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Climate Change, the US Elections and Small Island Developing States’ Survival

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Alicia Nicholls

“We are the first generation to be able to end poverty, and the last generation that can take steps to avoid the worst impacts of climate change. Future generations will judge us harshly if we fail to uphold our moral and historical responsibilities.” – Ban Ki-Moon, Secretary General of the United Nations.

In a step that was both historic and symbolic, the Presidents of the United States (US) and China last week ratified the Paris Agreement ahead of the on-going G20 summit in Hangzhou, China. This single showing of solidarity by the world’s two largest industrialised powers was welcomed news for the small island developing states (SIDS) such as those in the Caribbean, Pacific and the Africa, Indian Ocean, Mediterranean and South China Sea (AIMS) states. Through the 44-member Alliance of Small Island States (AOSIS), SIDS  pushed not only for the conclusion of the Paris Agreement but insisted on the inclusion of language in the Agreement in which parties endeavored to “pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels” (Article 2(a) of the Paris Agreement).

SIDS are the least culpable but most physically and economically vulnerable to the adverse effects of climate change. Rising sea levels have dislocated coastal communities and threaten the territorial integrity of the Pacific states of Kiribati and the Marshall Islands. Earlier this year, Cyclone Winston caused US1.4billion in damage, with the highest economic and human toll in Fiji, while Tropical Storm Erika in 2015 cost the Caribbean state of Dominica nearly half of its GDP. However, as the story of a remote Alaskan village which has voted to relocate from their ancestral home because of sea level rise shows, climate change is not a SIDS’ problem alone. It is a cross-cutting global issue which has implications not just for the global environment but for human health, security, sustainable development and economic growth.

So what does all of this have to do with the upcoming election for the 45th President of the US? Well, if one considers the wide disparity in climate change rhetoric and policy proposals between the two major candidates running for the Oval Office, it is pellucid that the election of either Mrs. Clinton or Mr. Trump is the difference between strong US support for reducing GHG emissions and leading the global fight against climate change on the one hand, and on the other, a reversal of the gains that have been hard fought for. In other words, the future of SIDS’ survival could depend on the outcome of the US election.

Current US climate change policy

Current US policy supports global climate change efforts. US President Obama’s three-pronged Climate Action Plan commits to cutting carbon pollution in America, preparing the US for the impacts of climate change, and critically for the Paris Agreement, leading international efforts to address Global Climate Change. This is a policy position which Democratic candidate, Hillary Clinton, has pledged to honour should she be elected to office by the American people this November.

The Paris Agreement was concluded in December 2015 at the end of the United Nations Framework Convention on Climate Change (UNFCCC) Twenty-first session of the Conference of the Parties (COP21). Since the Agreement’s opening for signature in April 2016, over 180 states have signed. However, as of September 3, only 26 states so far (representing 39% of global emissions) have ratified it. The recent ratification by the US and China, which together account for about nearly 40% of GHG emissions, is a significant step towards the threshold needed for the Agreement to come into effect; ratification by at least 55 countries which contribute to 55% of global GHG emissions. According to a White House press release on the US-China Climate Change cooperation outcomes, the two countries “committed to working bilaterally and with other countries to advance the post-Paris negotiation process and to achieve successful outcomes this year in related multilateral fora”.

Climate Change Platforms of Candidates 

While a four-way race in theory, the candidates of the two major parties, the Democratic Party and the Republican Party, still have a large lead ahead of the two other candidates (Jill Stein of the Green Party and Gary Johnson of the Libertarian Party). Perhaps never before has there been such wide disparity in the positions of two US presidential candidates on the issue of climate change. The democratic candidate, former US Secretary of State, Hillary Clinton, has vowed to “take on the threat of climate change and make America the world’s clean energy superpower”. Some of her major policy initiatives to this end are: launching a $60 billion Clean Energy Challenge, investing in clean energy production and infrastructure, cutting methane emissions across the economy and prioritising environmental and climate justice, inter alia.

This stands in stark contrast to the stated position of Republican candidate, billionaire real estate mogul Donald Trump, who, inter alia, tweeted in November 2012 that “the concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive”. He later said he was joking. Unfortunately, for the world, and especially for SIDS, climate change is no joking matter.

While Trump’s skepticism on the anthropogenic nature of climate change is not dissimilar to that of most Congressional Republicans, a Sierra Club report has rightly stated that “if elected, Trump would be the only world leader to deny the science of climate change.” He has also denounced the Paris Agreement as a bad deal for America, ascertaining it “gives foreign bureaucrats control over how much energy we use right here in America”, a claim soundly and poignantly rejected by the US special envoy for climate change (2009-2016) in a Washington Post op-ed. Mr. Trump first asserted he would renegotiate the Agreement and later stated that he would ‘cancel‘ the US’ participation in it. He has railed against environmental regulations. His proposals to reverse President Obama’s climate change initiatives, abolish the US Environmental Protection Agency, save the coal industry and continue subsidies to the oil and gas industry would jeopardise the US’s current emission reduction targets.

Implications for SIDS of US Climate Policy Change

Should a President Trump, if elected, implement his stated policies, not only will there be a 360 degree reversal of the US’ current commitment to meeting its emission-reduction targets, but an end to US cooperation or support for the global climate change agenda. If this happens, there will be little the world could do,besides raise universal condemnation. This is because one weakness of the Paris Agreement is that there is no binding enforcement mechanism in the agreement to force compliance of countries to the emissions limits they set for themselves. Already, there is skepticism that the current “nationally determined contributions” are not ambitious enough to conform with the Agreement’s goal of “holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels” (Article 2(a) of the Paris Agreement).

Secondly, should the US withdraw from the Agreement or renege on its commitments, some other high emitters may feel less of a moral imperative to follow through with their own commitments or may withdraw as well.

Thirdly, climate change finance is important for SIDS’ adaptation to, and mitigation of, the effects of climate change. Under Article 9 of the Paris Agreement developed country members are obligated to provide “financial resources to assist developing country Parties with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention”.

Caribbean countries  and several other vulnerable states around the world have benefited significantly over the years from the US Department of International Aid (USAID)’s projects which aim to build countries’ resilience to climate change. Climate change was one of the Obama Administration’s priorities for DA funding with $310.3 million in funding requested for Global Climate Change in the FY2017 Budget Request. The future of USAID aid flows to developing countries for climate change adaptation is bleak if current US policy towards climate change action changes under a Trump administration.

What then for SIDS?

The aim of this article is NOT to be an endorsement of either of the two major candidates running for the upcoming US Presidential election, neither is it an attempt to influence the American people’s decision. The US election is a democratic choice for the American people and only they can decide which of the four candidates’ platform better serves their interests. What this article attempts to do is to discuss and show the wide policy differences which exist between the two candidates of the major parties on climate change, and argues that any negative change in current US climate change policy will have far-reaching implications for the global climate change fight.

There are a few nuggets of hope, however.  Because of Article 28 of the Paris Agreement, a President Trump would have to wait at least three years from the date the Agreement has entered into force in the US before he could notify his intention to withdraw the US from the Agreement and it would take another year for such withdrawal to come into effect.Any US withdrawal from the Paris Agreement is unlikely to be a popular move among Americans. Recent US polling data show there is grassroots support for Climate Change. Action. This includes not just environmental lobbies but the ordinary man on the street. There would also be universal condemnation by other major countries.

SIDS may have a few allies in the fight within the US. Outside of federal action, some states, like Oregon, have quite robust climate change initiatives. Moreover, faced with pressure from more discerning and environmentally-aware consumers, more businesses and large corporations are forced to demonstrate their use of energy-friendly processes and products.

Despite this, however, besides lobbying and moral suasion by other countries, there is little SIDS  can realistically do to change US climate change policy should there be a reversal. The vote for US president is a decision only the US electorate can make. However, for SIDS it could be a matter of survival.

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.

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Over 170 Countries Sign the Paris Agreement: What next for SIDS?

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Alicia Nicholls

Earth Day 2016 was extra symbolic this year. On this day (April 22nd), 174 countries plus the European Union signed the Paris Agreement at a High-Level Signature Ceremony at the United Nations’ Headquarters in New York. Among the signatories were small island developing states (SIDS) from the Caribbean, the Pacific and the Indian Ocean, for whom climate change is a serious matter of survival.

The Paris Agreement, which will replace the Kyoto Protocol when it comes into force, is a landmark climate change agreement which aims to strengthen the global response to climate change. Many years in the making, the Paris Agreement was concluded and adopted at the end of intense negotiations during the United Nations Framework Convention on Climate Change’s (UNFCCC) 21st annual Conference of the Parties (COP21) held in Paris last December.

Climate change is a global problem with implications for us all. According to the United States’ National Oceanic and Atmospheric Administration (NOAA) and NASA, 2015 was the hottest year on record since the start of record keeping in 1880. If these first few months of 2016 are anything to go by, this year may shatter that record handily.

SIDS which are responsible for less than 1% of global GHG emissions, are the most vulnerable to its adverse effects. Besides sea level rise, extreme weather events have caused tremendous economic devastation and loss of human life. The Rapid Impact Assessment showed that Tropical Storm Erika cost Dominica 90% of its gross domestic product (GDP). Earlier this year, the Category 5 Severe Tropical Cyclone Winston ravaged the Pacific SIDS of Fiji, Vanuatu, Tonga and Niue. In Fiji the storm left 44 dead, destroyed over 31,000 homes and caused 1 billion USD in damage.

For SIDS, climate change is an existential threat to our economies, societies and survival, which led our states to push the “1.5 to stay alive” campaign. To keep the temperature increase to just 1.5 percent above pre-industrial levels or even 2 percent, signature of the Paris Agreement is just one step.

Signature is not the same as ratification

The turnout for the signature of the Paris Agreement is reported to be a record number for a new treaty. However, signature does not make a treaty legally binding on a signatory party unless the Treaty specifically provides for this. In the case of most treaties, like the Paris Agreement, it is only after a party has deposited its instrument of ratification (or accession, approval or accession) that it has consented to be bound by the treaty.

The ease of the domestic ratification process depends on the legal system and domestic political processes in each state. In the US, the type of international agreement determines the process. Article II, section 2 of the US Constitution requires approval of two-thirds of the US Senate for a treaty to be approved. Executive type agreements do not require congressional approval. Given the strong objection to the Paris Agreement in the Republican-controlled Congress, the US negotiators were careful to avoid any language or provisions, such as mandatory emission reduction targets, which would require Congressional approval of the agreement. However, the US has not yet ratified the Agreement and the upcoming US Presidential election this November could lead to a dramatic reversal in US policy on climate change depending on whom is elected president. No one wants a repeat of the Kyoto Protocol; the US had signed it but did not ratify and was therefore not bound by the Agreement.

According to Article 21, the Paris Agreement will enter into force 30 days after at least fifty-five parties which account for at least fifty-five percent of total global greenhouse gas emissions (GHG) have deposited instruments of ratification. As at the time of writing this article, 177 parties have signed the agreement, which represents the vast majority but not all the 195 countries which negotiated the agreement in December. Conspicuously absent from the  signatures are several major oil producing states, namely Nigeria, Saudi Arabia and Iraq. Signature will be open for one year until April 2017 so there is still time for more states to sign.

Fifteen countries have so far ratified the Agreement, three of which with declarations. It is no surprise that SIDS led the way in the number of ratifications. Those countries which ratified already are the Marshall Islands, Nauru, Tuvalu, Palau, Somalia, Palestine, Barbados, Fiji, Grenada, St. Kitts & Nevis, Samoa, Maldives, St. Lucia, Mauritius and Belize.

Scaling Up of Climate Action

Even before the entry into force of the Agreement, countries will need to scale up their climate actions to reduce emissions. Prior to the conclusion of the Paris Agreement, most countries submitted their Intended Nationally Determined Contributions (INDCs) which set out their policies, targets and actions for contributing to the reduction of GHG emissions. In Barbados’ INDC, for example, the country intends to achieve an economy-wide reduction in GHG emissions of 44 percent compared to its business as usual (BAU) scenario by 2030. In absolute terms, this means an intended reduction of 23 percent compared to 2008 levels.

However, the just released updated UN synthesis report of all INDCs communicated by Parties by 4 April 2016, a total of 189 Parties (96% of all Parties to the UNFCCC), found that the level of ambition is still not enough to lead to an increase of less than 2 degrees above pre-industrial levels. There is the need to deepen ambitions and convert intention to concrete actions and achievements. This will require planning, political will, cooperation among all stakeholders, the implementation of legislative frameworks and systems for monitoring progress, implementation and reporting.

Of critical importance will be the level of reduction of GHG emissions  by countries, such as the US, China, India and in Europe, which account for over 50 percent of global GHG emissions. However, domestic politics within these countries could be an issue for meeting their goals. As an example, in August 2015, US President Obama and the US Environmental Protection Agency (EPA) announced the Clean Power Plan to lower US emissions by curbing carbon dioxide emissions from power plants through shifting from coal-fired power to renewable power. Some major fossil fuel producing states like West Virginia and Texas have challenged the administration’s plan and by a 5-4 decision the US Supreme Court issued a stay of the Clean Power Plan pending judicial review. Additionally, there is no guarantee that the next US president will be as committed to the climate change mitigation goals set out by the Obama administration to reduce emissions between 26 to 28 percent by 2025, which already is a modest target.

Climate Finance for Adaptation and Mitigation

SIDS require financing not just to build climate-resilient infrastructure but to transition to climate-resilient economies. One of the stated goals in the preamble of the Paris Agreement is to jointly provide USD 100 billion annually by 2020 for mitigation and adaptation, and to provide appropriate technology and capacity-building support.

Many Caribbean States have been graduated from accessing grants and concessionary loans due to their relatively high gross domestic product per capita (GDP per capita), while their high levels of indebtedness also make borrowing on international markets difficult. While several climate change finance streams are available, including funding from Multilateral Development Banks, official development assistance and dedicated funds, some SIDS Governments have raised concern  that the red tape for accessing funds is often cumbersome.

What next for SIDS?

The signature of the Paris Agreement is just but one step. Though SIDS account for less than one percent of GHG emissions, we all have our part to play in lowering emissions and contributing to a climate-friendly future. Domestically, our governments need to focus on implementing our INDC commitments and encourage the use of climate friendly technologies, including in buildings, transportation and the agriculture, tourism and manufacturing sectors. This is not a task for governments alone, but will require continued cooperation with civil society, the business community and ordinary citizens.

It also requires the continued encouragement of a shift from fossil fuels to renewable energy. In Barbados’ INDC, it was noted that energy consumption accounted for 72% of our GHG emissions in 2008, followed by the waste sector (16%). Disconcertingly, major players in the island’s solar energy industry have complained that falling oil prices have led to a decrease in solar installations. Barbados has been a leader in the solar industry, with a high level of solar water heater use which  saved the country a reported US$100 million on its fuel import bill in 2002. We cannot allow the drop in oil prices to allow us to lose sight of the necessity of shifting from fossil fuels for achieving our climate goals and preserving an environmentally-sustainable future for the next generations.

On the multilateral level, continued participation and advocacy in climate change talks are a must for SIDS governments. As I had indicated in my previous article, the Paris Agreement is an important step but its efficacy will depend on its ratification and implementation and subsequent follow-up, especially by those countries which contribute the most to GHG emissions. The future of our states, and the world, depends on it.

The full text of the Paris Agreement may be found here. Barbados’ statement at the High-level signing ceremony may be found 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.

Human Development Report 2015 – A Mixed Bag for Barbados and the Caribbean

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Alicia Nicholls

The United Nations Development Programme (UNDP) released its Human Development Report 2015 yesterday. Entitled “Work for Human Development”, this year’s report focuses on the link between work and human development.  The central thrust of the Report is that work (not limited to a job or employment but in the broadest sense) can enhance human development. However, the link between income and human development is not automatic. While sustainable work can contribute to human development, some types of work (such as work which violates human rights) are detrimental to human development.

The Human Development Index 2015, the Report’s flagship index, ranks 188 countries based on a range of human development indicators. Norway again topped the HDI rankings with an HDI value of 0.944, followed by Australia, Switzerland, Denmark and the Netherlands which retained their top 5 positions in the same order as in 2013. Niger was the lowest ranked country with an HDI of 0.348.

Caribbean Performance 

Caribbean countries continue to have a high level of human development. However, their performance in the 2014 HDI rankings was mixed. Barbados, Jamaica, Cuba, Dominica, Haiti and Suriname declined slightly from their 2013 rankings. The Bahamas, Antigua & Barbuda, Trinidad & Tobago, St. Lucia and Guyana maintained their positions. Only four countries: Dominican Republic, St. Kitts & Nevis, Grenada and St. Vincent & the Grenadines improved their ranking. The biggest improver was Grenada which jumped from 82nd position in 2013 to 79th position in 2014, with improvements in life expectancy at birth and mean and expected years of schooling.

Countries on the HDI are classified by development level into one of the following categories: very high human development, high human development, medium human development or low human development. The majority of Caribbean countries are ranked as having high human development.

The Bahamas has the highest level of human development in the Caribbean, maintaining its 55th place overall and increasing in HDI value from 0.786 in 2013 to 0.790 in 2014. Barbados has the second highest human development level in the Caribbean, dropping one place from 56 in 2014 to 57 in 2015 but maintaining an HDI of 0.785.

The other Caribbean islands included in the High Human Development rank were: Antigua & Barbuda (58), Trinidad & Tobago (64), Cuba (67), Saint Kitts & Nevis (77), Grenada (79), Saint Lucia (89), Dominica (94), Saint Vincent & the Grenadines (97), Jamaica (99), Belize (101), Dominican Republic (101) and Suriname (103).

Guyana which ranked at 124 is the only Caribbean country ranked in the Medium Human Development category. Haiti was the lowest ranked Caribbean country with a rank of 163 and an HDI value of 0.483. It is the only Caribbean country in the Low Human Development category.

When compared to the HDI values of SIDS on average (0.660) and the average world HDI of 0.711, the performances of the Bahamas, Barbados and Antigua & Barbuda are especially commendable.

Room for Improvement

However, Caribbean countries should not take their rankings at face value as a reason for complacency. Drilling down into the HDI indicators and in the other indices comprising the report, there are several areas of concern and where improvement is needed. HIV prevalence among adults remains high in the region compared to other SIDS and the world. The Report also reaffirms the high vulnerability of Caribbean populations to natural disasters.

Another worrying statistic is the high prison population per 100,000. Saint Kitts & Nevis had the highest per capita prison population in the region with 714 prisoners per 100,000. Crime is also an area for concern. For the period 2008-2012 Belize had the highest homicide rate among CARICOM countries, with 44.7 homicides per 100,000. Violence against women also raises concern. For Barbados and Jamaica, two of the handful of Caribbean states for which this  data was available, 30 per cent and 35 per cent of women (15 years and over) respectively have experienced intimate or intimate partner violence.

Many Caribbean countries are seeing declining private capital inflows as a percentage of GDP and have also seen a decrease in their GNI per capita. Barbados’ GNI per capita decreased by about 0.8 per cent between 1980 and 2014. Jamaica’s decreased by about 32.5 percent during the same period. On the contrary, Grenada’s GNI per capita increased by about 124.6 per cent.

Another area for improvement is in gender equality. Despite females in Barbados having a higher level of human development than males due to their higher life expectancy at birth, longer expected years of schooling and mean years of schooling for females, GNI per capita is much higher for males (10,407 for females and 14,739 for males).  Moreover, while a higher percentage of Barbadian women than men have at least a secondary level education, women have a lower participation in the workforce and make up only 19.6% of seats in Parliament. Therefore, despite a ranking of 57 on the HDI, Barbados ranks 69 out of 155 countries on the Report’s Gender Inequality Index. In comparison, the Bahamas is ranked at 55 on the HDR and  58 on the GII.

Maternal mortality ratios in the Region remain a cause for concern. Haiti’s rate is 380 maternal deaths per 100,000 live births. Though much lower than Haiti’s, Trinidad & Tobago’s maternal mortality ratio of 86 per 100,000 and Cuba and Jamaica’s of 80 per 100,000  are above the average rate for SIDS of 61.5 per 100,000 live births and above the average for high human develoment countries (41 per 100,000). Barbados’ ratio of 52 maternal deaths per 100,000 births is also worrying.

Youth unemployment is a growing problem globally and in the region exacerbated by the global recession of 2008 and the continuing uncertainty in the global economy. According to the HDR report, the global youth-to-adult unemployment ratio is at a historical peak and in 2015, 74 million young people (ages 15- 24) were unemployed. Youth unemployment data was not available for all Caribbean countries. However, the available data in the report is troubling. For example, according to the report, Trinidad & Tobago’s rate of youth (not employed or not in school) was 52.5%.

For too many indicators, there is lack of data available for Caribbean countries.  It is for this reason that we have no idea of how Caribbean countries would rank on the inequality-adjusted human development index which gives a truer measure of human development as it takes into account inequality. Lack of data makes it difficult to track progress.

Despite a mixed performance in 2014, the Caribbean Region continues to enjoy overall high levels of human development. However, there are several areas of concern which policymakers will have to target if our countries are to reach the ranks of “very high human development”.

The full Human Development Report 2015 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. 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

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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.