Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Caribbean Development Trends

  • HOME
  • CATEGORIES
    • Agribusiness
    • Antigua and Barbuda
    • Barbados
    • BehaviorChange
    • Belize
    • Bermuda
    • biodiversity
    • Blockchain
    • Caribbean
    • Caribbean Culture and Media
    • Climate Change
    • Creative Economy
    • Crime Prevention and Citizen Security
    • Data and Knowledge
    • De-risking
    • Dominica
    • Dutch
    • Early Childhood Development
    • Economic Growth
    • Education Policy
    • energy
    • entrepreneurship
    • Environmental and Climate Change
    • Events
    • Extractives
    • Finance
    • Fiscal Rules
    • gender
    • Governance and Regulatory Policy Reforms
    • Grenada
    • Guyana
    • Haiti
    • Health
    • Health Policy
    • Hurricane
    • Hurricane Irma
    • infrastructure
    • Innovation and change
    • Intellectual Property
    • IWD
    • Jamaica
    • JumpCaribbean
    • Labor
    • Labour Markets
    • MOOC
    • Music
    • Natural Disasters
    • Nurturing Institutions
    • OECS
    • Podcast
    • Poverty
    • Private Sector and Entrepreneurship
    • Saint Kitts and Nevis
    • Saint Lucia
    • Saint Vincent and Grenadines
    • skills
    • Sports for Development
    • Suriname
    • Technology
    • The Bahamas
    • The Blue Economy
    • Transportation
    • Tourism
    • Trinidad and Tobago
    • Uncategorized
    • VAWG
    • Webinar
    • women
    • Women for Change
    • youth
  • Country Offices
    • Bahamas
    • Barbados
    • Guyana
    • Jamaica
    • Suriname
    • Trinidad and Tobago
  • Press Releases
    • Bahamas
    • Barbados
    • Guyana
    • Jamaica
    • Suriname
    • Trinidad and Tobago
  • Authors

De-Risking and Correspondent Banking – A Caribbean Example

October 7, 2015 by Juan Pedro Schmid Leave a Comment


Photo courtesy of Wikimedia Commons, Author, Hagainativ

Not too long ago, news started to emerge that Jamaican banks would sever relations with cambios as they created problems with their international correspondent banks. (To transfer money abroad, banks need partner banks in that country, these are called correspondent banks.)  This is a severe problem as in today’s modern, globalized world, countries depend on international financial transactions for trade and other flows such as remittances.

We quickly assumed that anti-money laundering (AML) considerations must be at the heart of the problem, so fixing any gaps in the AML framework would fix the issue. So, the Country Office Jamaica hired a lawyer and went out to find the AML hole to fill. Unfortunately, we had just stumbled over a world-wide issue that was just about to unfold, so this is not a blog about how we solved the issue in the blink of an eye but rather to highlight and explain the issue.

The Policy Brief on correspondent banking and AML in Jamaica contains an in-depth analysis.

It was indeed AML considerations that caused the reluctance of banks to offer correspondent services to cambios. However, we were wrong in thinking that filling some loopholes would fix the issue. Not only did Jamaica have quite a robust AML framework, they were also in the process of addressing remaining deficiencies, resulting in a robust AML framework in an international perspective. However what  happened was, based either on a real or perceived threat from regulators, international banks started to sever business relations that they saw as high risk. This practice is called ‘de-risking’.  This is contrary to managing risks based on the approach elaborated by the Financial Action Task Force (on Money Laundering).

Obvious candidates for de-risking were correspondent banking relations with foreign banks in small, lesser-known countries that worked with money services businesses, which are seen as especially risky. A correspondent bank is responsible for due diligence of its clients, but there is an important twist:  that responsibility also includes knowing how well its clients do their own due diligence of their own clients. So as a result, the bank abroad is responsible for what happens in some country thousands of miles away and/or needs to trust the regulatory framework and its implementation. The graph below is a schematic representation of this chain of liability. However, it can be much more complicated if, for instance, funds are transferred between two countries that do not have direct correspondent relations.

Responsibility extends to the client of the client of the client1Source: Schmid (2015)

Compliance officers at banks have an in-depth knowledge of the legal and regulatory framework in their country but that knowledge does not extend to hundreds of countries that they deal with.  And how could they?

So what is the solution? Unfortunately, there is no straightforward answer and several reports in the international press indicate that the issue is worsening, affecting correspondent relationships in several countries. Authorities from affected countries are in bilateral discussions with correspondent banks and regulators to find ways to overcome the risk of international banks to be involved in money-laundering transactions. And countries that want to be part of the international financial system of course need to be fully compliant with all AML regulations and have effective enforcement.  The issue however remains, checking compliance in a country far away is challenging and costly.

What has changed since the time when we stumbled over the issue is that the risks to financial flows has been recognized and several institutions, including the Financial Action Task Force (FATF), the IMF and the IDB have started work to find a viable solution. This is important as integration in the international financial system is central for economic development.


Filed Under: Economy & Investment, Jamaica Tagged With: anti-money laundering, de-risking, FInances, Financial Action Task Force, international correspondent banks, international financial system, international financial transaction, Jamaica, money transfers, remittances

Juan Pedro Schmid

Juan Pedro Schmid is a Lead Economist in the Caribbean Country Department of the Inter-American Development Bank (IDB). Since joining the IDB, Juan Pedro has worked in different capacities, including as a country economist for Jamaica and for Barbados, and as regional macroeconomist. His work has covered a broad range of areas, including macroeconomic monitoring, preparation of country strategies, lending operations, coordination of departmental macroeconomic work, and programming and research on a broad range of topics. Before joining the IDB, he worked for three years as an Economist at the World Bank’s Economic Policy and Debt Department on debt relief operations, technical assistance missions, and advisory services across different regions, including Africa, Asia, and Oceania. He holds a M.A. from the University of Zurich and a Ph.D. from the Federal Institute of Technology, both in economics.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Caribbean Dev Trends

We provide unique and timely insights on the Caribbean and its political, social, and economic development. At the IDB, we strive to improve lives in the Caribbean by creating vibrant and resilient economies where people are safe, productive and happy.

Similar posts

  • Surviving the Next Financial Crisis 101: De-Risking in the Caribbean
  • High-risk listing problematic for The Bahamas
  • De-Risking in the Caribbean: Which Solutions Lead to Improved Relations Between Banks?
  • Correspondent Banking Relationships (CBR) Withdrawals
  • Getting on the grid

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

    Blog posts written by Bank employees:

    Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


    For blogs written by external parties:

    For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

    The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

    Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



    Privacy Policy

    Copyright © 2025 · Magazine Pro on Genesis Framework · WordPress · Log in

    Banco Interamericano de Desarrollo

    Aviso Legal

    Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

    facebook
    twitter
    youtube