Caribbean Trade Law and Development

Tag: banks

  • Will US Financial Deregulation help mitigate the de-risking phenomenon?

    Will US Financial Deregulation help mitigate the de-risking phenomenon?

    Alicia Nicholls

    The exigencies of complying with a complex and often confusing maze of overlapping regulations, coupled with steep fines for compliance breaches, have been identified as principle drivers for United States-based global banks’ restriction and termination of correspondent banking relationships with respondent banks in other jurisdictions. As part of his promise to “Make America Great Again”, US President Donald Trump has pledged to cut the regulatory noose argued to be strangling US enterprise and growth. Will this deregulatory push have the unintended spin-off of mitigating the de-risking phenomenon facing several countries around the world, including Caribbean States?

    President Trump has been adamant that ‘burdensome’ regulations passed during the Obama administration to avert a repeat of the Global Economic and Financial Crisis of 2008, have been fetters on US business activity and prosperity. While most available data point to the contrary, the Trump Administration and Corporate America posit that Obama-era regulations like the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) have reduced bank profitability and risk appetite, culminating in dampened bank lending to consumers and businesses.

    President Trump has so far signed two executive actions on financial deregulation. The latter, an executive order dated February 3, 2017, sets out seven core principles for regulating the US Financial System. It mandates Treasury Secretary, Steve Mnuchin, to consult with the heads of the member agencies of the Financial Stability Oversight Committee (FSOC) and to submit to the President within 120 days a review of “laws, treaties, regulations, guidance” inter alia, which among other things inhibit regulation in sync with the Core Principles. There has been reportedly a shift towards more ‘pro-business’ regulators. Perhaps most telling, in contrast to his anti-Wall Street rhetoric during the campaign, President Trump has picked several former bankers (notably Goldman Sachs) for key cabinet and administration positions, including for Treasury Secretary.

    Stringent compliance burdens and costs, as well as uncertainty about the interpretation of the regulations, are major drivers for banks’ avoiding, rather than managing risks. Will an unintended consequence of financial deregulation in the US be a mitigation of the de-risking phenomenon? While at first blush this conclusion may appear tempting, I respectfully submit that this may be an overly optimistic view, at least at this early stage, for the reasons which I outline below.

    Firstly, the Trump Administration has set its cross-hairs firmly on the Dodd Frank Act which President Trump termed a “disaster”. This Act, which is hundreds of pages long, was passed in the aftermath of the Great Recession. It includes, for instance, rules against predatory lending, sets measures to deal with banks which become “too big to fail”, prohibits proprietary trading by banks for their own profit (Volcker Rule), inter alia. While Dodd Frank is not perfect and has been blamed for contributing to de-risking, repealing it would not only create an environment for a resumption of the pre-crisis risky behaviours by banks and other financial institutions. It would set the stage for a repeat of 2008, in much the same way that deregulation during the 1990s to early 2000s, including changes to the (now repealed) Glass-Steagall Act, laid the groundwork for the Great Recession, almost a repeat of the Great Depression of the 1930s.

    Secondly, Dodd-Frank is just one aspect of the de-risking problem. There appears to be no indication that the Trump Administration intends to tackle the constellation of other regulations, including international anti-money laundering, countering the financing of terrorism (AML/CFT), tax and banking regulations (Basel III), with which banks, including in the US, must comply.

    In the World Bank’s seminal 2015 global survey on the Withdrawal from Correspondent Banking, some 95% of large banks had cited “concerns about money-laundering/terrorism financing risks” as a driver for withdrawing from correspondent banking relationships. However, it is unlikely that the Trump Administration will try to rollback AML/CFT rules. President Trump’s ‘America First’ ethos has a strong national security undertone. Weakening the US’ AML/CFT rules would likely make him appear ‘soft’ on money laundering and countering the financing of terrorism. International pressure is also a factor as the US’ last Financial Action Task Force (FATF) Mutual Evaluation Report (2016) highlighted some AML/CFT weaknesses, including gaps in timely access to beneficial ownership information.

    Thirdly, replacing existing regulators with so-called pro-business regulators does not necessarily mean that there will be a more lenient approach to fines imposed on banks for compliance breaches. Unlike popular belief, most of the large banks which have been made to pay record fines had indeed knowingly committed serious AML/CFT breaches.

    Fourthly, even if financial deregulation in the US eases the regulatory pressure on US global banks, it does not affect two core problems which appear to be driving the de-risking of regional banks, namely the perceived unprofitability of providing correspondent banking services to indigenous Caribbean banks, and the Caribbean region’s unjustified characterisation as a ‘high risk’ region for conducting financial services. In the previously mentioned World Bank 2015 Survey, some 80% of large banks cited “lack of profitability of certain foreign CBR services/products” as a driver of exiting correspondent banking relationships.

    Further to the latter point, Caribbean countries, particularly international financial centres (IFCs) are consistently and unjustifiably placed on US government lists deeming them as money laundering threats, despite the fact that no Caribbean IFC is currently on any CFATF list of ‘high-risk and non-cooperative jurisdictions’. The most notorious example of this unfair practice is the US’ annual International Narcotics Control Strategy Report, the latest edition of which listed 21 Caribbean jurisdictions without providing (as usual) any evidence to support the conclusions drawn.

    Caribbean countries are consistently branded as tax havens in spite of the fact that all Caribbean countries have signed intergovernmental agreements (IGAs) with the US Government pursuant to the extra-territorially applied US Foreign Account Tax Compliance Act (FATCA) passed in 2010. Most Caribbean governments have already passed implementing legislation to bring their IGAs into force. In addition, while the US has opted not to be a part of the OECD’s Common Reporting Standard, several Caribbean countries have elected to be early adopters!

    Added to this is that compliance officers in overseas banks usually view the Caribbean as a “collective” and not as individual countries; any perceived risks in one country are transposed to the Region as a whole.

    Granted, it is still early days of the Trump Administration and the findings of the Treasury Secretary’s report on which regulations may possibly be earmarked for axing would not be known for some time. What does help, however, is where there is clarification of the rules through clearer guidance. For instance, for a long time it was unclear how far banks’ due diligence requirements were to go. In addition to knowing their customer (KYC), there appeared to be a growing consensus that banks were also supposed to know their customer’s customers (KYCC).  Definitive guidance through the FATF Guidance in October 2016 showed that KYCC was not required. Turning to the US, that same month the US Office of the Comptroller of the Currency (OCC) released guidance to assist banks in the periodic risk reevaluation of foreign correspondent banking relationships.

    However, the Region would be well-advised not to expect any serious mitigation of the de-risking phenomenon stemming from US financial deregulation. Despite being a ‘pro-business’ administration, it should be remembered that the overriding goal of the Trump Administration’s regulatory rollback is to “Make America Great Again”, point blank. Any spill-over positive benefits to the Caribbean from Trumpian financial deregulation would be welcomed but unintended, and it is more likely that the regulatory rollback may perhaps be more harmful than helpful to the region.

    There is no panacea for the de-risking phenomenon as it is caused by a multiplicity of factors. Regional governments and private sector stakeholders should continue their lobbying and advocacy efforts, including engagement with key US administration officials, regulators and the banking sector. Given the Trump Administration’s ‘America First’ disposition, lobbying efforts which emphasises the implications that possible derisking-related economic and social destabilisation in the Caribbean may have on the US’ homeland security would be more impactful than pure moral suasion.

    These advocacy efforts should also highlight to US officials and to US correspondent banks Caribbean countries’ own efforts at continuously improving their AML/CFT frameworks and the compliance efforts of Caribbean banks. Regional banking stakeholders should also continue to explore the possibility of investing in technologies such as Know Your Customer (KYC) utilities and legal entity identifiers (LEIs) to assist in customer due diligence (CDD) information sharing between themselves and their US correspondents.

    These were part of the remarks I gave as a panellist at the Barbados International Business Association (BIBA) International Business Forum 2017. 

    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 Region Most Affected by Loss in Correspondent Banking Relationships, according to World Bank Survey

    Caribbean Region Most Affected by Loss in Correspondent Banking Relationships, according to World Bank Survey

    Alicia Nicholls

    The withdrawal by international banks of correspondent banking relationships with Caribbean-based banks and money transfer businesses has once again been making headlines in the Caribbean. This week Antigua & Barbuda’s Prime Minister raised the issue at the Fourth Summit of the Community of Latin American and Caribbean States (CELAC), terming it a “clear and present danger”. Last year mere weeks after Prime Minister Barrow of Belize raised the issue in his address at the Summit of the Americas in Panama, the Bank of America severed ties with Belize Bank, the largest bank in Belize.

    Correspondent banking relationships are Caribbean countries’ umbilical cord to the international financial system. They allow for the conduct of international trade and investment by facilitating crossborder payments, as well as the receipt and sending of remittances through international wire transfers. At the microlevel these relationships help local exporters to receive payments for their goods and services, local businesses to pay for imports, and poor families to receive remittances for their day to day survival. As I mentioned in an earlier article, the loss of correspondent banking relationships could spell disaster for the small, open economies of the region which are highly dependent on trade and investment flows, with implications for poverty reduction and eradication.

    World Bank Survey

    The Caribbean’s fears are not unfounded. According to the findings of a survey published by the World Bank in its report “Withdrawal from Correspondent Baking: Where, Why, and What to do About it” in November last year, the World Bank found that “small jurisdictions with significant offshore banking activities are particularly affected by the decline of CBRs”. More ominously, according to the Report, the Caribbean Region seems to be the most affected by a decline in correspondent banking relationships.

    It also noted that United States banks have been most frequently identified as withdrawing their correspondent banking services. According to the Report, the services which respondents mentioned as being the most affected by the loss of correspondent banking are “cheque clearing and settlement, cash management services, international wire transfers”, while banking authorities and local/regional banks identified trade finance.

    While the report noted that the majority of respondent banks have been able to find alternative banking relationships, in some cases the time and cost of finding new relationships are significant and not always on comparable terms and conditions as with the previous correspondent bank.

    The survey highlighted several reasons identified by international banks for withdrawing their correspondent banking services and noted that for large international banks, the main reasons were AML/CFT (anti-money laundering and counter-terrorism financing) and CDD/KYC (customer due diligence and know your customer) related concerns.

    In concluding, the Report provided a number of recommendations for both respondent banks and correspondent banks. One of the recommendations was for correspondent banks to consider the respondent bank’s business when making their decision to end a relationship, including by outlining the reasons for withdrawal, considering giving longer notice periods and considering the use of restrictions as opposed to outright termination.

    Caribbean seen as “Risky business”

    For the Caribbean, the loss of correspondent banking relationships, mainly as a result of banks’ de-risking practices, is intertwined with the fight against the arbitrary blacklists the region’s offshore financial jurisdictions are constantly called on to defend themselves against. Last year, both the EU and the District of Columbia (US) published blacklists which included Caribbean countries, causing regional governments to spend consider time advocating for their removal. Either way, the net result of these arbitrary actions would appear to do little to mitigate international banks’ perception of the Caribbean as literally a “risky” place to do business. The Financial Action Task Force (FATF) has reiterated the risk-based approach to AMT/CTF on a case-by-case basis as opposed to the wholesale de-risking which many banks are doing.

    The way forward

    The World Bank’s report is welcomed as it has provided some empirical evidence to support the concerns of Caribbean countries and in so doing helps to place a global spotlight on this issue. The Financial Stability Board (FSB) Report to the G-20 on actions taken to assess and address the decline in correspondent banking referenced the World Bank Report. The FSB has partnered with several organisations, including the World Bank, IMF among others, to address this issue through a four-point action plan which it has articulated in its report to the G-20.

    The E15 Initiative Report entitled “Strengthening the Global Trade and Investment System in the 21st Century” which was launched at World Economic Forum’s Annual Meeting at Davos this year noted that while data was scarce it would appear that developing countries are most affected by limited correspondent banking relationships and has offered some very timely proposals.

    Given the potential threat this issue poses to the region’s economies, it is incumbent on Caribbean banks to continue to observe the highest regulatory standards, including on AML/CTF and CDD/KYC. The Caribbean Association of Banks (CAB) has commendably been at the forefront of advocacy in regards to the issue of correspondent banking and their continued advocacy will be important.

    Former Prime Minister of Barbados and economist, Owen Arthur, at a Roundtable discussion on Correspondent Banking held in Kingston, Jamaica earlier this month has called on regional leaders to adopt coordinated regional measures to address the issue. Caribbean leaders must continue to raise the issue at the diplomatic and multilateral levels at every opportunity, and join forces with other similarly affected countries in advocating for an immediate global solution to the problem, including action on some of the proposals highlighted in the World Bank’s and E15 Initiative’s reports.

    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. The Author is not affiliated with the World Bank, the Caribbean Association of Banks or any bank. You can read more of her commentaries and follow her on Twitter @LicyLaw.