Caribbean Trade Law and Development

Tag: SIDS

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

    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

    Bank De-risking: An Emerging Threat to Caribbean SIDS’ Survival

    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.