Caribbean & Central America - October 2022

The damage that financial ‘de-risking’, most particularly through the reduction of correspondent banking arrangements, has done to the small nations of the Caribbean, and what may be done to reverse this damage, was the focus of a hearing of US House of Representatives Committee on Financial Services on 14 September.

The Financial Action Task Force (FATF), an intergovernmental organisation founded in 1989 by the G7 to develop policies to combat money laundering (and, since 2001, terrorism financing), defines de-risking as “situations where financial institutions terminate or limit business relationships with entire countries or classes of customers in order to avoid, rather than manage, risks in line with the FATF’s risk-based approach (RBA)”.

The problem is now widely recognised, but the solutions remain elusive. They range from a more imaginative approach to risk assessment to the greater adoption of technology and innovation.

The first witness, the chief executive of the Caribbean Association of Banks (CAB), Wendy Delmar, started her testimony by pointing out that the CAB has been sounding the alarm over the consequences of de-risking since at least 2015, and she quoted from a 2017 CAB research paper which argued that “the scaling up of efforts related to anti-money laundering and combating the financing of terrorism ultimately resulted in a deteriorated cost-benefit analysis position for the business of Caribbean banks and other financial institutions wherein the provision of correspondent banking services was no longer deemed profitable”.

She then added: “Yet, regrettably, and quite candidly, the current arrangements through which the international financial system has chosen to relate to Caribbean banks and other financial institutions has rendered the region disproportionately dependent on correspondent banking services. Consequently, the adverse effects of de-risking are exacerbated.”

Among the consequences highlighted by Delmar are the increased operational costs of banking in the region, “driven almost entirely by compliance related initiatives”, a reduced appetite for foreign direct investment, the limiting of participation in international trade, and (counter-productively) driving individuals to seek alternatives to mainstream banking “thereby limiting the ability of banks and regulators to track remittances through legitimate sources, adding yet another layer of complexity to the challenges already identified”.

The most-powerful testimony to the committee was provided by Prime Minister Mia Mottley of Barbados, who has been making an increasingly influential name for herself on the international stage. For Mottley, the fear of losing correspondent relationships “has created a highly risk-averse culture” a consequence of which has been “a decline in financial inclusion for the first time in our history”.

She points out in her testimony that 40 countries have lost 40% of their correspondent banking relationships, and 20 countries, many in the Caribbean, have lost over 50%. Some, like Belize, warns Mottley, “are down to just a few connections”.

Mottley, like Delmar, fears that this dynamic “will force legitimate transactions underground” and/or “towards the digital-yuan issued by the People’s Bank of China as a cheaper, less restrictive alternative system of international payments”.

For Mottley, much of the blame lies with the FATF which has listed many jurisdictions as countries requiring increased monitoring against money laundering without due cause, and this additional monitoring has disproportionately increased costs in small jurisdictions.

Fines, she says, are often related to the size of the institution deemed to have transgressed not to the profits from the jurisdiction in which it is said to have transgressed, thus “further worsening the attractiveness of small jurisdictions”.

In her testimony, Mottley’s sense of injustice was palpable. She pointed out that the “vast majority of laundering of sanctioned Russian money was found in the United Kingdom, United States, Switzerland, and Luxembourg”, yet these “larger money centres that money launderers prefer to lose themselves in are never on the list” while countries that are listed, such as Barbados, Burkina Faso, Jamaica, Mali, Senegal, and South Sudan “pose no risk to the integrity of the global financial system”.

Caribbean jurisdictions that have been placed on the FATF’s list for enhanced monitoring (the grey list) include The Bahamas, Barbados, Cayman Islands, Jamaica, and Trinidad and Tobago. The problem has been compounded by the European Union adding The Bahamas, Jamaica, and Trinidad and Tobago to its blacklist in May 2020.

The starting point for finding a solution, urges Mottley, is for the US Treasury to pay more attention to the principle of risk sensitivity “and not to participate in listings of countries where the lists pose a material risk to a country’s development and where there is no evidence that the country poses a risk to the global financial system”.

Mottley also turned her fire on the US State Department’s International Narcotics Control Strategy Report (INCSR) saying that it needed to be amended to include a section that shows improvements to the listed nations’ anti-money laundering regimes. And, at a minimum, “jurisdictions should be allowed to respond to the draft report so they can identify any factual inaccuracies prior to publication”.

With regard to actions that can be taken by Caribbean nations themselves, Mottley argues that government and central banks need to explore mechanisms to pool international payments to make them more profitable for correspondent banks. An alternative would be to support the establishment of a US-regulated institution “that specialises in correspondent banking for the Caribbean or small states more generally in the expectation that this expertise and narrow focus will lead to a better assessment of risk”.

• Persistence of de-risking

In her testimony, Mottley highlights that the persistence of de-risking has been attributed to several factors. These include:

1.  Low volumes of transactions and small profit margins
2.  Increased compliance costs associated with regulatory requirements
3. Concerns about the quality of AML management by respondent banks
4. Perceived risk about the jurisdiction
5. Crack down on tax havens and offshore centres
6. Changes in banks’ financial risk appetite; and
7. Concerns about reputational risk 

•  Caribbean food security continues to be key focus

The question of food security in the Caribbean continues to attract considerable attention. At the second regional Agri-Investment Forum in Trinidad & Tobago from 19-22 August, one of the private-sector delegates, Gervase Warner, the chief executive officer of Massy Holdings, warned: “Food security has clearly become front and centre, a critical issue for our own survival. It is very clear to us we are not going to get help from our colonisers of the past, we are not going to get help from big developing countries…This is our problem for us to address.” However, Trinidad’s Prime Minister Keith Rowley, along with others, bemoaned the apparent lack of commitment to the cause by the local private sector.

   In his remarks to the forum, Rowley urged the private sector “not to be resistant to these developments and these initiatives but to get on board and be the distributor of the local produce rather than the commission agent of imported produce”. And he called on Caricom leaders to “keep trying to become self-sufficient in food if we are to protect ourselves from the promise of the harsher months and years ahead.”

   The case for urgent action was most strenuously outlined by the secretary-general of Caricom, Carla Barnett. She prefaced her remarks by talking about the “grim reality” of food insecurity and reiterating the target of reducing the region’s food import bill by 25% by 2025. She said this was to be achieved through “a strong focus on innovation and technology transfer”. She added: “This encompasses water management, market information, application of technological solutions, climate resilient planting materials, sustainable land and soil management, as well as the preservation of the Region’s bio-diversity. The aim is to increase agri-food production in ways that will also ensure the sustainable development of the Region’s agri-food system.”

   Barnett also pointed out that this all needs to be achieved at a time when “higher temperatures, pests, reductions in the agricultural labour force, and more extreme events are reducing yields in the Caribbean and causing more crop losses”.

   On a more positive note, Barnett reported the approval of four “game-changing policy actions and strategies”:

• “CARICOM Trade Policy for Animals and Animal Products which will create a harmonized procedure for all Member States within the Region;
   
  • The Regional Agricultural Heath and Food Safety Policy;
     
  • The Alternate Sanitary and Phytosanitary (SPS) Dispute Resolution Mechanism; and
     
  • 19 Special Guidelines for the Trade in Animal and Plant Commodities.
• “Second, we have strengthened partnerships with and among our stakeholders, including the CARICOM Private Sector Organization (CPSO), the Food and Agriculture Organization (FAO), the Inter-American Institute for Cooperation on Agriculture (IICA) and several financial institutions.
   
• “Third, we moved closer to the free movement of agricultural workers to support this agricultural transformation when the Heads of Government agreed to a definition of agricultural workers at the July Meeting of the Conference.
   
• “Fourth, our work, through the Ministerial Task force and in collaboration with the CARICOM Private Sector Organisation, has led to agreement on the priority commodities for regional investment and further development.”