Caribbean Trade Law and Development

Category: Caribbean

  • Private Sector Development in the Caribbean: A Regional Overview 2015

    Alicia Nicholls

    The Economist Intelligence Unit recently released a report entitled “Private Sector Development in the Caribbean: A Regional Overview” commissioned by Compete Caribbean. The report discusses private sector development in the Caribbean region and is based primarily on the analysis in the Private Sector Assessment Reports (PSARs) on fourteen Caribbean countries which are available as separate reports on the website of Compete Caribbean.

    A direct extract from the Report:

    For the Caribbean countries as a group, 2015 will be a significantly more difficult year than the previous three, reflecting the still-challenging economic climate. The need for private-sector-oriented solutions to these nations’ longstanding challenges has never been greater.

    Some of the key challenges and opportunities identified in the PSARs are:

    Challenges:

    • Strained public finances
    • Cost of energy
    • Access to finance
    • Human capital, in particular inefficient labor markets and emigration of skilled labor
    • Innovation capacity

    Opportunities:

    • Engagement of diasporas
    • Key measures to improve business environment
    • Improve education systems
    •  Improve firm productivity
    •  Regional approach to climate change

    The full report may be accessed on the website of Compete Caribbean here. Happy reading!

    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 her commentaries and follow her on Twitter @LicyLaw.

  • 41st COTED Meeting in Georgetown Concludes

    Alicia Nicholls

    The CARICOM Council for Trade and Economic Development (COTED) concluded its 41st meeting in Georgetown, Guyana last Friday, November 13. The two-day meeting was preceded by a special session with the Region’s private sector on Thursday, with representation from a cross-section of regional private sector associations, including the West Indies Rum and Spirits Association (WIRSPA), the Private Sector Association of Jamaica and Caribbean Export, among others.

    COTED is responsible for the promotion of trade and economic development of the Community and consists of ministers designated by each CARICOM member state. The packed agenda centered on matters pivotal to the region’s growth and development, including the private sector, the CARICOM SIngle Market, external economic and trade relations, health and the regional investment promotion strategy.

    According to the Statement by the Hon Maxine McClean, Minister of Foreign Affairs and Foreign Trade of Barbados,  Chair of COTED, the following comprised the key items discussed at the meeting:

    • Private Sector – The discussion focused on investment promotion, the challenges and the priorities for the business community, doing business in the Caribbean, and the successes of various private sector development interventions and how these successes may be replicated.
    • CARICOM Single Market – The implementation of the CARICOM Single Market and Economy (CSME) Application Processing System (CAPS) will begin on a phased basis next year.
    • External Economic and Trade Relations – COTED Ministers began deliberations on the regional External Trade Strategy and agenda, reviewed preparations for participation in the 10th WTO Ministerial Meeting in Nairobi, Kenya in December and also received an update from Member States with regard to their progress in implementing the provisions of the WTO Trade Facilitation Agreement.
    • Health Matters – COTED Ministers recognised the need for action on confronting non-communicable diseases and their impacts on the health of the region’s workforce and their potential impacts on competitiveness. A presentation on the proposed establishment of a Caribbean Regulatory System for Medicines was considered.
    • Regional Investment Promotion Strategy – COTED Ministers recognised the completion of the Regional Investment Promotion Strategy (RIPS) and are expected to agree on a medium-term work programme for the implementation of the RIPS at the Ministerial Meeting scheduled for March 31, 2016.

    The full statement by Minister McClean may be accessed on CARICOM’s website 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 read more of her commentaries and follow her on Twitter @LicyLaw.

  • Has the Caribbean Basin Initiative Outlived its Usefulness to CARICOM countries?

    Alicia Nicholls

    This September the United States International Trade Commission (USITC) released its biennial report on the operation of the Caribbean Basin Economic and Recovery Act (CBERA), one of the components of the Caribbean Basin Initiative under which CARICOM countries currently enjoy non-reciprocal, preferential access to the US market for most merchandise exports.

    Three years ago I authored an article questioning whether the CBI was still relevant and beneficial to CARICOM countries. In that article I had highlighted that while the CBI still has relevance for CARICOM countries, its structure meant that CARICOM countries have benefited unequally and risk losing any margin of preference if its WTO waiver is not extended. I had concluded that a reform of the CBI would have been a preferred option but that a CARICOM-US FTA which had a trade and development focus could be more beneficial in the long term to CARICOM countries once it allows for special and differential treatment and capacity building assistance.

    The USITC reports that average CBERA utilisation rates fell in 2014 and that the impact, though positive, has been small and again limited to a few exports and a few countries. This prompts two questions: has the CBI outlived its usefulness and is it time for CARICOM countries to negotiate a free trade agreement (FTA) with the US?

    Current CARICOM-US Trading Arrangements

    Most CARICOM countries currently enjoy non-reciprocal duty-free or reduced duty access for most merchandise exports (about 5,700 HTS 8-digit tariff lines) to the US market under the Caribbean Basin Initiative. The CBI is comprised of CBERA (non-expiring) and CBTPA (expiring September 30, 2020). Haiti also enjoys additional preferences under the HOPE Acts (Haitian Hemispheric Opportunity through Partnership Encouragement Acts of 2006 (HOPE I) and of 2008 (HOPE II)) and the Haitian Economic Lift Program (HELP) Act of 2010 which give preferential treatment to Haitian apparel, textiles, and certain other goods.

    The stated goal of the CBI is to contribute to the economic growth and development of beneficiaries. The seventeen Caribbean beneficiary countries and territories are: Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, British Virgin Islands, Curaçao, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. Though a CARICOM country, Suriname is not a CBERA beneficiary.

    In May 2013, CARICOM countries signed a Trade and Investment Framework Agreement (TIFA) in Port of Spain, Trinidad following a meeting between CARICOM Heads of Government and US Vice President Joe Biden. The TIFA, an updated agreement to one signed in 1991, is not an FTA. While it outlines several objectives and goals, it does not create binding commitments or market access. It does however create a CARICOM-US Trade and Investment Council which will be charged with executing the agreement. An annex to the Agreement called the Initial Action Agenda sets out priority areas for action. Currently, Grenada, Jamaica and Trinidad & Tobago are the only CARICOM countries which currently have bilateral investment treaties in force with the US.

    Current Level of CARICOM-US Trade

    The US is CARICOM countries’ largest trading partner for goods and services trade and a major tourism source market for CARICOM countries. However, the $8.5 billion USD worth of total US exports from CBERA countries (with and without preferences) only accounted for 0.36% of total US’ imports from the world, and declined from $8.9 billion in 2013 and $12 billion in 2012 (USITC 2015).

    US product imports from CBERA countries are concentrated primarily in the energy and mining and manufacturing sectors (USITC 2015). Trinidad & Tobago, Haiti, The Bahamas, and Guyana jointly accounted for 89.1 percent of the value of US CBERA imports in 2014 (USITC 2015).

    The USITC 2015 reports that CBERA utilisation rates, that is, CBERA imports as a percentage of total US imports from that country, have fluctuated over the past five years and have varied by country. After rising to 26.5% in 2013, average CBERA utilisation rates fell to 23.1% in 2014, although a few countries saw an increase in their utilisation rates during this period. This means that of the CBERA countries’ exports to the US in 2014 ($8.5 billion), only 23.1% ($1.97 billion), or less than a quarter, were done under CBERA. Most CARICOM merchandise exports to the US are therefore not under the CBERA but are either under the Generalised System of Preferences (GSP) or under Most Favoured Nation (MFN) applied rates.

    According to the USITC Report, while Belize had the highest CBERA utilisation rate (62.5%) and was the fifth largest source of US imports under the CBERA in 2014, Trinidad & Tobago was the leading source of US imports under CBERA but registered the 6th highest CBERA utilisation rate for the same period. Trinidad & Tobago which has been the main beneficiary of CBERA due to its energy exports (mainly methanol and crude petroleum) has seen its total imports and utilisation rate decline due to declining US consumption, increased US production of crude oil and maintenance and shutdown of some factories in Trinidad (USITC 2015).

    CBERA is of less importance for smaller islands of the region whose economies are services-based, mostly tourism and financial services. St. Lucia’s utilisation rate dropped from 51.7% in 2010 to just 7.5% in 2014. While Barbados saw its utilisation rate increase from a mere 3.8% in 2013 to 10.6% in 2014, this still is down from its rate of 17% in 2010.

    The good news is that despite my prediction back in 2012, the WTO Council for Trade in Goods considered and approved the US’ waiver request for CBERA again and it is now up to the General Council to adopt it. Additionally, some of the products which are eligible for dutyfree access under the CBERA are not eligible under the GSP. However, more sobering is that the weaknesses of the CBI remain, including the exceptions in its product coverage, the lack of eligibility for services trade and certain stringent product eligibility requirements. Another problem is its unpredictability due to its unilateral nature. A beneficiary’s status may be revoked or the programme discontinued at any time. As an example, the US recently indicated it will suspend South Africa’s benefits under AGOA, a preferential programme for African countries, for allegedly failing to make continual progress towards eliminating barriers to U.S. trade and investment.

    Generalised System of Preferences

    Besides CBI, certain CARICOM countries also currently benefit under the Generalised System of Preferences (GSP), the oldest of the US’ trade preference programmes. Similar to the CBI, the GSP is a unilateral arrangement providing non-reciprocal duty-free access to eligible products originating in qualifying countries. Unlike the CBI which currently applies only to Caribbean countries, according to the USTR Report 2015, as of January 1, 2015, there were 122 designated GSP beneficiary developing countries, of which 43 were LDCs.

    Under the GSP less tariff categories and products benefit from preferences than under the CBERA. However, LDCs, such as Haiti, are entitled to additional product coverage.

    The only CARICOM countries currently eligible for benefits under the US GSP are Belize, Dominica, Grenada, Guyana, Haiti, Montserrat, St. Kitts & Nevis, St. Lucia, Suriname, St. Vincent and the Grenadines. Eligibility of a country for beneficiary status is subject to both economic and political considerations. Among other things, the US President is prohibited by statute from designating any communist countries (with exceptions) or countries which have expropriated, imposed taxes or other measures on US property as GSP beneficiaries.

    If he/she finds that a country is sufficiently competitive or developed, the President may withdraw, suspend or limit the GSP status of any beneficiary country. Antigua & Barbuda, the Bahamas, Barbados, and Trinidad & Tobago are not currently GSP beneficiaries.

    The GSP expired on July 31 2013 and was renewed retroactively on June 29, 2015. It has been extended to December 31, 2017. The future of the GSP beyond December 2017 is uncertain. However, some in the US believe GSP benefits should only be extended to LDCs, in which case only Haiti would benefit among current CARICOM beneficiary countries. Some so-called import sensitive products for the US, especially those in which developing countries have a competitive advantage such as most textiles and apparel, are not eligible. GSP imports are also subject to more stringent rules of origin than those under CBERA.

    Would an FTA with the US be the answer?

    Several former CBERA beneficiaries have concluded FTAs with the US, including five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua) and the Dominican Republic (CAFTA-DR in 2004) and Panama (US-Panama FTA in 2012). Given the issues outlined with both the CBI and the GSP, should CARICOM countries do the same?

    Since the failure of the CARICOM-Canada negotiations, CARICOM still only has one FTA with a developed partner (the Economic Partnership Agreement with the EU). CARIFORUM’s negotiation position during the EPA negotiations was strengthened by the presence of the Dominican Republic. Such would not be the case in FTA negotiations with the US.
    US FTAs, even those with developing countries such as CAFTA-DR and US-Panama, are generally light on development provisions and strong on those which provide protection for US investors and their investments, and for intellectual property rights.

    For a sense of the US’ negotiation prowess, just take into consideration that with just a few exceptions the Trans-Pacific Partnership (TPP)’s investment chapter agreed to by 11 other negotiating partners is practically a carbon copy of the US’ Model BIT 2012. CARICOM countries will have to be strategic and clear on what they want to achieve and what are their deal breakers.

    Priorities for CARICOM would be recognition of CARICOM countries’ small size and economic vulnerability and asymmetry in the commitments. As such they would likely be lobbying for special and differential treatment, development cooperation provisions, including technical assistance and capacity building to assist them, especially CARICOM lesser developed countries, in taking advantage of the market access opportunities an FTA with the US would open. With regards to services trade, CARICOM countries would likely seek enhanced commitments from the US in regards to (Mode 4) temporary entry for CARICOM natural persons.

    Under the CBI, Caribbean countries are not required to extend duty-free treatment to like US imports into their territories. One of the main drawbacks to an FTA with the US will be the loss of tax revenues from the removal and reduction of tariffs on US imports as would be required under an FTA. One way to mitigate this would be lobbying for asymmetric and phased tariff removal, similar to what was committed to under the CARIFORUM-EPA with the EU. However, US FTAs, including CAFTA-DR are always ambitious in their scope in regards to liberalisation. Under the EPA, CARIFORUM was able to exclude a number of their most sensitive sectors from liberalisation. A deal breaker for any FTA with the US would be the extent to which CARICOM countries are able to protect nationally-important and sensitive industries from the stiff competition and possible death of these sectors and job losses if liberalised to competing US products too quickly. Civil society and industry consultations thus would be crucial to determining which sectors are most sensitive.

    While an FTA with the US will likely increase the volume of US goods into CARICOM, the reverse is not necessarily guaranteed. Most CARICOM merchandise goods exports are already competing with other countries’ exports under normal trade conditions (i.e. at the MFN applied rate), and not under preferences. Therefore, the margin of preference secured for some CARICOM goods under a trade agreement may be negligible.

    Investment treaty practice has evolved since the days when Grenada, Jamaica and Trinidad & Tobago signed their BITs with the US. The investor protections provided by a comprehensive investment chapter in a US-CARICOM FTA, coupled with robust investment promotion provisions, could serve as a signal for greater US investment to the region, while at the same time include development-friendly provisions and provisions which reinforce the right of the State to regulate.

    As CARICOM service providers enjoy no preferential access to the US market, they face competition from service providers of countries which already have FTAs with the US. However, even when market access is created under an FTA for cross border services trade, there will be the need for mutual recognition agreements and visa waiver agreements in order to translate market access into market penetration.

    The US will likely insist on a negative list approach to market access liberalisation of service sectors, the approach used in NAFTA and its subsequent FTAs. The negative list approach requires liberalisation of all sectors unless a reservation is specifically made in a country’s list of reservations. CARICOM countries and other developing countries have preferred to use the positive list approach used under the General Agreement on Trade in Services (GATS). It is a more development friendly approach which means only sectors specifically listed in a country’s schedule of commitments are liberalised and thus allows for the gradual liberalisation of sectors in keeping with each country’s development goals.
    The US will also likely insist on no less favourable treatment than what CARICOM countries had agreed to with the EC under the EPA. CARICOM will also have to bear in mind that given a provision in the MFN clause in the EU-CARIFORUM EPA, the EU can insist on any more favourable treatment given to US than was given the EU under the EPA.

    US treaty practice typically includes binding commitments on non-trade issues, such as labour. It has an on-going claim against Guatemala before the CAFTA-DR dispute settlement body in which it claims Guatemala has failed to meet its obligations under the CAFTA-DR agreement relating to effective enforcement of labour laws.

    There are currently three main trade issues between the US and CARICOM countries which have to be addressed expeditiously even without an FTA. CARICOM rum exports are losing market share in the US market because of large subsidies given to rum producers in two US territories: the USVI and Puerto Rico. Secondly, the US/Antigua & Barbuda cross border gambling services dispute remains unresolved despite a WTO ruling in Antigua & Barbuda’s favour. An FTA will not necessarily resolve these issues as the DR which is a part of CAFTA-DR has complained about the rum issue as well.

    Thirdly, the US has for a long time criticised copyright protection and enforcement in the Caribbean, a possible issue which might trigger disputes under any future US-CARICOM FTA. Caribbean countries constantly feature on the US Watch Lists under its annual Special 301 Report. The 2015 Special 301 Report is no different.

    The Bottom Line

    CARICOM countries should continue to take advantage of the non-reciprocal duty-free access to the US market provided by the CBI for their goods while these benefits last. However, while I do not think the CBI has outlived its usefulness just yet, it has several deficiencies which means it should not be treated as a long term strategy for boosting CARICOM trade with the US.

    As mentioned, CBERA exports as a proportion of total CARICOM exports to the US are small and declining. The beneficial impact on regional exports has been unevenly spread and its unilateral nature, like the GSP, means benefits may be discontinued by the US at any time.

    For the short term, the updated TIFA presents the best opportunity for CARICOM through the US-CARICOM Trade Council to lobby for reform of the CBI, address the long-standing rum and internet gambling disputes, and to negotiate concrete frameworks for increasing trade and investment between the US and CARICOM countries. Success on this front will not be automatic and will require strong regional cooperation, as well as effort on the part of both CARICOM and the US to ensure that concrete initiatives and commitments come out of these efforts.

    However, given the importance of the US market for CARICOM and the growing importance of services-trade to regional economies, CARICOM will at some point  in the future have to consider, albeit cautiously, negotiating an FTA with the US as part of a long term plan to create a more predictable trade framework for US-CARICOM trade.

    I say in the future because negotiations are an expensive and human-resource intensive exercise and require extensive research and stakeholder consultations. At the moment CARICOM countries are still grappling with the lingering effects of the 2008/2009 crisis on their economies and are also still struggling to implement many of the commitments made to the EU under the EPA. Progress on deepening CARICOM integration itself has ground to a halt and it would be easier to formulate a consolidated negotiating position as a more integrated region. I say cautiously because based on its current treaty practice the US is unlikely to extend the same level of special and differential treatment or development assistance which CARIFORUM was able to secure from the EU.

    An interesting space to watch would be the on-going Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations between the US and EU. The EU is currently insisting on the inclusion of certain sustainable development provisions into the agreement. An example is its recently released proposed text for the investment chapter. It would be interesting to see whether these provisions make it into the final TTIP text and that could help make it easier for CARICOM to insist on some of the same provisions in any future FTA with the US.

    For my previous article on the relevance of the CBI, please click 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. Please note that the views expressed in this article are solely hers. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

  • Bank De-risking: An Emerging Threat to Caribbean SIDS’ Survival

    Bank De-risking: An Emerging Threat to Caribbean SIDS’ Survival

    Alicia Nicholls

    De-risking actions by banks in advanced economies are an emerging threat to Caribbean SIDS’ financial inclusion and sustainable development. This reduced risk appetite by foreign banks is in response to an increasingly stringent regulatory environment aimed at combating the twin threats of money laundering and terrorist financing. De-risking actions have impacted Caribbean countries in two main ways: the severance of correspondent banking relationships with regional banks and the denial or withdrawal of services to money transfer operators. The net result is that Caribbean SIDS face the threat of being cut out of the global financial system, while the fall-out from the loss of remittances and the impact on their financial sectors, cross-border trade and investment could pose serious threats to these states’ economic growth  and sustainable development prospects.

    What is De-Risking?

    In an increasingly inter-connected world where money can be moved across the globe with the click of a mouse, anti-money laundering efforts and efforts targeted at combating the financing of terrorism (AML/CFT) are national and global security priorities particularly for the US and European countries.

    The regulatory authorities and courts in these countries have taken a zero tolerance approach towards their banks found to have willingly or unwillingly facilitated financial crimes like money laundering and tax evasion. Banks are increasingly facing tougher regulatory policies and sanctions and face the threat of onerous penalties, prosecution, private lawsuits and reputational damage if they are found to have facilitated financial crime

    The Financial Action Task Force (FATF)’s risk based approach requires that “countries, competent authorities and banks identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk”.

    However, in response to an ever stricter regulatory environment, an increasing number of banks in advanced economies are seeking to reduce their risk exposure by engaging in “de-risking”. That is, instead of managing risk in line with the FATF’s risk-based approach, they are avoiding risk altogether by terminating or restricting business relationships with clients, regions or in sectors deemed to be high risk.

    Driving Factors of De-Risking

    The Caribbean is increasingly seen as a high risk area for banking. This state of affairs is regrettable as Caribbean countries have expended significant time, funds and effort to make themselves compliant with international standards and best practices, including updating their anti-money laundering legislation. Caribbean states have also signed Foreign Account Tax Compliance Act (FATCA) agreements with the US government.

    Despite these efforts, Caribbean countries have had to continuously duck from the target placed on their backs by authorities in advanced economies. The US Department of State’s International Narcotics Control Strategy Report 2015 identified several countries, including  in the Caribbean, as ‘jurisdictions of primary concern’ for money laundering and financial crimes. Coupled with the frequent ‘tax haven’ smear, this only reinforces the notion that dealing with Caribbean banks is literally a risky business.

    Banks in advanced economies are increasingly wary of the exposure to risks of financial crime inherent in corresponding banking relationships. Correspondent banking relationships are entered into bilaterally between banks and allow banks to offer their services in a country in which they have no physical presence through the use of a correspondent bank in that foreign jurisdiction. A correspondent bank can conduct business transactions, receive deposits and make payments on behalf of the other bank. In effect, the bank is placing its faith on the due diligence and transaction monitoring rigor of the correspondent bank, increasing the risk it can be unwittingly used as a vehicle for money laundering.  As such, a major manifestation of de-risking is the severing of correspondent bank relationships with banks in countries and regions perceived to be “high risk”.

    A second manifestation of de-risking by banks is seeking to limit their exposure by getting out of higher risk sectors, such money transfers, through the denial or withdrawal of bank accounts and services to money transfer operators for fear of unwittingly assisting in terrorist funding and money laundering.

    Impact of De-Risking on Caribbean SIDS

    The impact of de-risking is already being felt in the region. Only a limited number of foreign banks have correspondent relationships with Caribbean banks and this number has been decreasing. This has made it difficult for Caribbean banks to find corresponding banks in advanced economies for the completion of transactions. Just this year the Bank of America cut its correspondent banking relationship with Belize Bank and Atlantic Bank International in Belize, compromising these banks’ ability to execute US dollar bank drafts, wire transfers and foreign currency transactions. In most cases banks are ending correspondent relationships without evidence of wrongdoing on the part of the regional bank and without giving clear reasons for their actions.

    Correspondent banking relationships are Caribbean SIDS’ links with the international financial system. The severing of this link can potentially wreck economic havoc on Caribbean countries’ economies by excluding them from the global financial system. A reduction of accessible financing for cross border transactions and of services for transmitting and authenticating payments has implications for the ability of individuals and businesses in Caribbean states to pay for and engage in the trade of goods and services across borders.

    The remittances business has also been a casualty of bank de-risking. Remittances are an important source of foreign exchange inflows to Caribbean economies, particularly in Jamaica and Guyana, where they are much more impactful than official development aid.  Remittances, which are usually sent through money transfer, are a lifeline for poor households which depend on monies sent by relatives living abroad to meet their daily needs.

    As a result of the high due diligence costs compared to the relatively low profits from remittances services, many banks see it in their best interest to simply sever their ties with money transfer operators in ‘high risk’ regions. In the Cayman Islands, which unlike Jamaica and Guyana is a net exporter of remittances, Fidelity Bank ceased its money transfer business with Western Union making it difficult for migrants there to repatriate remittances back to their families. Difficulties in receiving remittances due to higher fees or the unavailability of money transfer services compromise the financial well-being of dependent households and individuals, with implications for poverty reduction and eradication.

    Caribbean SIDS are not the only ones affected by de-risking policies. Last year it was reported that the Central Bank of Seychelles had to swoop in to the rescue of an offshore bank, the Bank of Muscat International (BMI) Offshore Bank after the Bank of China (Johannesburg) and JP Morgan months earlier ceased correspondent banking relations, making it unable to process outward foreign transactions. In war-torn Somalia where there is a high dependence on remittances banks have been ceasing money transfers to that country for fear of sanctions by the US government, with devastating consequences on dependents. Even charities and aid groups operating in ‘high risk’ countries have felt the brunt of banks’ de-risking policies.

    Global Recognition of the De-Risking Phenomenon

    In recognition of the de-risking phenomenon, the FATF has reiterated the risk-based approach to AMT/CFT on a case-by-case basis as opposed to the wholesale de-risking which many banks are doing. The Global Center has begun an exploratory study on de-risking in the financial services industry, while the World Bank has launched a survey of 19 member countries (excluding the EU) to assess the impact of de-risking on remittance flows. The findings are expected to be published later this year. This month the Financial Stability Board (FSB) released its report to the G20 on actions taken to assess and address the decline in correspondent banking.

    In the interim findings of its qualitative study on de-risking the G-24/Alliance For Financial Inclusion identified several drivers of de-risking and outlined several proposals for stemming the tide of de-risking.  Moreover, among the points highlighted by the recently held G-24/AFI Policymakers’ Roundtable on Financial Inclusion in Peru on the theme “Stemming the tide of De-Risking through Innovative Technologies and Partnerships” was that de-risking could have the unintended consequence of driving consumers to smaller informal providers, which only enhances the AML/CFT risk.

    Several Caribbean countries have sounded the alarm about the de-risking threat. Prime Minister of Belize, the Rt. Hon. Dean Barrow raised the issue in his speech at the Summit of the Americas, noting that “our financial and trade architecture cannot survive this phenomenon“. At the recently held Institute of Chartered Accountants of Barbados (ICAB) Conference, the Minister of Finance of Barbados, the Hon Christopher Sinckler, drew attention to the ‘fresh threat’ currently posed by bank de-risking to the international business and financial services sectors of Barbados and other Caribbean SIDS.

    The Bottom Line

    The threat posed to Caribbean SIDS by de-risking is real, with implications for trade, investment and remittances flows which are critical to the financial stability, inclusion and sustainable growth of regional economies. The worst part is that this is only just the beginning. A balance needs to be struck between AML/CFT regimes on the other hand with the interests of SIDS and their people to conduct business and transfer money on the other. Caribbean countries and other affected SIDS need to leverage their collective strengths to raise awareness about the real and negative fall-out of this phenomenon for their economies and the urgent need for international solutions to the issue of de-risking. Their survival depends on it.

    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 read more of her commentaries and follow her on Twitter @LicyLaw.