In this interview, Allan Wright, Country Economist at the IDB, discusses the impact of de-risking strategies on the Caribbean. Below you will find a short summary of what he discussed:
What is the problem?
De-risking is the termination of or the restriction of business relationships to avert risk related to anti-money laundering (AML) and the counter financing of terrorism (CFT).
Why should the Caribbean pay attention?
International institutions have been the subject of regulatory censures as a result of deficiencies identified within their AML/CFT frameworks. Penalties and fines have increased and as a result, financial institutions have looked for ways to address these deficiencies. One of such ways is the termination of business relationships with certain businesses and regions considered to be high risk.
A World Bank study (2015) revealed that the Caribbean appeared to be the region most severely affected by the de-risking strategy adopted by international banks. Indeed, a number of banks in the Caribbean have recently experienced the termination of relationships with international correspondent banks. While this may not have resulted directly from AML/CFT issues, many large international banks consider their business with the region as either high risk or unprofitable. As a result, banks have ceased to offer their services or have restricted the type of services offered to the domestic banks in the region.
How much of an impact does this have on our people and businesses?
Globalization and technology allow countries to conduct business, despite the distance between them. Correspondent banks facilitate international transactions by providing access to the global payment and financial system. Such transactions include remittances, credit card payments, foreign direct investments and international trade in goods and services. These transactions contribute significantly to the region’s growth and development. Therefore, the loss of these relationships could, therefore, threaten the regional banking sector as banks would no longer be able to conduct international transactions on behalf of their customers.
Similarly, for regional economies, trade facilitation would be stymied resulting in the inability for countries to import essential basic goods such as food and medicine, which could ultimately destabilize regional economies.
De-risking has already affected certain classes of business, clientele, and jurisdictions throughout the Caribbean. One correspondent bank has ceased to conduct business with money service businesses (cambios) and cash intensive businesses (money transfers). Some regional branches of international banks have also started de-risking within the jurisdictions in which they operate. The services offered to credit unions, building associations and third party transactions on behalf of lawyers and other service providers are no longer facilitated.
Do people know what’s going on?
De-risking has generated much discussion among international and regional financial institutions including Central Banks, the Financial Stability Board (FSB), The World Bank (WB), the International Monetary Fund (IMF) as well as the Caribbean Community (CARICOM), to facilitate an understanding of the complexity and multi-dimensional nature of the problem of de-risking. The FSB has proposed the following four-point plan:
- a further examination of the issue;
- clarification of regulatory expectations;
- capacity-building in jurisdictions where respondent banks are affected; and
- the strengthening of tools for correspondent banks to perform due diligence checks.
What are Caribbean Governments doing?
CARICOM is fully committed to the international processes of financial reforms and has embraced the FSB’s four-point plan for addressing de-risking. At its most recent meeting in July 2016, the CARICOM Heads of Government agreed to a new approach for addressing the threat of bank de-risking. The CARICOM Committee of Finance Ministers proposed the establishment of a global forum in the Caribbean to bring the various stakeholders together, including correspondent banks, respondent banks, the regulators, policy makers and non-government organizations which have been adversely affected by de-risking.
Furthermore, the Committee has communicated with the United States Government officials and the US Treasury Department regarding clarification about the nature of the issues giving rise to the heightened risk aversion towards Caribbean transactions by US regulatory authorities. Also, there has been regional participation and advocacy at high-level fora including the WB, IMF, FSB, meetings of the CARICOM Heads of Government and Central Bank Governors.
What are Caribbean regulators doing?
Regional regulators have also participated in high-level discussions with the international financial institutions as well as international regulators. Regulators have also implemented strategies which are specific to their respective jurisdictions.
A CARICOM Central Bank Governors’ Technical Working Group on De-risking was established to document and analyze the impact of de-risking strategies on regional financial systems. They prepared a background paper on the issue of de-risking which was recently published by the Caribbean Centre for Money and Finance.
It can’t be too late… can it?
While some regional banks have already received official notification of the imminent termination of relationships, most of the affected banks have already commenced establishing new relationships with other international banks. Government officials and regulators continue to canvass and participate in high-level fora towards determining the best approach for addressing the de-risking issue. As legislation continues to evolve, more banks may eventually adopt the de-risking strategy as an alternative response.
We’re all going to be affected — what should we do now?
De-risking is a hot button issue which continues to affect all sectors of the regional economies. Information can be gleaned via various links on the internet including those of various international regulatory bodies such as FATF, the IMF, the WB; regional organizations such as CARICOM and the Caribbean Development Bank, inter alia.
Alternately, you can contact the Caribbean Economics Team (CET) of the Inter-American Development Bank at firstname.lastname@example.org