Stave off banking disaster
Jamaica, like other small developing states, must contend in an increasingly global and competitive environment in which the great and the powerful are often more preoccupied with maintaining their dominance than with extending a helping hand.
It is within this milieu that Jamaica and the Caribbean region find itself challenged by what is euphemistically referred to as the 'de-risking of foreign correspondent banking relationships'.
According to a November 2015 World Bank report, the Caribbean seems to be the region most adversely affected by de-risking.
By way of working definitions, a correspondent bank is one that provides banking services on behalf of another bank. A respondent bank is any bank for which another bank, the correspondent bank, maintains or provides a correspondent account or banking relationship.
A foreign correspondent banking (FCB) relationship refers to a banking relationship established on behalf of a foreign financial institution (FFI) to receive deposits, to make payments or other disbursements on behalf of the FFI. An example would be an account established with the Bank of America in Miami - the FCB - for a Jamaican bank or financial institution - the FFI - for the receipt of deposits or to make payments or disbursements at the direction of the Jamaican financial institution; or, to handle other transactions related to the lawful business of the Jamaican financial institution.
Generally speaking, foreign correspondent banking services include cash-management services, international funds transfers, cheque clearing, foreign-exchange services, overnight investment accounts, loans, and letters of credit.
It is, therefore, easy to understand that by establishing multiple correspondent banking accounts globally, an FFI such as a Caribbean regional bank can undertake international transactions for its customers and themselves in far-flung jurisdictions where they have no physical presence and where they have no regulatory licence to operate. This presents great benefits for the FFI and indeed for its customers, as it effectively expands its reach and deepens its menu of services that it can provide to its customers.
The most-sought-after correspondent banks are those found in the more advanced economies such as the US, UK, Canada, EU and regions such as Asia-Pacific. And herein lies the inherent vulnerability of the FCB; they are highly susceptible to money laundering and terrorist financing.
Since the FCB is at a disadvantage in not having full due diligence on the customers of the FFI, the FCB is not in a position to fully mitigate a wide range of legal and regulatory risks since it has diminished capacity to conduct enhanced due diligence.
To make matters worse, the large volumes that flow through FCB accounts pose a threat, and in some cases, an existential threat to the correspondent bank, as they have diminished capacity to identify unusual, suspicious and terrorist-financed transactions.
The FCB faces a wide range of additional risks such as sanctions and other risks that flow from the mere fact that some FFIs are not subject to similar regulatory guidance as obtains in the home jurisdiction of the FCB.
The impact of an FFI losing its foreign correspondent banking relationship is simple. The FFI is cut off from legitimately transacting in the jurisdiction of the correspondent. This creates a knock-on effect in that other would-be FCBs in other jurisdictions also shy away and the de-risked FFI now becomes a financial pariah.
From the standpoint of an economy such as the Jamaican economy, the denial of legitimate foreign correspondent banking to our local banks and financial institutions could produce devastating consequences, adversely impacting our international trade and earnings prospects, and interrupting remittance flows.
The truth is that, to a large extent, the FCBs have good reason for being risk averse. A casual review of publicly available information will reveal that in the US alone, over the past decade, the top US regulated banks together have incurred fines and penalties exceeding US$200 billion, not to mention the intrusive and costly consent orders imposed on them to carry out internal reforms.
So, what are some approaches that can be recommended to address the FCB de-risking conundrum being faced by Jamaica and the wider Caribbean?
1. Undertake a dispassionate and honest analysis of the FCB de-risking phenomena. Invest the resources to understand the problem and the nuances that are driving de-risking in the region.
2. Team up, regionally and diplomatically. While Jamaica must chart its own course, we will not be fully effective if we attempt to go it alone. If ever a more unified and effective CARICOM was needed, it is now. The goal should be threefold:
(i) to engage the key international policy-making actors such as the Financial Action Task Force, the Wolfsberg Group and the Egmont Group of Financial Intelligence Units and impress upon them the adverse impact that the interpretation of their policies are having on regional banking;
(ii) to urge the key governments in the advanced economies to have their stated financial regulatory policies aligned with their respective financial regulatory authorities. Case in point, the US Federal Reserve and the Office of the Comptroller of the Currency are the key regulators of the largest banks in the United States. They have in subtle and not so subtle ways stated that they have not directed US banks to de-risk from the FCB business. However, the US banks often claim that the message being sent to them by the imposition of mammoth regulatory fines and near-crippling sanctions and consent orders tells a different story.
3. We must improve our local regulatory framework, standards and market practices to meet internationally acceptable best practices. It is unhelpful if Caribbean states proceed with plans to sell citizenship to investors unless the most rigorous due-diligence and monitoring programmes are put in place.