Category: Trade

Alicia Nicholls

De-risking remains a “key priority” for the United States’ (US) Department of the Treasury. This is according to Acting Under Secretary for Terrorism and Financial Intelligence in the US Department of the Treasury, Mr. Adam Szubin, in a key note address delivered at the American Bankers Association/American Bar Association’s annual Money Laundering Enforcement Conference held in Washington DC November 13-15, 2016.

The withdrawal and/or restriction of correspondent banking services as part of banks’ de-risking efforts has been a growing problem internationally, with small states in the Caribbean appearing to be the most affected, according to a World Bank study published last year. For small open economies, the loss of correspondent banking relationships threatens to sever their access to global trade, finance and remittance flows. Belize in particular has been seriously impacted by de-risking as even its Central Bank has seen some of its CBRs severed.

Responding to those who highlight that the current regulatory environment is prohibiting  financial inclusion, Mr. Szubin noted that “we at Treasury firmly believe that expanding access to the financial system and protecting it from illicit activity are mutually reinforcing goals that can and must be addressed simultaneously.”

He went on to discuss what the Treasury found were the reasons why some international banks were reassessing their business relationships:

• Correspondent banking is a low-margin business in a global banking environment that has seen many multinational banks reassess their global strategic footprint, cut costs, and reallocate capital.
• Heightened prudential standards following the global financial crisis
• There are often very real concerns about the risks presented by anti-money laundering and countering the financing of terrorism (AML/CFT) compliance

It should be pointed out that Caribbean-based research on De-Risking and Its Impact found that “[banks’] decisions are based on a complex of factors, including the cost of compliance with laws and regulations, and is an unintended consequence of decisions taken by the official sector in globally systemic countries.”

It is also worth noting that no CARICOM state is currently on the CFATF’s watch list, not even Belize which has been the most affected. Therefore, the view of Caribbean countries as “high risk” is unfounded. Another issue is that US banks themselves have highlighted the need for better regulatory guidance on de-risking, which shows that ambiguous regulations are indeed part of the problem. A good step is the Joint Fact Sheet entitled “Joint Fact Sheet on Foreign Correspondent Banking” released by the US Treasury and US regulators this August.

Mr. Szubin then outlined the following ways in which the US is dealing with the problem:

• On-going engagement with the private sector, foreign jurisdictions, money services businesses, non-profit organizations, including with the Caribbean
• Ensuring that the global standards in place are well understood and implemented consistently and effectively e.g: release of its Factsheet clarifying that Knowing your customer’s customer – KYCC is not required
• Treasury’s Office of Technical Assistance offers technical assistance to roughly 18 countries, including a number of countries impacted by de-risking
• Information sharing and he gave an example of Mexico

Mr. Szubin called the perception that banks are taking an indiscriminate approach to terminating, restricting, or denying services across entire sectors as “inaccurate and overblown and not, in fact, what most institutions are doing in terms of best practice”. This, however, has not been the experience of some banks in the Caribbean which have had their correspondent banking relationships severed without a concrete explanation and often with only a short notification period. Bank of America’s abrupt termination of its relationship with Belize’s largest bank, Belize Bank, is perhaps the most glaring example.

Mr. Szubin did, however, encourage banks “to continue to take the time and effort to assess your controls and the risks presented by individual clients and where you cannot manage effectively that risk make conscientious decisions.”

It is, however, comforting to know the US Treasury has reiterated its prioritisation of the phenomenon of de-risking, which bodes well for Caribbean governments and other stakeholders as they continue their lobbying on this issue.

The full remarks may be accessed here.

Alicia Nicholls 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.