Banking: Is the US making a stick to beat its own back?
By Sir Ronald Sanders
Caribbean governments have rightly focussed on the severe consequences for their countries of the withdrawal of correspondent banking relations from regional banks by international banks, particularly those located in the US.
But there will also be serious consequences for other parts of the world, particularly the US, if the current troubling trend remains unchecked.
The gravest immediate threat is to Caribbean countries certainly. This not an abstract issue, restricted to the banking sector or governments. The adverse effects will spare no one. They will affect every sector of economic and financial activity including tourism, importers and exporters of goods, and individuals who either send money abroad or receive it.
On the tourism sector, airlines will not be able to transfer monies earned in the Caribbean to their home locations; cruise ships will not be able to pay for their passengers who sail to the region; hotels will not be able to purchase the food and beverages they import for the tourism industry; motor car dealers won’t be able to pay for vehicles they bring in to the country.
Even persons abroad, who send money to their dependent relatives, will find it impossible to do so. And, so the list goes on.
Without correspondent banking relations, all financial transactions with the US and many other countries will come to a halt. These relations are so important globally that it caused the managing director of the International Monetary Fund (IMF), Christine Lagarde, to observe in July in a major policy address that “correspondent banking is like the blood that delivers nutrients to different parts of the body. It is core to the business of over 3,700 banking groups in 200 countries”.
A recent World Bank study of the impact of de-risking on correspondent banking globally found that 75 percent of large international banks have reduced their total number of correspondent banking relationships, and 80 percent reported that they had severed all relationships in some jurisdictions.
The study also revealed that about 55 percent of banks receiving correspondent banking services reported a decline in the availability of those services, with about 70 percent of those reporting a decline indicating that the decline was “significant”.
But, the Caribbean is the region in the word that is hardest hit. Undoubtedly, this is because of two decades of the European Union Commission, members of the US legislature, the US government and even state governments in the US branding Caribbean countries as tax havens, even though the evidence does not support the contention.
According to the IMF, at least 16 banks in five Caribbean countries had lost all or some of their correspondent banking relationships as of May 2016.
The same study reports that, in Belize, only two out of nine banks (representing 27 percent of banking system assets) have been successful in maintaining correspondent banking relations with full banking services. And in The Bahamas, five financial institutions (accounting for 19 percent of banking system assets) have lost at least one correspondent banking relationship.
But, no Caribbean country has been spared and banks in all of them, including in the Eastern Caribbean, Barbados, Jamaica and Guyana are currently facing the real prospect of losing all correspondent relations with US banks.
There are ways of getting around the problem, but they are expensive and their permanence is not assured. For instance, these transactions can continue through willing banks in intermediary countries that enjoy correspondent banking relations with global banks in the US. But the cost of such transactions will be high, and in many cases unaffordable. In any event, they would push up costs, making the Caribbean uncompetitive. Further, the facility could be cut-off if global banks in the US apply onerous conditions.
That is why the Global Stakeholders’ Conference on “Correspondent Bank Relations; De-risking; and Branding Caribbean Countries as Tax Havens”, being held in Antigua on 27 and 28 October, is vitally important.
Hosted by the Antigua and Barbuda prime minister, Gaston Browne, who has responsibility for financial affairs in the quasi-Cabinet of Caribbean Community (CARICOM) heads of government, the conference will gather representatives from international financial institutions, regulatory bodies, government and banks in a ‘closed-door’ meeting to try to find solutions from frank discussions.
Christine Lagarde is sending her deputy managing director, Zhang Tao, to the represent her. Zhang, appointed two months ago, is the former deputy governor of the People's Bank of China.
The global stakeholders attending the conference will be keenly aware that what Caribbean countries are facing, is grave limitation of a country’s ability to undertake international trade or financial transactions. That would mean collapse of businesses, rapid escalation of unemployment, increase in poverty, and a huge reduction in any government’s capacity to provide its people with adequate health, care, education and protection.
The dreadful effects of such a woeful transformation of the Caribbean would not be limited to the Caribbean Sea. Inevitably, economic refugees with end up on the shores of US territory and other wealthy countries; so too would drugs, trafficked through the region, which would increase as the unemployed and the desperate seek means to survive.
Additionally, money would find unregulated and unstructured ways to cross borders, defying the very money laundering activities that withdrawing correspondent banking relations are trying to suppress.
Further, if Caribbean countries cannot pay or be paid for the goods and services they trade with the US, they will be forced to turn their attention elsewhere. In such a case, the US will lose revenues and jobs. The total loss may minuscule, given the relative small size of Caribbean markets; nonetheless they will have an impact.
Of greater importance is the loss of US influence in a region that sits next door. That vacuum will be filled by some other country or group of countries that the US might not appreciate. But, the people of the Caribbean have to survive. It will not be that they love the US any less, but they love life more.
By failing to respond swiftly, creatively and positively to the destructive effects of the withdrawal of correspondent banking relations, US decision-makers in government, in regulatory bodies, and in the legislature might be making a stick to beat their own backs.
Caribbean News Now
#518456 - 10/22/1605:38 AMRe: Caribbean entangled by U.S. financial crackdown
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.”
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.
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.
“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.
#518585 - 10/29/1604:59 AMRe: Caribbean entangled by U.S. financial crackdown
The Caribbean Response to the Withdrawal of Correspondent Banking
Conference on the Withdrawal of Correspondent Banking Relationships
IMF Deputy Managing Director Tao Zhang
Honorable Prime Minister, central bank governors, and distinguished guests, good morning! It is a pleasure to join all of you here.
I am so pleased to be able to join you on my first official overseas visit in my new capacity as IMF Deputy Managing Director. This visit provides the
opportunity to see the beauty of Antigua and Barbuda—and to learn more about a region rich in history and culture.
To see a country so dependent on the linkages between financial services and tourism and other sectors provides an immediate understanding of the
importance of today’s conference.
The discussions yesterday and today highlight a serious problem that relates to a lifeline for your economies—the withdrawal of correspondent banking
relationships, also known as CBR.
Indeed, this problem is not only observed in the Caribbean. Countries in Africa, Asia, Europe, and the Middle East are also losing banking services that
keep them connected to the global financial system.
This issue received substantial attention during the IMF Annual meetings earlier this month. Policy makers, regulators, and bank representatives attended a
conference there to discuss solutions to the problem. This is a collective problem that calls for a collective solution.
And I understand that this is the reason why we are gathered here today once again to make headways in solving this problem.
In my remarks this morning, I would like to address three themes:
First, to outline the scope and sources of the problem;
Second, to take stock of the policy response here in the Caribbean region, and, more broadly, from the international community;
Finally, I would like to discuss some of the issues that need to be addressed going forward.
What is the scope of the problem?
The Caribbean Association of Banks says that almost 60 percent of member institutions that it has interviewed report a loss of such relationships.
This is creating a difficult situation for some affected countries. For example, banks in Belize with assets equivalent to half of GDP are affected.
In some cases, while Caribbean banks have been able to hold on to their correspondent relationships, key services have been discontinued. These include
check clearance, trade finance, and wire transfers.
Some banks face higher costs for the remaining services.
In many other cases, global correspondent banks have withdrawn from transactions involving money transfer operators. But these operators traditionally have
been the intermediaries for remittances, which are a crucial source of income for the most vulnerable people in the Caribbean.
If the trend is not arrested, it could damage not only financial stability, but also economic growth, financial inclusion, and other development goals. Of
course these potential consequences are worrisome.
Moreover, the continued loss of legitimate correspondent banking services may drive legitimate transactions underground.
This would encourage transactions in cash and increase other forms of informality.
So the end result could be to undermine the objectives of the progress we have seen in the effort to supervise and regulate the financial sector services
and activities, including the effort to fight money laundering and combat the financing of terrorism.
What is driving this trend?
In short, the withdrawal of CBRs is partly a reflection of cost-benefit tradeoffs growing out of increased regulation and enforcement affecting
international banks, global banks.
Regulatory reforms have produced increased bank capital and liquidity requirements. This has contributed to reduced profitability of correspondent banking.
In addition, compliance costs have increased because of the intensified efforts to combat money laundering and terrorism financing.
Banks also have to respond to efforts to promote international tax transparency.
The bottom line is rising expenses, relative to the potential benefits associated with banks’ engagement in the region.
Global banks acknowledge that decisions to withdraw some services have been driven partly out of fear of large sanctions.
They point to a risk-assessment of respondent banks’ ability to implement adequate customer due diligence.
The tendency toward drastic action has been more likely where regulatory expectations are unclear and risks cannot be mitigated.
How to deal with this problem?
Let’s look at what has been done.
Caribbean authorities and those in other affected countries have been actively addressing this policy challenge in global meetings and in interactions with
developed country officials.
This already is having significant results: regulators in the home countries of global banks are becoming more proactive in clarifying their regulatory
For example, the U.S. Treasury Department is putting considerable resources into educating financial institutions on the precise nature of transactions and
behaviors that are subject to sanctions.
In the region, reports of the Caribbean Financial Action Task Force indicate that countries are making progress bringing their AML/CFT frameworks to
However, effective implementation and enforcement remain a challenge.
To this end, ECCU countries have decided to consolidate their national AML/CFT work into one regional operation, under the responsibility of the ECCB.
Most countries have also signed an intergovernmental agreement with the United States to facilitate compliance with U.S. tax law.
They also are committed to implementing the OECD Common Reporting Standards. The first information exchanges are targeted for the next two years.
The international community has also been active in looking for solutions to this challenge.
The Financial Stability Board has a four-point action plan on correspondent banking.
These include: establishing regular data collection and monitoring; clarifying regulatory expectations; capacity building; and strengthening tools for
customer due diligence. These are clearly areas where the Caribbean will most need the support of the international community.
The Financial Action Taskforce has just issued a new guidance specifying that the principle of “knowing your customer’s customer” is not
generally required in international banking.
However, respondent banks may be required to answer queries from correspondent banks about their customers in a timely manner.
For the private sector, banks world-wide continue to invest in employee training and implementing better AML/CFT platforms.
Some global banks have launched multi-year projects to build comprehensive databases and develop technology for universal customer coverage.
These innovations will allow banks to improve “know-your-customer” frameworks, better monitor transactions, and identify patterns of illegal activity.
All these responses and the progress so far are welcome and indeed encouraged. But there is a lot more to be done.
So what are the next steps?
We know by now what the problems are. We also know that while there is “no quick fix” to the problem. There is an urgent need for action to mitigate the
impact on affected economies. How can we then best address these issues collectively?
Here, I would like to lay out three areas that I think we should explore further, discussing pros and cons, in order to move forward toward concrete
addressing the problem of economies of scale;
mitigating cost and technical limitations;
improving information flows.
First, on the economies of scale.
As small states, the Caribbean countries are likely to offer relatively small volumes of CBR transactions. This makes it difficult for banks to generate
economies of scale--and therefore higher profits from CBR activity.
How can small institutions adapt?
We need to determine whether small Caribbean banks can bundle transactions to create the scale required for global banks to maintain banking services.
For example, one could explore if there is scope for some consolidation of banking systems in the region. If there is, how to do it? Can it be done through
public or private initiatives, or some combination of the two? In each of these options, what are the benefits and costs?
Second, on cost and technical limitations. Technology can be part of the solution by reducing compliance costs and strengthening “know-your-customer”
On the one hand, various industry solutions can be considered in the region to reduce the cost of compliance.
For example, one approach is to take advantage of “know-your-customer” software utilities, which store customer due-diligence information in a single
repository and allow easy access to bank customer information.
This may help respondent banks to reply to correspondent banks’ requests in a comprehensive and timely manner. They may also help correspondent banks to
identify and mitigate risks.
On the other hand, global banks should continue to work toward building comprehensive databases and developing technology for universal customer coverage.
This will allow them to better monitor transactions and to identify illicit activity. Some governments are also pursuing similar innovations.
The third issue is information sharing. Durable solutions will likely take a long time. Thus, it is essential to find interim approaches to improve the
information flow between correspondent banks and respondent banks, and then make sure the channels are strengthened in the long run.
I have already mentioned the broader use of “know-your-customer” utilities as a possible step forward.
There is also a need to tackle legal and contractual obstacles to sharing information across institutions and borders. These include data privacy laws and
diverging regulatory frameworks.
One further option is for banks to make more widespread use of the Legal Entity Identifier to identify corporate customers. The Legal Entity Identifier, or
LEI, is designed specifically to help the authorities around the world clearly identify the entities that transact across markets, products and regions,
and thus make it easier to recognize trends and risks and take appropriate corrective action.
Problems, issues, and solutions can go beyond the three areas I have just outlined. The overarching objective is to safeguard the integrity of financial
systems, and at the same time address the unintended consequences of and collateral damages from stronger regulation.
For our part, the IMF is committed to helping you resolve this problem.
We can facilitate candid and constructive dialogue among all parties to achieve practical solutions.
We will continue to encourage standard-setting bodies to take into account the impact of CBR policies—particularly when there are unintended negative
consequences like we are discussing now.
We will also encourage our member countries to work closely with correspondent banks to promote greater transparency on their exit decisions.
For example, it is important to ensure that they do not terminate a wider range of relations because of perceived problems with only a few respondent
Needless to say, we will continue to provide technical assistance and build capacity. In particular, we will continue to work with you to strengthen and
effectively implement your national AML/CFT and financial regulatory and supervisory frameworks in line with international standards.
We will build on ongoing efforts to identify concrete policy options. In this regard, I am pleased to note that IMF staff is in the process of preparing a
paper on this very issue, for which your views from this conference will be very useful for our deliberations. Once approved by the IMF Executive Board
early next year, we will work with you to implement it effectively.
Before I complete my remarks, I would like to reiterate that we at the IMF stand ready to work with you on this issue until it is resolved. It is essential
to our partnership that we find solutions together.
#518742 - 11/05/1604:46 AMRe: Caribbean entangled by U.S. financial crackdown
Some regional central bank banks turn to SWIFT to combat de-risking threat
Eight regional central banks have signed up to adopt the sanctions screening service and Know Your Customer (KYC) Registry provided by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in an effort to combat the threat posed to the region by de-risking measures imposed in correspondent banking relationships.
The trend of de-risking – the decision taken by international banks partially or fully to exit certain jurisdictions, product domains and currencies by exiting their foreign correspondent banking relationships – has been pervasive in the Caribbean and Latin America.
By taking up SWIFT's financial crime compliance services, the central banks of Belize, Bolivia, Costa Rica, Curacao, Dominican Republic, Ecuador, Haiti and Paraguay, hope to enhance transparency and build greater trust with the international financial community, mitigating the threat of being disconnected by their foreign counterparts.
In addition to adopting the KYC Registry themselves, some of the central banks have also endorsed the uptake of the services across their entire jurisdictions, doubling the number of regional institutions adopting SWIFT’s financial crime compliance tools over the past 12 months.
“De-risking in some regions has become so extreme that banks are now being challenged to address the problem, and the focus has moved from a commercial issue to one of financial inclusion,” said Fedra Ware, lead compliance services Latin America, SWIFT. “Implementing the right compliance controls within an organization, as well as ensuring enhanced transparency and collaboration between private and public entities, is critical to avoid being on the receiving end of a de-risking decision.”
#518918 - 11/12/1605:59 AMRe: Caribbean entangled by U.S. financial crackdown
Withdrawal of Correspondent Banks Poses Significant Risk to Caribbean
Conference addresses withdrawal of global banks, an urgent issue for the Caribbean
Open dialogue between countries, regulators, banks part of solution
Opening of Cuba to U.S. tourists is more an opportunity than a challenge
A significant threat to Caribbean economies has emerged as global banks withdraw their correspondent banking relationships in these countries.
Correspondent banking with global banks allows smaller banks access to the international payments system, facilitating money transfers through transactions
such as wire transfers, check clearing, and currency exchange. Without these banking relationships, businesses are cut off from international trade and
financing, families are unable to collect remittances from relatives working abroad, and foreign investors may be unwilling to invest if there is a risk
they will be unable to repatriate their profits.
The threat to Caribbean economies from large-scale withdrawal of correspondent banks was high on the agenda of policymakers attending the 2016 High Level Caribbean Forum in Port of Spain, Trinidad and Tobago,
on November 2, 2016. “The withdrawal of correspondent banking relationships presents a clear and present danger to the Caribbean,” declared IMF Deputy
Managing Director Tao Zhang in opening remarks at the forum, which was co-hosted by the IMF and the Government of Trinidad and Tobago.
A survey conducted by the Caribbean Association of Banks shows banks in 12 countries in the region have experienced loss of correspondent banking, among
them The Bahamas, Belize, Guyana, Jamaica, Suriname, Trinidad and Tobago, and countries in the Eastern Caribbean Currency Union. In Belize, the withdrawal
of correspondent banking relationships is systemic, with affected banks’ assets amounting to more than half of the domestic banking system’s assets. In
other countries, the loss of correspondent banking relationships has not reached systemic proportions but still presents an urgent threat.
Increased regulation of banking systems globally—to address concerns about tax evasion and combat money laundering and the financing of terrorism—has had
the unintended consequence of making correspondent banking relationships costlier and less attractive to global banks. Increased enforcement and unclear
regulatory expectations present correspondent banks with the possibility of large fines for noncompliance, particularly in cases where local privacy laws
prohibit the sharing of information about banks’ customers. Thus, the withdrawal of correspondent banking services is seen as “de-risking” by global banks.
Another concern highlighted during the forum is the risk that increased monitoring would push transactions to informal channels, making it difficult to
monitor illicit transactions and in effect countering anti-money laundering efforts.
Search for solutions
IMF officials said de-risking was an issue that the institution regarded as very important for its member countries and reaffirmed the IMF’s commitment to
helping countries find solutions, including through increased policy dialogue and technical assistance.
“We believe a solution to this issue requires dialogue between countries, regulators and banks, and increased information exchange. This can help clarify
regulatory expectations, build trust, facilitate capacity building, and highlight best practices,” Zhang said in his opening remarks.
Panelists expressed a sense of urgency to address the impact of de-risking on the region. They encouraged policymakers to examine the scope for collective
solutions to mitigate the costs to individual countries of introducing measures—such as taking advantage of better technology to facilitate information
sharing and reduce the cost of providing correspondent banking services.
Shake-up in Caribbean tourism?
The Caribbean Forum also featured a lively discussion on the likely impact from the normalization of relations between Cuba and the United States.
Panelists agreed the tourism sector was the most likely to be affected.
Challenges would arise if, as seems likely, Cuba opens up to tourists from the United States, potentially diverting tourists away from other Caribbean
destinations in the short term. However, the consensus among panelists was that the opening up of Cuba should be viewed not as a threat but as an
opportunity to expand tourism in the rest of the Caribbean—an opportunity to become more competitive and to build the Caribbean brand.
“The region has shown its resilience on this front before—when the Dominican Republic emerged as a tourist destination. It can be done again,” said Zhang.
Underscoring the need for regional cooperation, keynote speaker Gervase Warner, President and CEO of Trinidad-based Massy Group, called on the region’s
leaders to address disadvantages caused by small economies. “There’s no cavalry coming to our rescue,” he said, and challenged them to take a collective
approach to solving the region’s problems.
The loss of correspondent banking, also known as derisking, was a sticking point for Antiguan Minister of Trade, E.P. Chet Greene. His government has taken the lead for the Caribbean in exposing the effects of delinking countries from the international money chain. CARICOM member states, including Belize, have been adversely affected after U.S. financial institutions began severing relationships and closing off accounts with regional banks in numerous Caribbean countries. The U.S. claims this measure was taken to address money laundering and transnational issues. But Minister Greene says that ‘derisking’ severely impacts the economies of the Caribbean because there is no access to international exchange.
E.P. Chet Greene, Minister of Trade, Industry, Commerce and Consumer Affairs
“Effectively, what derisking does it takes you away from the global money chain. So for our tourism product, we cannot trade. For goods and services, we cannot trade. We would not even be able to buy medicines to maintain healthy populations across the region. So you can understand when you drill down to a layman explanation of what derisking really is; it is one that affects the entire region, all our peoples. All Caribbean countries have this challenge as the metropolitan countries decided that they wanted to delink themselves from us in the financial chain. And we are saying to the global community that this is just a wrong because access to the international money chain is one of those issues that we have a right to. And it is not even begging to be a part of; it is one of those things that you have a right to be a part of. It is a good. One of those goods that the people have a right to—the right to water, to education, to health, we also see a right to the financial money chain because without it, it is denying you the rights to those things I just mentioned.”
When I made an emergency trip to the US in May I did not leave enough money with my caretaker to cover the expenses for my extended stay. Using the form provided my by my bank here my bank there sent through a wire transfer. This cost me $40 USD. Two weeks later it was returned to the US bank due to the ever changing terms and I was charged $50 USD for the return. In the meantime I sent money Western Union for $10 and it was available here in San Pedro Town the same day. We sure are being jerked around. (cleaned up my language) Now extra time t the airport.