Caribbean Trade Law and Development

Tag: de-risking

  • The EU’s Updated Draft AML/CFT List of High Risk Third Jurisdictions ‘Take Two’: A Critique

    The EU’s Updated Draft AML/CFT List of High Risk Third Jurisdictions ‘Take Two’: A Critique

    Alicia Nicholls

    In the midst of the human and economic challenges wrought by the novel coronavirus (COVID-19) pandemic, another threat looms for three Caribbean countries. The European Commission (the Commission) last week released its draft updated List of High Risk Third Jurisdictions which have strategic deficiencies in their Anti-Money Laundering and Countering the financing of terrorism (AML/CFT) regimes that pose significant threats to the financial system of the 27-nation bloc. Barbados and Jamaica now join The Bahamas on the updated draft EU list.

    Readers would recall that the Commission’s previous draft list of February 13, 2019 was ultimately rejected by the Council of the EU on March 5, 2019, sending the Commission back to the drawing board. Unfortunately, the Commission’s release of the revised draft list has occurred in the middle of the COVID-19 pandemic – widely acknowledged to be the worst economic shock to hit the global economy, including the economies of those Caribbean countries listed.

    While the draft list still requires European Parliament and Council approval, and is set to apply only from October 1 2020, mere inclusion on such a list could still present reputational risks and other financial implications for those countries listed, particularly for Barbados and The Bahamas which are International Financial Centres (IFCs). This article briefly looks at the implications of the updated list for the countries named and possible next steps.

    What is the EU’s AML/CFT List of High Risk Third Countries?

    The EU’s draft AML/CFT List of High Risk Third Countries is completely distinct from its list of non-cooperative jurisdictions for tax purposes. Indeed, this draft list forms part of a suite of measures proposed by the European Commission designed “to further strengthen the EU’s framework to fight against money laundering and terrorist financing”. The EU’s stricter approach to AML/CFT supervision was prompted, in particular, by a number of high-profile money laundering scandals involving European banks over the past few years. The EU has also this week proposed the creation of a Pan-European AML/CFT authority.

    However, despite these threats in its own backyard, the EU has chosen to focus a good part of its attention on purported AML/CFT risks posed by third States. According to the EU’s website, the list “aims to address risks to the EU’s financial system caused by third countries with deficiencies in their anti-money laundering and counter-terrorist financing regimes”. The first EU AML/CFT list of high risk third jurisdictions was drawn up in 2016 based on the Financial Action Task Force (FATF) lists and has been updated regularly by subsequent delegated regulations. In 2017, the EU commenced working on its own methodology for identifying third jurisdictions with strategic deficiencies in their AML/CFT regimes. This new EU methodology, which only uses the FATF lists as a starting point, was adopted in 2018. The now rejected February 13, 2019 list is the first to be drawn up according to this new methodology which was again revised in May 2020.

    Under the EU’s Fourth Anti-Money Laundering Directive (4AMLD), banks and other ‘obliged entities’ in the EU are required to apply enhanced customer due diligence (ECDD) on transactions and business relationships involving those countries listed as high-risk third countries. In other words, transactions originating from or going to those countries will be subject to enhanced scrutiny, which could mean longer wait times for completion and more frequent risk assessment reviews of the relationship.

    Who is included in the updated draft list?

    The EU in its methodology for identifying high risk jurisdictions, indicated that its proposed AML/CFT blacklist would use the FATF lists as its starting point. As such, the Bahamas, which is on the FATF list of jurisdictions under increased monitoring (loosely referred to as the ‘grey list), remains on the updated Commission list. Barbados and Jamaica, which were added to the FATF grey list of February 21, 2020, were added to the new draft EU AML/CFT List of High Risk Third Jurisdictions. Like the other countries on the FATF grey list, The Bahamas, Barbados and Jamaica were identified as having strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing but have undertaken a high-level political commitment to implement a FATF-agreed action plan to address these deficiencies.

    The other countries included on the EU’s updated draft list are Botswana, Cambodia, Ghana, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe, which are also on the FATF grey list of February 2020. However, the draft list does not include Iceland, a non-EU Member Country but part of the European Economic Area, which was also added to the FATF’s grey list.

    Issues with the List

    First, it is unfortunate that the European Commission would release this updated list while these countries’ economies are already suffering the harsh impact from the COVID-19 pandemic and could be further impacted by the reputational fall-out from this unilateral action. Indeed, although this measure is not supposed to take effect until October 1, 2020, the mere mention of these countries’ inclusion could spook investors and clients at a time when these countries’ economies are in a tailspin from COVID-19.

    Second,  like its failed list before, the EU is lumping jurisdictions which are on FATF’s grey list, that is, the list of monitored jurisdictions with an action plan with those which are on the actual FATF blacklist, that is, those countries for which there is a FATF call for action, namely North Korea and Iran. That poses additional reputational risks for named countries. It is incomprehensible to suggest that the AML/CFT risk posed by Barbados, The Bahamas or Jamaica is equivalent to that posed by those two countries for which a FATF call for action exists.  

    Third, as with the list before, the listed countries have complained that they were not given any advance notice of the updated list or any opportunity to query or contest their inclusion. The EU has stated it will provide technical assistance to those countries listed, but what will such assistance involve and how is it different from the assistance offered by the Caribbean Financial Action Task Force, the FATF regional body for the Caribbean?

    Fourth, the EU methodology only uses the FATF lists as the baseline for identification of countries with strategic deficiencies in their AML/CFT regimes. It begs the question why would the Commission, which is a full FATF member, see the need to create a separate list from FATF – the globally recognized standard-setting and monitoring body for AML/CFT matters. Moreover, unlike the FATF which provides detailed country-specific information through the mutual evaluation reports (MERs), the EU did not publish any detailed reasons for the inclusion of each jurisdiction.

    Fifth, the level of due diligence imposed by the EU goes beyond what is expected by FATF for countries listed as having strategic deficiencies in their AML/CFT regimes with an action plan. The FATF does not call for the application of ECDD to jurisdictions with strategic AML/CFT deficiencies with an Action Plan, but encourages its members to take into account the information presented in its risk analysis.

    Sixth, while the EU list does not impose sanctions or any other restrictions on trade, once a country has been listed as high-risk, European banks and other ‘obliged entities’ are required to apply ECDD on any transactions and relationships involving natural persons or legal entities based in such countries. Further, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) provides additional guidance as to the type of ECDD required, which includes obtaining supplementary information on customers and beneficial owners.

    Implications for the Countries Listed

    There are already implications for the Bahamas, Barbados and Jamaica being on the FATF list but they increase with the EU list. The required ECDD on transactions  involving  clients  and  intermediaries from these countries could result in costlier and longer clearance times for transactions.

    The EU says its list is not a “name and shame” exercise, but there are reputational implications of being blacklisted or the threat of being blacklisted, especially in the increased climate of bank de-risking. Many large global banks in their risk rating of countries rely on FATF and other countries’ lists to assess country risk. Increased perceived country risk has implications for a jurisdiction’s attractiveness as an IFC and for its foreign direct investment (FDI) attraction more broadly. Some financial institutions may simply decide the enhanced transaction and business relationship monitoring is too much work and choose to de-risk.

    There are, of course, attendant implications for the ease of doing business, cross-border trade and financial transaction flows, which are the lifeblood of these countries’ economies.

    Next Steps?

    The updated draft list still requires approval by the European Parliament and the Council of the EU. So what can the named countries do in the interim? Since the EU has stated the FATF lists are its starting point, Barbados, The Bahamas and Jamaica have and should continue to prioritise addressing the outstanding issues highlighted by CFATF in order to exit the FATF grey list.

    The Bahamas, Barbados and Jamaica should continue public awareness and outreach activities to local stakeholders, as well as to external stakeholders, on their commitment and progress toward technical and effective compliance with the FATF recommendations.

    Lastly, whenever the EU unjustly and arbitrarily includes our countries on a list such as this, there is a chorus of indignation from our leaders about the morality reprehensibility of such lists. We need to go beyond emotional arguments and present sound empirical research on the impact of blacklisting or the threat of blacklisting on our economies. Perhaps that way we could truly empirically show the negative economic impact of these heavy-handed actions instead of simply appealing to moral suasion.  

    Alicia Nicholls, B.Sc., M.Sc., LL.B is an international trade and development specialist. Read more of her commentaries here or follow her on Twitter @licylaw. All views expressed herein are her personal views and do not necessarily reflect the views of any institution or entity with which she may from time to time be affiliated.

  • De-Risking discussed at CARICOM 28th Inter-sessional Meeting

    De-Risking discussed at CARICOM 28th Inter-sessional Meeting

    Alicia Nicholls

    The issue of de-risking by global banks, manifested most prominently by the restriction or withdrawal of correspondent banking relationships with mainly indigenous banks in the Region, was discussed at the Caribbean Community (CARICOM) Twenty-Eighth Inter-sessional Meeting of the Heads of Government of CARICOM which took place in Georgetown, Guyana February 16-17 last week.

    CARICOM countries have been engaging in high-level advocacy to raise awareness of the implications of global banks’ de-risking, including the restriction and termination of correspondent banking services to mainly indigenous Caribbean banks. In the Communique released after the Inter-Sessional Meeting, it was noted that Heads of Government recognised the need for a continued regional approach and concerted action on this issue which has the potential to undermine the region’s financial systems and to cut off access to trade, investment and other financial flows, with both economic and poverty-reduction implications.

    Heads of Government also  recognised the need for continued urgent action to strengthen the integrity of the financial system in CARICOM Member States and to address the perception of the Caribbean as a high-risk Region. They also commended the Prime Minister of Antigua and Barbuda, and the Committee of Ministers of Finance for spearheading the advocacy initiatives towards resolution of the issue.

    Below are the main take-aways from the Communique in regards to Heads of Government’s current and further action on the de-risking issue:

    • Heads of Government considered the Strategy and Action Plan submitted by the Committee of Central Bank Governors, and requested the Committee of Ministers of Finance with responsibility for Correspondent Financing to assume the oversight of its roll-out.
    • The Heads of Government agreed that the Region must continue its robust and unrelenting advocacy on the issue of Correspondent Banking, noting the advocacy initiatives’ success in raising international awareness of the consequences of de-risking.
    • Heads of Government encouraged Member States to seize the opportunity of heightened awareness among International Development Partners (IDPs) to secure the resources and support required to strengthen the domestic and regional financial system.
    • Heads of Government welcomed the efforts of the Caribbean Development Bank (CDB) to assist Member States to strengthen their financial systems and partnering with multilateral financial institutions to determine solutions to the ongoing de-risking threat to the Community.
    • Heads of Government acknowledged the multi-dimensional nature of the several drivers behind the de-risking strategies being pursued by global banks, and called for a comprehensive stock-taking exercise to determine Member States’ status and ensure that national action plans are aligned with the timetable for compliance with global regulatory standards.
    • Heads of Government noted the need to strengthen Member States’ compliance with the global regulatory standards with regard to Anti-Money Laundering/Counter Terrorism Financing (AML/CTF) and Tax Transparency Information Exchange.

    More on the 28th Inter-sessional Meeting may be viewed here.

    The full communique is available 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.

     

  • De-Risking remains “a key priority”, according to US Treasury

    De-Risking remains “a key priority”, according to US Treasury

    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.

  • 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.