Categorized | Features, General

Correspondent Banking – Understanding De-risking: Between Rock and Hard Place in the Caribbean

By Andrew Enriquez

Op-Ed Contributor

The correspondent banking system in Latin America and the Caribbean has recently been facing increasing pressure, so much so that institutions like the World Bank and the Financial Action Task Force (FATF) have issued consultative reports on the brewing crisis in these emerging markets.

Because much of the world’s cross-border capital flows are in US dollars, most Caribbean banks maintain what are called “correspondent accounts” in American banks.

This allows them to exchange U.S dollars and handle other financial transactions in the United States. Without the accounts these banks would have limited access to foreign financial markets, thus severely hampering their ability to service client accounts without opening up a branch in the States.

In the immediate aftermath of the September 11, 2001 terrorist attacks, correspondent banking relationships came under heightened congressional scrutiny. Shortly thereafter several US banks reported special restrictions including the monitoring of all transactions involving Antigua and Barbuda, and Belize.

A decade and a half later, Belize and Antigua, among other territories are again being perceived as high-risk jurisdictions. Consequently, tier one banks like J.P. Morgan Chase, Bank Of America  and Citigroup  have been severing correspondent-banking relationships with whole categories of customers in the region including  domestic banks, charities, diplomatic accounts, money services business (MSB)  and even a few central banks .

Such moves are consistent with a broader shift across the industry, in which international banks are indiscriminately restricting, terminating or denying services to supposedly risky customers from jurisdictions deemed to be high risk. This is especially applied in cases where the business returns do not justify the investment needed to manage the risk brought on by higher compliance cost, unprecedented penalties, vague legal standards and escalating litigation cost.  The most common cause of this phenomenon known as “de-risking” is the increasing cost of regulatory compliance, especially in relation to the Anti-Money Laundering and Counter Financing Terrorism (AML/CFT) regulation.

The wholesale exiting of these business lines is particularly acute in Belize and some Eastern Caribbean countries.

Consequently, some of the local banks are forced to try and establish relationships with the smaller tier-three banks. Even that is proving to be a huge challenge. In these economically disadvantaged countries, “de-risking” or more appropriately de-linking, is threatening international trade and could potentially lead to the collapse of some key growth industries like tourism. The issue is further exacerbated by the fact that oftentimes banks don’t fully disclose their reasons for terminating the relationships. If interim solutions to stave off this crisis are not found, this could potentially lead to economic devastation.

Global Center on Cooperative Security

An exploratory study – TRACEY DURNER AND LIAT SHETRET

http://www.globalcenter.org/wp-content/uploads/2015/11/rr-bank-de-risking-181115-en.pdf

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A Moment with the Registrar of Lands

By Andrew Enriquez

Op-Ed Contributor

The correspondent banking system in Latin America and the Caribbean has recently been facing increasing pressure, so much so that institutions like the World Bank and the Financial Action Task Force (FATF) have issued consultative reports on the brewing crisis in these emerging markets.

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Because much of the world’s cross-border capital flows are in US dollars, most Caribbean banks maintain what are called “correspondent accounts” in American banks.

This allows them to exchange U.S dollars and handle other financial transactions in the United States. Without the accounts these banks would have limited access to foreign financial markets, thus severely hampering their ability to service client accounts without opening up a branch in the States.

In the immediate aftermath of the September 11, 2001 terrorist attacks, correspondent banking relationships came under heightened congressional scrutiny. Shortly thereafter several US banks reported special restrictions including the monitoring of all transactions involving Antigua and Barbuda, and Belize.

A decade and a half later, Belize and Antigua, among other territories are again being perceived as high-risk jurisdictions. Consequently, tier one banks like J.P. Morgan Chase, Bank Of America  and Citigroup  have been severing correspondent-banking relationships with whole categories of customers in the region including  domestic banks, charities, diplomatic accounts, money services business (MSB)  and even a few central banks .

Such moves are consistent with a broader shift across the industry, in which international banks are indiscriminately restricting, terminating or denying services to supposedly risky customers from jurisdictions deemed to be high risk. This is especially applied in cases where the business returns do not justify the investment needed to manage the risk brought on by higher compliance cost, unprecedented penalties, vague legal standards and escalating litigation cost.  The most common cause of this phenomenon known as “de-risking” is the increasing cost of regulatory compliance, especially in relation to the Anti-Money Laundering and Counter Financing Terrorism (AML/CFT) regulation.

The wholesale exiting of these business lines is particularly acute in Belize and some Eastern Caribbean countries.

Consequently, some of the local banks are forced to try and establish relationships with the smaller tier-three banks. Even that is proving to be a huge challenge. In these economically disadvantaged countries, “de-risking” or more appropriately de-linking, is threatening international trade and could potentially lead to the collapse of some key growth industries like tourism. The issue is further exacerbated by the fact that oftentimes banks don’t fully disclose their reasons for terminating the relationships. If interim solutions to stave off this crisis are not found, this could potentially lead to economic devastation.

Global Center on Cooperative Security

An exploratory study – TRACEY DURNER AND LIAT SHETRET

http://www.globalcenter.org/wp-content/uploads/2015/11/rr-bank-de-risking-181115-en.pdf