Caribbean Trade Law and Development

Category: Correspondent Banking

  • Caribbean Response to the Withdrawal of Correspondent Banking

    Alicia Nicholls

    IMF Deputy Managing Director, Mr. Tao Zhang, gave an interesting and comprehensive speech summarising the “Caribbean response to the Withdrawal of Correspondent Banking” at the Conference on the Withdrawal of Correspondent Banking in Antigua & Barbuda on October 28, 2016.

    The following realities stood out to me from Mr. Zhang’s speech:

    1. Almost 60% of the Caribbean Association of Banks’ member institutions,  which it has interviewed, report a loss of CBRs.
    2. In some cases where the banks have been able to hold on to CBRs,  some key services have been discontinued e.g: cheque clearance, trade finance and wire transfers
    3. Some banks face higher costs for the remaining services.
    4. Global correspondent banks are withdrawing from transactions involving money transfer operators.

    Given the above, Mr. Zhang rightly noted that if this continues, not only would it affect the financial stability of affected countries, but also economic growth, financial inclusion, and other development goals. He further reiterated that continued loss of CBRs would drive legitimate transactions underground and encourage increased informality, thereby undermining anti-money laundering and countering the financing of terrorism (AML/CFT) objectives.

    Mr. Zhang then turned to the issues driving this trend. A number of international organisations and agencies have studied this issue, including the IMF, and their findings were echoed in Mr. Zhang’s speech. He noted, for example, the cost-benefit considerations which banks have to weigh; rising expenses associated with compliance and international tax transparency versus limited profitability in some CBRs.

    He made reference to several policy responses being made by Caribbean authorities and other affected regions which he  noted have already started to have some results. He gave the example of the US Treasury Department which has increased its education of financial institutions on the “precise nature of transactions and behaviours that are subject to sanctions”. He further made reference of Eastern Caribbean Currency Union (ECCU) countries’ decision to consolidate their national AML/CFT work into one regional operation under the responsibility of the Eastern Caribbean Central Bank (ECCB).

    Mr. Zhang emphasised that there is “no quick fix” to the problem and reiterated the need for urgent action to mitigate the impact on affected economies.

    In addressing what are the next steps, he outlined three areas for further exploration:

    • Addressing the problem of economies of scale
    • Mitigating cost and technical limitations
    • Improving information flows

    He also set out a number of ways in which the IMF could be of assistance, including for example, facilitating dialogue and encouraging standard-setting bodies to take account of the impact of CBR policies.

    In concluding, Mr. Zhang reiterated the IMF’s continued commitment to working with affected countries on the issue until it is solved.

    The full speech is a must-read and may be accessed 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.

  • FATF releases Guidance on Correspondent Banking Services

    Alicia Nicholls

    The Paris-based Financial Action Task Force (FATF) has released its long-awaited guidance on the application of FATF standards in the context of correspondent banking services following its plenary session held October 19-21st, 2016. The purpose of the guidance is to address de-risking and has been prepared in collaboration with the Financial Stability Board (FSB).

    The target audience for the guidance includes not just banks and money or value transfer service (MVTS) providers engaged in providing correspondent banking or respondent bank services, but financial institutions with account holders that are MVTS which in turn provide correspondent banking-type services to their own customers, as well as competent authorities (particularly AML/CFT regulators and supervisors of banks and of MVTS providers).

    Key Points from FATF Guidance on Correspondent Banking Services

    Some key points from the Guidance are as follows:

    • FATF recommendations do NOT require the correspondent bank to know its customer’s customers (KYCC). In other words, correspondent banks are not required to conduct CDD (Customer Due Diligence) on the individual customers of its respondent institution.
    • While noting that simplified CDD are never appropriate in the cross-border correspondent banking context, FATF explains that not all correspondent banking services carry the same level of money laundering or terrorist financing risk so enhanced due diligence measures must be commensurate with the degree of risk identified.
    • FATF identified some factors to consider in assessing correspondent banking risks, including the respondent institution’s jurisdiction, products/services offered and customer base. FATF recommended the risk factors included in Annex II of the BCBS Guidelines on Sound Management of Risks related to ML/FT.
    • However, FATF stopped short of defining what constitutes a higher risk on the basis that doing so could lead to ‘a tick the box approach’ which could encourage, rather than discourage, de-risking.
    • The requirements of FATF Recommendations 10 (Customer Due Diligence) and 13 (Correspondent Banking) must be met before correspondent banking services may be provided to a respondent institution.
    • Correspondent institutions may obtain information required by FATF recommendations 10 and 13 directly from the respondent institution but this information MUST be verified in order for it to meet those requirements.
    • FATF provided some examples of sources of verification from BCBS General Guide on Account Opening
    • On-going due diligence of existing and new CBRs is required but the frequency should depend on the level of risk associated with each relationship.
    • FATF recommended maintaining an on-going, open dialogue with correspondents and noted that while FATF requirements require termination of customer relations where identified risks cannot be managed in accordance with the risk-based approach (RBA), the other options offered by recommendation 10 should be explored before the relationship is terminated.

    This is welcomed news especially for Caribbean countries which, according to a World Bank study released in September 2015, appear to be the most affected by the loss of correspondent banking relationships.  This guidance is an important step in tackling de-risking by providing definitive clarity on a number of key areas, including on the hitherto confusing issue of KYCC.

    It also stresses against the wholesale termination of CBRs as a first resort, but rather keeping an open dialogue with respondent banks. If followed, therefore, the guidance should reduce the alacrity with which some banks have restricted or terminated correspondent banking relationships. However, this guidance is not binding and the effectiveness will depend on the level of observance by foreign banks and by their regulators.

    The Guidance on Correspondent Banking Services is to be read in conjunction with FATF recommendations and guidance papers, including the guidance on RBA for the Banking Sector. It also complements other guidance on correspondent banking services previously released by the Wolfsberg Group and the Committee on Payments & Market Infrastructure (CPMI).

    The full FATF Guidance on Correspondent Banking Services may be read 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.

  • Caribbean States raise de-risking concerns at the 71st United Nations General Assembly

    Caribbean States raise de-risking concerns at the 71st United Nations General Assembly

    Alicia Nicholls

    De-risking was one of the myriad of developmental issues raised by small states of the Caribbean Community (CARICOM) at the 71st Regular General Assembly of the United Nations in New York over the past few days. The theme of the general debate of the 71st session was “The Sustainable Development Goals: a universal push to transform our world.”

    De-risking practices by banks involve the avoidance of risk by discontinuing business with whole classes of customers without taking into account their levels of risk. This is in direct contradiction to the risk-based approach advocated by the Financial Action Task Force (FATF). The major manifestation of bank de-risking has been the restriction or termination by large banks (particularly in the US) of correspondent banking relationships with banks and discontinuing relationships with money transfer operators (MTOs).

    While countries across the world have been affected by de-risking in varying degrees, a World Bank study published in 2015 found that the Caribbean region appeared to be the most affected by a decline in correspondent banking relationships. This situation is even more vexing considering CARICOM countries’ adherence to international regulations and best practices, including the recommendations of the Financial Action Task Force.

    Arguing that correspondent banking services are a public good, CARICOM countries launched a high-level diplomatic offensive over the past months to raise awareness and mobilise action on this serious issue. The restriction and loss of correspondent banking relationships not only threaten the region’s financial stability but also threaten to de-link Caribbean countries from the global financial and trading system, undermining their sustainable development prospects. There has, however, been limited international progress on this front despite strong advocacy and a myriad of studies on the issue by regional and international development agencies.

    Singing from the same hymn sheet, CARICOM representatives consistently raised the issue in their national speeches before the UN General Assembly.  In perhaps one of the most comprehensive and impassioned statements, Minister for Foreign Affairs of the Bahamas, H.E. Frederick Mitchell,  made de-risking the starting point in his speech, emphasizing not only the difficulty being faced in opening accounts, but also the impact on tourism, remittance and financial flows. Calling it a “moral imperative,” he reiterated Caribbean countries’ adherence to anti-money laundering rules, while condemning the over-regulation which has had led to the de-risking phenomenon. He also termed the attacks on the Bahamas and the CARICOM region as “inaccurate and unfair”.

    Touching on the sustainable development implications of de-risking, representative of Trinidad & Tobago, Senator the Honourable Dennis Moses, Minister of Foreign and CARICOM  Affairs, poignantly stated as follows:

    “The 2030 Sustainable Development Agenda recognizes that national development efforts need to be supported by an enabling international economic environment through international business activity and finance, international development cooperation, and international trade. However, the issue of financial institutions terminating or restricting correspondent banking relations in the CARICOM Region has destabilized the financial sectors of our Member States and has disrupted the Region’s growth and economic progress.”

    On behalf of Trinidad & Tobago and CARICOM, Senator Moses further called on “international banks to engage collaboratively with affected Member States to restore normal financial relationships between domestic banks and international markets.”

    Prime Minister of St. Kitts & Nevis, the Hon. Timothy Harris noted that “[a]lready, in the Caribbean, as of the first half of this year, some 16 banks, across five countries have lost all or some of their correspondent banking relationships putting the financial lifeline of these countries at great risk”. Highlighting Caribbean countries’ dependence on tourism and remittance flows, he further explained that “such [de-risking] actions threaten to derail progress, undermine trade, direct foreign investment and repatriation of business profits.”

    Laying the blame for de-risking on “heavy-handed” FATF regulations, Prime Minister of St. Vincent & Grenadines reiterated the potential of de-risking to disconnect Caribbean countries from global finance and “a shifting of potentially risky transactions to institutions that lack the regulatory wherewithal to handle them”. He further explained that “these [FATF] regulations must be revised urgently before legitimate transactions in the Caribbean–from credit card payments to remittances to foreign direct investment–grind to a halt.”

    Besides de-risking, CARICOM representatives raised several other development issues, including climate change, graduation policies of international development agencies, United Nations reform, the US embargo of Cuba, the attack on international financial centres by OECD countries and the on-going border disputes between Guyana and Venezuela and Belize and Guatemala. CARICOM states also congratulated newly elected UNGA President, Peter Thomson of Fiji, and thanked outgoing UN Secretary General Ban Ki-Moon for his service, particularly his support of SIDS.

    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.

  • De-risking and its Foreign Trade Impact in the Caribbean

    De-risking and its Foreign Trade Impact in the Caribbean

    Alicia Nicholls

    A few weeks ago I had the honour and pleasure of presenting on the Foreign Trade Impact of De-Risking at the Institute of Chartered Accountants’ (ICAC) 34th Annual Conference in beautiful Belize as part of a panel discussion along with Dr. Trevor Brathwaite, Deputy Governor of the Eastern Caribbean Central Bank (ECCB) and Mr. Filippo Alario, Chief Risk Officer of Belize Bank.

    Alicia Nicholls ICAC 2016 Belize
    Alicia Nicholls  at ICAC 2016 Photo compliments of R Mohammed

    I wish to again express my gratitude to ICAC for the invitation and to all stakeholders and everyone who kindly provided me with information and assisted me in my research.

    Some of the key points from the presentation were as follows:

    • De-risking is a business decision but with serious implications for Caribbean foreign trade.
    • As small open economies, Caribbean countries are highly dependent on foreign trade as evidenced by their high trade to GDP ratios which range between 70-130% of GDP, according to World Bank data.
    • Several Caribbean countries are among the most dependent in the world on remittance-inflows.
    • Bank de-risking threatens the region’s integration into the global trade and financial systems and has implications for economic growth, stability, employment.
    • Disruptions to remittance and FDI flows by de-risking also have poverty alleviation and sustainable development implications.
    • Cross-border payment for goods via wire transfer and remittance sending appear to be the most affected from a trade perspective.

    Several persons  have written me requesting a copy of the full presentation. It is available below:

    ICAC_Presentation_2016_ANicholls(1)

    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.