CARICOM countries continue fight against bank de-risking

Alicia Nicholls

The countries of the Caribbean Community (CARICOM) are continuing their fight against bank de-risking practices which are resulting in the restriction, threat of, or outright termination of correspondent banking relations with banks and wire transfer providers in the Caribbean region.

Onerous global and national regulatory requirements (such as anti-money laundering and combating the financing of terrorism standards), burdensome compliance costs and the stringent sanctions for breach of these regulations are increasingly leading banks in metropolitan countries, particularly in the United States, to de-risk, that is, avoid risk by discontinuing business with whole classes of customers without taking into account their levels of risk, as opposed to managing and mitigating risk. While other countries are also experiencing this disquieting phenomenon, the Caribbean appears to be the most affected region according to a World Bank survey conducted last year.

There are a number of other factors influencing de-risking decisions. Besides risk and reward considerations, added to the mix is the growing perception of the Caribbean as a “risky” place for financial transactions. The unwarranted attacks against legitimate offshore financial centres in the Caribbean in the wake of the Panama Papers scandal will no doubt unfortunately add fuel to the fire. The net result is an increasing unwillingness of international banks to continue correspondent banking relationships with banks and wire transfer providers in the region.

Belize has been the hardest hit so far by bank de-risking, but other Caribbean countries are also being affected. In the International Monetary Fund (IMF)’s Caribbean Corner publication of September 2015, it was reported that “[a]lready at least 10 banks in the region in five countries have (as of June 2015) lost all or some of their CBRs, including two central banks.” This number has grown.

At the meeting of the Financial Stability Board in Tokyo in March this year, Barbados’ Central Bank Governor, Dr. Delisle Worrell, reporting in his capacity as co-Chair of the Financial Stability Board’s Regional Consultative Group for the Americas, highlighted that eight correspondent banking relationships in Barbados’ international business sector have already been severed. He further warned that the lack of correspondent banking services could lead individuals to utilise unregulated channels, thereby limiting transparency and adding further risk to international transactions.

The loss of correspondent banking relationships disrupts the processing of financial instruments, such as credit card transactions and cheques,  needed for trade, investment, tourism and remittance flows, and would effectively de-link regional economies from the international financial system. It also has humanitarian and poverty eradication consequences as well. Remittances are the “bread and butter” for many poor families who depend on earnings made by breadwinners abroad. In light of the serious threat posed to the region’s economic, financial and social stability by de-risking, CARICOM heads of government took the decision to raise the issue not just bilaterally but in multilateral fora.In March Caribbean countries sought the Organisation of American States’ support.

Last week, Prime Minister of St. Kitts & Nevis, Dr. Timothy Harris took the lead during an important consultation with officials from the US State and Treasury Departments in Washington DC raised the serious impact de-risking was having on regional economies. The issue was also raised at the recently concluded Ninth UK-Caribbean Forum. The Ministers noted at paragraph 9 of the Communique:

The Caribbean therefore called on the UK to continue to work with international
partners to address this global phenomenon, and to encourage banks which
provide correspondent banking services, and regulatory authorities, to take
into account the efforts being made by Caribbean countries and financial
institutions to implement international regulations and to mitigate risks.

The full communique from that meeting may be viewed here.

The Caribbean Association of Banks has also been playing a critical role in lobbying efforts. At the Association’s recently held CEO Forum on May 3rd, parties came together “to explore potential solutions and develop a set of actions in response to this threat”. According to the press release, the Forum “discussed and agreed” on the following possible solutions:  the establishment of a clearing institution in the US, alternative Payment Methods and alternative Correspondent Banking Relationships. The forum also established a six member committee to advance these recommendations. The full press release from the CAB’s CEO Forum may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.