Correspondent banking: The ‘de-risking’ phenomenon

In the face of the constant changes and challenges caused by the imposition of global regulations and anti-tax competition initiatives, Caribbean IFCs continue to stand the test of time, thereby validating the role they play in furthering business and investments in the major global economies. The Caribbean IFCs, amid the clamor for greater transparency and censorship on legitimate tax planning practices, demonstrate that they are a durable and valuable part of the modern global economies and very integral to wealth management and wealth structures for high net worth clientele.

That being said, Caribbean IFCs remain under global scrutiny and pressure with the latest round of challenges remaining in play, i.e. – Base Erosion and Profit Shifting (BEPs), outcry for public beneficial ownership registries, the U.S. Foreign Account Tax Compliance Act (FATCA), the OECD’s Standard for Automatic Exchange of Financial Account Information in Tax Matters (aka the Common Reporting Standard (CRS), and the withdrawal of correspondent banking in the region.

Caribbean IFCs, rising to the challenge and refusing to be knocked out, continue to work even harder to address these matters; the outcome thus far giving rise to better governed and transparent financial sectors throughout the region in comparison to onshore jurisdictions.

Better governed and transparent financial sectors may, however, prove insufficient to overcome the challenges faced, given the curtailment of and in some cases withdrawal of correspondent banking relations in the Caribbean region. This issue on its own, continues to be a growing multifaceted problem for regional financial institutions, and with it an overarching threat to erode the ability to do business whatsoever in the region should correspondent banking cease entirely. It shall have a direct impact on each jurisdiction’s legal, regulatory and administrative frameworks for tax transparency, bank supervision, financial services and anti-money laundering (AML) and counter-terrorist financing (CFT).

 

Drivers for ‘de-risking’ may go beyond anti-money laundering/terrorist financing

The main correspondent banking relationship providers in the Caribbean are located in the United States, Canada, and to a lesser extent Europe and elsewhere in the Caribbean.

By any measure, the primary driver for the withdrawal of correspondent banking in the Caribbean region is said to be AML and CFT. Notwithstanding, and in the face of better governed and transparent financial sectors in the region to combat the said AML and CFT, it appears that this may not be the primary driver, given that de-risking continues to occur and pose an impact.

The potential drivers of de-risking, as identified in preliminary information gathered by FATF, with input from the private sector, highlights that there is a continued need to improve the evidence base in order to determine the causes, scale and impact of de-risking.  The FATF approach to de-risking is based on its recommendations, which require financial institutions to identify, assess and understand their money laundering and terrorist financing risks, and implement AML/CFT measures that are commensurate with the risks identified.   The FATF is undertaking work to further clarify the interplay between the FATF standards on customer due diligence, correspondent banking and other intermediated relationships, and wire transfers.

While awaiting findings of such work, I would make an educated guess, and conclude that the age-old taint of tax havens and the undying debate of tax evasion vs. tax avoidance, is at the heart of and the basis for the conclusion and treatment of the Caribbean region collectively as high risk, and of which the region is dealt with in a likeminded manner – de-risking and sanctions for all! This categorization and unwarranted fears fuel the unfair, prejudicial and punitive “do or die” treatment of the Caribbean IFCs in this de-risking phenomenon.

At no point in time is it apparent that Caribbean IFCs have been allowed a fair opportunity to address the ill-conceived fears. Upon a proper identification and assessment of any risk and issues that arise, it would become apparent that the necessary measures have been and/or are being put in place to combat and set such fears aside. Instead, unilateral actions are taken by countries and international financial banking institutions in the U.S. and Europe, to stymie business in the region, for what only can be viewed to have one main purpose – seeking to destroy the sector so as to maximize/ preserve their own revenue streams; to their benefit and to our detriment – all of which is based on a flawed cost benefit analysis.

De-risking makes no commercial sense; correspondent banking being an important component of global public policy and because of the valuable role in plays to facilitate inter alia international trade and foster economic wellbeing. It is the strategies of, and analysis done by such countries and the financial banking institutions of the U.S. and Europe that should be reviewed.

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By any means necessary:  The offensive and defensive plays

This de-risking phenomenon has not stopped the jurisdictions from fighting head on. The region as a whole is addressing and prepared to stay in the game with support from the Caribbean Secretariat and the International Monetary Fund (IMF) urging the Caribbean region to put in place a plan of action to address the withdrawal of correspondent banking.

Thus far, and as evidence of the continued efforts of the varying Caribbean jurisdictions, the respective financial sectors (and its participants) have implemented and/or embarked upon the implementation of the following, in an attempt to be even more transparent, meet international standards, and most importantly, reduce the risk of losing correspondent banking relations: –

  • Greater tax transparency – e.g., meeting the OECD/G20 established “objective criteria”
  • Greater AML/ CFT monitoring
  • Implementation of Basel II to meet international standards
  • Joining the SWIFT/ KYC Registry so as to improve inter alia, the respective institutions risk rating, i.e., reputation, profile, compliance within the correspondent banking arena. The Caribbean Association of Banks has endorsed this Registry.
  • Financial sector participants entering into negotiations with service providers or other institutions in order to provide alternate methods of service that benefit everyone involved.
  • Legislative initiatives to enact legislation and policies to the benefit of the financial sector and its participants (financial institutions, service providers and customers alike)
  • Governmental lobby initiatives (heads of government) to address stakeholders of the international financial institutions, affiliated governments and international bodies relating to same
  • Integration and cooperation.

 

What if?

According to the IMF, as of May 2016, at least 16 banks in the region in five countries have lost all or some of their correspondent banking relationships .

In that regard the region has seen the termination of correspondent banking relations from Belize, Montserrat, Barbados, the Bahamas, the Eastern Caribbean, Guyana, Haiti, Jamaica and Trinidad and Tobago with the shroud of curtailment and/or withdrawal of relations in other jurisdictions, and possibly the entire region. Banking fees to conduct business are now higher and appear in most cases to be punitive.

Should the day ever arise where there is wholesale termination of correspondent banking relations within the region, chaos would ensue within the respective financial sectors, as correspondent banking relations are crucial to the conduct of any business transactions in this day and age (i.e., electronic wire transfers/remittances), and thereafter the negative spill-over into other sectors. Worse yet, the drive of legitimate business underground and the realm of the black market.

That day, however, has not and will not come if the region continues to deal with its challenges head on. In that regard, the ECCB/ OECS Monetary Council has given consideration to the region opening a correspondent Caribbean bank (non-deposit) in the U.S. The proposed plan to establish is in theory good, but there must be a strategic assessment of it, and thereafter proper execution, since without such components it will not work.

 

Conclusion

Under no circumstances can it be acceptable to de-risk an entire sector and region.

The Caribbean region is by far more transparent and compliant with international standards, and in continuing to address as set out above, the region shall weather the storm.

The region must do all it can to address this threat relentlessly so as to combat any notion of loss of correspondent banking relations, and by extension, loss of access to the global financial markets.