The risk of de-risking could leave the Caribbean locked out of global markets

Craig Mair, vice-president of commercial banking at Scotiabank Jamaica urges political leaders and regulators to do more to stem the fallout from the risk of local financial institutions losing their correspondent banking relationships with international money operations. 

Craig Mair, vice-president of commercial banking, Scotiabank Jamaica (Photo: YouTube)

Mair suggested that “our leaders across the Caribbean must do more to clarify ambiguities in regulation and articulate clear, specific guidelines governing how far our banking due diligence must go.” 

Research shows that international banks in the U.S., Europe and other major money centres around the globe are purging their correspondent banking relationships (CBRs) in order to de-risk. The result of de-risking is that banks and other financial institutions particularly from third world and developing nations are being shut out of the global financial system.

Many financial institutions around the world are purging corresponding banking relationships to de-risk. (Photo: Fico.com)

Mair shared with the JSE conference audience that, “As of May 2016, 16 banks in the Caribbean across five countries have lost all or some of their CBRs. In Barbados, eight financial institutions have had their CBRs severed; five of seven banks in Belize have had their CBRs terminated. In the Bahamas, two domestic and four international banks have also had their CBR brought to an end. In Haiti, all local banks have either seen their CBR severed or truncated and here in Jamaica, international correspondent banks have restricted or terminated their relationships with a number of our financial institutions.”  

” The termination or threat of termination of CBRs directly threaten our local economy.”

– Craig Mair

 One of the main reasons for de-risking is not risk per se, but the cost to comply with regulations that protect against risk.  Research funded by the Council of Europe suggests that international banks are responsible for due diligence of their clients and how well banks do due diligence of their own clients. The Council of Europe reports that this is a costly process. Compliance officers at international banks are required to have an in-depth knowledge of the legal and regulatory framework in their country and that knowledge should extend to jurisdictions in which their banks have CBRs.  

And when compliance requirements are not adhered to, it can be very costly as it pertains to fines paid by the international banks. 

According to Mair, “following the 9/11 terror attacks, where heighten concern for financing terrorism and money laundering arose, there has been several significant fines imposed on international financial institutions.  Most recently, Western Union agreed to pay over US$500 million to the US government to compensate victims of fraud, principally scammers.”

Western Union agreed to pay US$500 million to the US government to compensate fraud victims. (Photo: geomarketing.com)

 The same research papers that outline how costly it is for international banking partners to scrutinize the compliance of their Caribbean banking partners also note that stock exchanges are significant contributors in reducing the risk of poor financial practices.

 Research provided by the OCED noted that stock exchanges contribute to corporate governance practices through its listing and disclosure standards as well as monitoring compliance for listed companies.

Stock exchanges help with monitoring compliance of listed companies. (Photo: engadget.com)

Mair added that, “the termination or threat of termination of CBRs directly threaten our local economy.  So, what have we done about it?  Jamaica has sought to handle de-risking by pro-actively assuring our partners that our compliance frameworks are robust.  Jamaica is currently fully compliant with the core and key regulations of the international Financial Action Task Force and we have signed FACTA agreements with the US Government.  Through the Government of Jamaica and Central Bank, we have seen amendments in legislation to strengthen customer due diligence and heighten the use of risk-based processes to identify risk.” 

In recognising how delicate the balance is to keep the CBR as part of the financial framework in Jamaica, Mair suggests the following:

  1. Strengthen our framework on a uniform regulation system and data collection
  2. Regional leaders must intensify efforts to persuade international correspondent banking partners to articulate how far data collection on customers must go.
  3. Financial institutions need to step up the communication to customers of the importance of being compliant
  4. Ask the regulators to heighten their monitoring of the financial sector’s activities.