

And Wyoming, etc. Really now.

This has been taken all the way to our president who promised assistance... With assistance like that, I am all for Putin's help also.... Having said that, he has his own US related banking problems.

This is more of a Government regulation problem than a banking problem. The banks are reacting to new regulations and the Billions of dollars in fines they have had to pay for not meeting the regulations to the governments satisfaction. Hence the name "De-risking."

The government over compensated with regulations after the 2007 banking crisis and the unintentional consequences have been the slowest economic recovery in the history of the USA since the 1930's and the banks trying to protect themselves from further financial damage. The effect on the rest of the world is the collateral damage. I've said it before but I'll say it again, there is zero chance of this and other problems being solved until after the election in the USA. Both canidates have close ties to the banks so change will eventually come.

IMF chief: Loss of small-country bank access risks 'systemic' disruptions

The loss of correspondent banking relationships in developing countries as major banks try to limit risk exposures could marginalize small economies and cause "systemic" disruptions to their financial systems, the head of the International Monetary Fund said.

IMF Managing Director Christine Lagarde said in prepared remarks at the New York Federal Reserve that regulators in both major financial center countries and small countries need to do more to help banks maintain these relationships.

"I am concerned that all is not well in this world of small countries with small financial systems. In fact there is a risk that they become more marginalized."

She said these already have hit a number of Caribbean countries, where as of May, at least 16 banks in five countries have lost all or some of their correspondent banking relationships.

Reuters reported last week that the problem is particularly acute in Belize.

Lagarde said such countries are especially vulnerable, often depend on remittances from workers abroad, and have minimal access to financial services under the best of circumstances.

"Even if the global implications of these disruptions are not visible so far, they can be come systemic if left unaddressed," she said.

Lagarde acknowledged that some of the pull-back by major global banks is a reaction to increased capital requirements prompted by the 2008-2009 financial crisis, which has made lower-return businesses such as correspondent banking less attractive.

Tougher compliance rules to combat money laundering and financing of terrorism also have been a factor, but she noted that IMF researchers found there is considerable uncertainty among many banks as to their regulatory obligations in these areas.

"Since these are the very issues where regulators have tried to provide clarity, this suggests that both sides still have some work to do to rach a better understanding," Lagarde said.

Lagarde also said the affected countries need to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, especially in the area of anti-money laundering and anti-terrorism finance compliance.

Source: Reuters

De-risking and the future of indigenous banks in CARICOM: The effort of finance ministers

by Louis Robinson

The case of Belize Bank, published in the August 4, 2016, edition of Caribbean News Now (Belize bank hit by withdrawals and corresponding banking de-risking) demonstrates the urgency of finding and implementing counter de-risking measures in a robust and unrelenting manner as promised by the Caribbean Community (CARICOM) ministers of finance on correspondent banking. At short notice, the Belize Bank was required to close its main correspondent account despite its long account relationship with that foreign bank.

In fact, at the July 4-6, 2016, CARICOM heads of government meeting held in Guyana and chaired by the prime minister and minister of finance of Dominica, the heads agreed to implement a robust and an unrelenting advocacy on the de-risking issues and, by way of a selected committee on correspondent banking, to maintain a high level of engagement with the parties involved.

Since the July 2016 meeting, the selected committee has released no public statement on the progress of their advocacy effort. Parties, interested in evaluating the progress of advocacy and the likely effects of de-risking on the operations of the region’s indigenous banks, have been notified that any such information was confidential or otherwise unavailable. Meanwhile, the Belize Bank has been experiencing deposit withdrawals, restrictions on international wire transfers, and other effects (e.g. on liquidity, new credit extension and profitability).

In providing correspondent banking services to the CARICOM indigenous banks, the regulatory and supervisory agencies require their banks to be on alert for customers who may be engaged in illegal or suspicious activities. Additionally, these agencies expect the banks under their supervision to continue offering correspondent banking and other services to legal but potentially high-risk businesses.

Foreign banks, therefore, are caught with two conflicting mandates from their regulatory and supervisory agencies: (a) to continue to offer high-risk correspondent banking services to several relatively small indigenous banks; and (b) to pay increasing compliance-related expenses, while generating inadequate revenue to cover the operating costs of providing such services.

Surely, public disclosure on how the CARICOM committee has addressed the issue of conflicting mandates and, if it has done so, what results the committee did achieve from its advocacy would be instructive.

Foreign regulatory agencies have identified certain sectors and industries as vulnerable or to be at risk for money laundering and terrorist financing. Simultaneously, these agencies have advised banks that engaging in wholesale de-risking of an industry or sector was not desirable.

Correspondent banking, money transmitting or money services businesses, and accounts of charities, etc., which are categorized as high risk activities require enhanced due diligence at the on-boarding process and continued monitoring and reporting throughout the account relationship. Such high level of due diligence, monitoring, and reporting comes at high cost to the banks.

The income, the foreign banks would expect from providing such services to the indigenous banks, would therefore be high, and the volume of transactions conducted by the indigenous banks would have to be large to enable the transaction fee paid by the customers of the indigenous banks to be competitive.

It is worthy to note that, through these so-called high-risk account relationships, foreign currency payments for goods and services are made, migrant transfers are received by beneficiaries and private charitable contributions are made. In view of the importance of these payments, the unimpeded flow of these transactions through the indigenous banks must be permitted.

Foreign regulatory agencies may, therefore, be requested to discontinue the practice of classifying the above account relationship as high-risk. With the removal of this risk-categorization impediment, even the community banks in the US would resume providing the above account relationships as they have done for several years before 2008.

My professional experiences have exposed me to correspondent banking departments of several medium sized community banks that once offered a portfolio of basic correspondent banking and trade financing services to indigenous banks located in the Caribbean and Latin America. Most of these banks operated in a safe and sound manner and provided a satisfactory service to their foreign bank customers.

Perhaps, the CARICOM committee has already considered advocating for the discontinuance of the practice of categorizing certain accounts as high-risk.

While the foreign regulatory agencies might consider changing their expectation that certain customers would be categorized as high-risk, the Caribbean governments (particularly those in the Eastern Caribbean) might want to reorganize their several small indigenous banks into one amalgamated bank with branches or other remote service facilities in selected locations.

A main objective of such a reorganization is to concentrate into one lager indigenous bank, all the foreign currency receipts and payments currently being processed by the smaller (sub-optimal) indigenous banking units within the region. The single indigenous bank would have the advantage of scale, would be more efficient, and more attractive to its foreign correspondent bank or banks.

There are several other advantages of an integrated indigenous bank (e.g. more efficiently allocating EC dollar savings from areas with surplus savings to area with excess demand for loans and advances; retaining management decision in the region etc.).

Finding effective solutions to the wholesale de-risking of CARICOM indigenous banks by their foreign correspondents is far more urgent than protecting the special interests of some stake holders wanting to maintain the status quo in the belief that de-risking cannot be a catastrophic event for them and for the entire indigenous banking sector in the region.

Nonetheless, to prepare for such a catastrophe, the sector must be reorganized to increase its capital base, internal control and compliance programs, and operational efficiency. Such measures may be more effectively implemented through an amalgamated indigenous banking sector.

An implication of the CARICOM correspondent banking committee’s apparent failure to disclose to the public the status of their advocacy is (a) the promised robust and unrelenting advocacy effort has not yet commenced or the committee members have since changed their promised effort in preference to inviting a set of well-established foreign banks to re-open their branching presence in the region and discretely closing each and every one of the indigenous banks operating there.

The reopened branches would provide all the foreign exchange services obtained from their head or regional offices. The small credit unions in the region would assume some of the deposits from the indigenous banks’ customers and would open their accounts with the branches of the foreign banks.

Louis Robinson

Caribbean News Now

Commonwealth Takes Notice of Region's De-Risking Worries

Caribbean countries are not alone in worrying about how de-risking is threatening their financial stability. The Commonwealth is not only noticing it but trying to come up with solutions.

Passions ran high as money transfer businesses and smaller financial institutions met this week at the Commonwealth Secretariat to address a "detrimental" decline in international banking for many businesses and individuals.

The public meeting was convened to discuss the report, Disconnecting from Global Finance, which proposes solutions to the trend of financial institutions terminating or restricting so-called correspondent banking relationships (CBRs) with legitimate clients as a way of mitigating legal risks. This practice, which is a response in part to increased regulation, is known as de-risking.

"Major banks are now avoiding banking customers, or categories of customers, they deem low profit or high risk. The drivers are complex and varied but global regulations that are designed to stop money laundering and the financing of terrorism have contributed to this worrying phenomenon," said Commonwealth Economic Policy expert Samantha Attridge, Head of Finance and Development Policy.

"Our report shows a worrying rise in CBR closures, doubling year-on-year since 2013. The issue is particularly affecting regions such as the Caribbean, where for example in Belize seven of Belize's nine banks lost their CBRs, as well as the Central Bank losing one of its CBRs."

De-risking is curtailing countries' access to essential cross-border financial services such as trade finance and international money transfers, which are essential to many economies. The issue is particularly detrimental to vulnerable economies and small states in the Commonwealth, Attridge said.

Participants at the meeting on Wednesday included the Executive Secretary of the Financial Action Task Force (FATF), the international anti-money laundering and counter financing terrorism standard setter, as well as senior representatives from the British Bankers' Association, HSBC Holdings, Santander and the Wolfsberg Group.

Delegates applauded the Commonwealth for proposing measures including setting best practice standards for money service businesses to boost their legitimacy and reputation, and improving guidance and risk-tolerance standards for banks, that balance the need to prevent illegal activity with ensuring smaller institutions in developing countries are not excluded from the global financial system.

The Disconnecting from Global Finance report also proposes building capacity for financial regulators in developing countries and ensuring they are part of global conversations on the setting of standards and policies.

Paulette Simpson, National's Executive Corporate Affairs and Public Policy of Jamaica National, one of Jamaica's largest financial institutions, appealed for an acknowledgement by banks that people's lives are hanging in the balance.

Stressing the urgency of the situation for institutions like Jamaica National, which was given three months to terminate one 25-year correspondent banking relationship, she called for continued dialogue and immediate solutions.

Caribbean 360