Is There a ‘New Normal’ for De-risking in the Caribbean?
22 Oct 2019

In early August 2019, it was revealed that large amounts of currency, upwards of $50 million monthly, are being shipped out of Jamaica. Peter Higgins, who is part of the Bank of Jamaica’s Foreign Exchange Code Working Group, noted that “too much cash is being shipped from Jamaica and to a great extent it cannot be explained.”2 Though the cash is likely worked through the island’s cambios (foreign exchange houses) and not the banks, this movement of cash has heightened the concern of international correspondent banks regarding cash outflows from questionable sources. It also brings back questions concerning the “de-risking” or “de-banking” of global banks from the Caribbean, a development that has caused economic and reputational damage throughout much of the region, as well as being a point of friction between regional governments and the advanced economies in North America and Europe. According to Toussant Boyce, head of the Office of Integrity, Compliance and Accountability at the Caribbean Development Bank, there is a “new normal” in terms of Caribbean finance. But it is questionable whether the new normal is sustainable; if not, it could represent further economic challenges in the region, especially when it comes to access to international finance.3

What is De-risking?

Although some have pointed to the financial crisis of 2008-2009 as the beginning of de-risking on the part of major global banks, economies throughout the Caribbean—as well as in parts of Africa, Eastern Europe, the Middle East, and the South Pacific—were the hardest hit by the loss of correspondent bank relationships (CBRs) in the 2015-2018 period. Broadly defined, de-risking refers to the restriction of correspondent banking relationships or business services from major global banks to certain jurisdictions due to concerns over money laundering or potential involvement in the financing of terrorist activities. The guidelines for de-risking (risk management) are found in the anti-money laundering (AML) and Combating the Financing of Terrorism (CFT) regimes that banks are obliged to follow.

According to the World Bank, the products and services identified as being most affected by the withdrawal of CBRs are:

  • Check clearing and settlement;
  • Cash-management services; and
  • International wire transfers.

De-risking has also had a major impact on money transfer organizations (MTOs), which are financial companies engaged in the cross-border transfer of funds, using either their local banking system or having access to another cross-border banking system. The largest of these companies include Western Union, UAE Exchange, MoneyGram, and PayPal. MTOs play an important role in countries with large flows of remittances, such as India, China, and much of the Caribbean.

Different Perceptions, Different Realities

From the perspective of international banks, mainly from Canada, the United States, and Europe, as well as their governmental regulatory agencies, the Caribbean is high risk due to weaker compliance and AML regimes—or at least it has been treated this way. To avoid the pain of being stung by financial fraud, paying large fines, and suffering from reputational risk, many banks opted to radically reduce their exposure to the region.

Since 2008, global banks have been under ongoing pressure to cut costs, while a number of institutions have been tagged by large fines. There is also the issue of higher compliance costs. According to a 2018 World Bank report:

“While more robust vigilance of correspondent banking channels is encouraged, maintaining CBRs comes at a cost to both correspondent and respondent banks. Rising compliance costs associated with more stringent Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regulations and international sanction regimes make the provision of correspondent banking services a less financially attractive business proposition. All bankers interviewed for this study acknowledged that correspondent accounts, including the new ones, cost much more to maintain, thus requiring larger transaction volumes and fees to remain a viable activity.”4

Banks pulling out of the region include the Bank of America, Scotiabank, Royal Bank of Canada, and CIBC. Banks from the Netherlands, Germany, and the United Kingdom also restricted their CBR business with Caribbean jurisdictions.

For Caribbean countries, de-risking has been a major economic problem. A survey in 2017 by the Caribbean Association of Banks found that 21 of the 23 banks in 12 Caribbean countries had lost at least one correspondent banking relationship. The impact was particularly hard on countries in the Eastern Caribbean (in particular Antigua and Barbuda and St. Kitts-Nevis), Suriname, and Belize.5

The gravity of the problem was caught by a 2016 discussion paper from the Caribbean Development Bank, which stated:

“Regionally, there is a looming risk of systemic economic and financial impacts if this issue is not addressed. The Financial Stability Board (FSB) in its recent report to the G20 on efforts to assess and address the decline of correspondent banking . . . noted that the decline of CBRs in the Caribbean could become a systemic issue for the Region. It warned that by driving payment flows underground into the shadow banking sector, the decline in CBRs could exacerbate the region’s challenges with being classified as ‘high risk’ for financial crimes, particularly money laundering and terrorist financing.”6

Most Caribbean economies are dependent on tourism and are open in terms of trade. Bearing this in mind, access to international payment services such as wire transfers, credit card settlements, and hard foreign currency are critical for everything from a tourist being able to pay at a hotel to a local retailer importing food to be used in major resorts, as well as feeding the local population. It is also important for such things as families making payments for their children to attend university in Canada, the United States, and the United Kingdom.

Another part of the problem is that the lack of CBRs complicates the flow of remittances back to the region. In the Dominican Republic, for example, remittances in 2017 were estimated by the central bank to be $5.7 billion.7 Indeed, a number of countries are dependent on remittances to help economic growth, as well as for families to meet day-to-day expenses (see table below). Much of the movement of remittances have been done through MTOs, most of which have been left scrambling in the aftermath of de-risking.

Although there was an earlier perception problem for the Caribbean as being a place offering “fun in the sun” tourism while simultaneously providing facilities for money launderers to carry out their trade, the days of free-wheeling financial fraud are generally over. AML/CFT rules and regulations have been widely implemented, and most governments have been active in the development of a regional body, the Caribbean Financial Action Task Force (CFATF), as well as active participants in cross-border investigations. CFATF focuses on the implementation of and compliance with AML/CFT standards across the region. Despite these advances, de-risking pressures were heavily felt from 2015-2018.

The risk of further de-risking exists. Indeed, in its 2018 Article IV report on Dominica, the International Monetary Fund (IMF) noted of risks facing the country de-risking.8 In its Article IV report on St. Vincent and the Grenadines, the IMF stated, “Domestic risks include more severe and frequent natural disasters, the loss of correspondent banking relationships, and materialization of financial sector risks.” This was paired with the IMF commending progress made in addressing legal deficiencies in the AML/CFT framework.

Many in the Caribbean feel unfairly targeted. Manuel Orozco, a senior director at the Inter-American Dialogue, noted before the U.S. Congress in October 2018: “Many commercial banks in the Caribbean saw longstanding banking relationships terminated due to the perception that financial activity with the Caribbean is by definition high-risk. Rather than manage risk or assess banking partners on an individual basis, a blanket assessment is made and banking relationships are terminated.”

By Scott B. MacDonald, CSIS, 16 October 2019

Read more at the Center for Strategic & International Studies

Photo: Stefan Schäfer, Lich [CC BY-SA 4.0], via Wikimedia Commons

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