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Martin Henry | CARICOM and correspondent banking

Published:Sunday | July 10, 2016 | 12:00 AM

After a 39-year withdrawal, we could well see a return of Barclays Bank to Jamaica's shores in short order. Barclay's pulled out in 1977, selling its operations to the brand new 'indigenous' National Commercial Bank, created for the purpose with government ownership. CARICOM leaders spent a good deal of their time at the 37th Heads of Government Conference in Georgetown, Guyana, last week trying to figure out how to respond to the risks of de-risking by correspondent banks. There are not many bright options.

A correspondent bank is a bank in one country that provides services on behalf of another financial institution in another country.

The USA PATRIOT Act defines correspondent banking very broadly as "any account established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institution".

So what a Jamaican bank without a licence to operate in another country like the United States does is to maintain a US-dollar account in an American bank. A customer can deposit Jamaican dollars with his bank here for a business transaction in the United States, the bank sells him US dollars at the day's exchange rate, but rather than handing him a big bundle of cash to be physically transported to the supplier, who doesn't want cash anyway, the Jamaican bank asks its correspondent bank in the United States to pay the bill there, usually by just transferring the amount into the supplier's account.

These arrangements are absolutely necessary for international trade. But they do allow dirty money to enter and flow through the global financial system and get laundered.

The interest of the PATRIOT Act, and similar legislation in the United States and other countries, in correspondent banking is at the heart of the matter. From way back in 2001, a US report on the role of correspondent banking in money laundering concluded that "US banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system and have, as a result, facilitated illicit enterprises, including drug trafficking and financial fraud".

Since then, a slew of laws and regulations has emerged in individual countries and multilaterally to clamp down on the flow of dirty money through financial services, generally, and, more specifically, through correspondent banking. To protect themselves from punitive penalties correspondent banks have responded with

'de-risking'. They simply unilaterally drop accounts that they deem too risky. No official assessments of risk, no discussion on risk reduction. The accounts are just closed. And location matters. The Caribbean and Latin America have been most affected.


9/11 Terrorist attacks


Following the 9/11 terrorist attacks, correspondent banking relationships came under heightened congressional scrutiny in the United States. Shortly thereafter, several US banks reported special restrictions, including the monitoring of all transactions involving the Caribbean territories of Antigua and Barbuda, and Belize as high-risk jurisdictions. Tier One banks like J.P. Morgan Chase, Bank of America and Citigroup have been severing correspondent-banking relationships with wide categories of customers in the Caribbean. These customers include domestic banks, charities, diplomatic accounts, money services business (MSB), and even some central banks .

These moves are consistent with a broader shift across the global financial system, in which international banks are indiscriminately restricting, terminating or denying services to supposedly risky customers from jurisdictions deemed to be high risk, especially 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.

Talking about penalties, last November, Barclays Bank was fined PS72 million by the UK's Financial Conduct Authority (FCA) for "failing to minimise the risk that it may be used to facilitate financial crime". The fine was imposed based on a PS1.88-billion pound transaction that the bank had arranged and executed in 2011 and 2012 for a number of ultra-high net worth clients. The clients involved were politically exposed persons (PEPs) and, therefore, should have been subject to enhanced levels of due diligence and monitoring by Barclays, the FCA said in its justification.

Barclays has been one of the most active banks in withdrawing correspondent-banking services from the Caribbean. The bank has also decided to close the accounts in the UK of people of several nationalities, including Jamaicans.

Both the IMF and the World Bank have taken up the

de-risking issue and its consequences for affected countries, their financial-services sector and their entire economies. The Caribbean Policy Research Institute (CaPRI) has also done its own study.

In February, CaPRI put out a report on 'The Correspondent Banking Problem: Impact of De-Banking Practices on Caribbean Economies'.

"The Caribbean region, the CaPRI report said, "is uniquely susceptible to the effects of de-risking, particularly given its dependence on trade, remittances and foreign direct investment.

"What emerges from the network of interests behind de-risking is an opaque, complex, overlapping, and sometimes inconsistent patchwork of regulations and requirements which makes solving the problem uniquely challenging," the CaPRI study said.




The think tank recommended that "all stakeholders should combine efforts and lobby for international regulators to clarify ambiguities in regulations [and] Caribbean heads of government should also advance these lobbying efforts at the international level as a developmental issue."

"Ultimately," CaPRI crawls to conclusion, "the recommendations outlined may help to address the underlying problem of inadequate information. A direct solution to the profitability concerns of banks may be difficult to identify. However, addressing the informational concerns, as well as some of the technical issues related to correspondent banking, may reduce compliance costs, reduce the fear of reputational loss and, ultimately, reduce the likelihood of CBRs negatively affecting banks' profits." It's "may" all the way.

"What is clear," the CaPRI study continues, "is that further discussions at the regional level are required." CARICOM heads did just that in Guyana last week.

"The Caribbean region needs to identify a leader to drive coordinated efforts to address this crisis, supported by adequate financial, human and technical resources," the study said. And what is this leader to do in the driving?

In a release, a few days ahead of the Heads of Government Meeting, the CARICOM Secretariat strongly declared that action to terminate correspondent-banking relationships is "an economic assault tantamount to an economic blockade against member states". A bold declaration strongly reminiscent of our Michael Manley and the Group of 77 developing countries shouting into the wind for a New International Economic Order in the 1970s.

The Heads of Government Meeting, the CARICOM Secretariat said, would "take stock of actions to date, and seek to advance the search for solutions to this matter". There are not many bright options.

Maintaining the stability of the shaky global financial system is the biggest geopolitical project of our times. A project in which the individual nation state, the United States of America excepted, does not matter. CARICOM territories, singly and en bloc, are two-bit players that do not even appear on the radar of the global financial system. The 37th Summit of Heads has decided to engage a US lobby group and to host a global conference to strengthen their advocacy against being de-banked. The region has no lobby power where money speaks, not UN and OAS votes. Effective lobbying has to have horses for horse trading. Any of the big correspondent banks has assets much greater than the combined GDPs of CARICOM states.

Some of the practical steps recommended by CaPRI for dealing with de-risking may yield some reprieve. Tightening up on domestic banking regulations and monitoring may impress some of the correspondent banks, if they are listening any at all. As may routing transactions through central banks, which will end up changing the functions and character of central banks with a whole set of other problems arising. But the Big Powers defence of the global financial system is never going to relax the ever-tightening bank regulatory framework, which is squeezing out an entire array of players, mostly smaller ones in smaller places. The correspondent banks, which are private enterprises bigger than most national governments, are not going to risk penalties and their profitability for what amounts to philanthropic action to help others.

Prime minister of Antigua and Barbuda, Gaston Browne, who is leading CARICOM's response, has labelled the situation an "existential threat". Ultimately, to deal with that "existential threat", Caribbean economies will have to accommodate onshore more of the transnational big banks, too big to fail, as their lifeline to the global financial system in a truly New International Order, but not the one Michael Manley dreamt about, and spoke so eloquently for without effect.

- Martin Henry is a university administrator. Email feedback to