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As correspondent banks cut ties, black market seen as emerging risk

Published:Tuesday | October 13, 2015 | 10:20 AM
Tasha Manley, chief compliance officer at the Jamaica National Building Society.

The derisking actions by United States-based banks against money-service providers has led to heightened black market activity in The Cayman Islands as American currency, which is now relied on for transfers, becomes scarce, according to Tasha Manley, chief compliance officer of the Jamaica National Building Society.

The compliance officer said that financial and regulatory agencies need to become more rational in their response to risk in order to avoid such consequences, while addressing Monday's session of the two-day Anti-Money Laundering/Counter-Financing of Terrorism Conference in Kingston.

"While we understand that the measures being taken stem from the necessity to protect the stability of the international financial system and to cut off resources to violent extremist groups, it is our firm belief that these have to be implemented with care in order to not have undesirable outcomes," she told the conference.

In The Cayman Islands, she said, there is a now a shortage of foreign currency, "consequently leading to an active black market in US dollars".

Jamaica National and other businesses recently switched to US dollar-only transactions in The Caymans in order to resolve concerns of bankers in that territory. Even before Manley spoke about the issue on Monday, there had been complaints from migrant workers that the funds they normally sent back home were being disrupted by the shortage of US dollars in Cayman. (See related story on this page.)

As background, Manley said that in the last three months, some local financial institutions had received communication from their correspondent banks regarding the non-acceptance of foreign currency cash originating from money-service businesses.

"The situation was similar for MSBs in Cayman. There, Cayman National Bank made it clear that they would not accept MSBs as customers. What that has meant is that remittance companies have had to develop a solution to their banking problem by moving to operate exclusively in US currency and then shipping cash out of the country."

Other challenges now being experienced include the question of how money shipped into Jamaica would be handled by Customs, the compliance officer said.

Penalties and threats

Manley said the recent derisking trend, as well as FATCA requirements, are influencing decisions taken by financial institutions as they try to avoid "ostracism from the international financial community", even though for the past decade, financial institutions have abided by the requirements of the heightened AML/CFT regulatory rules.

"With this increased scrutiny come high penalties and threats of individual prosecutions for non-compliance. While some banking institutions have responded by strengthening oversight and communicating obligations to customers, some are opting to end relationships with clients deemed high risk, especially when the relationships pose more risk than potential returns," said the JN compliance officer.

"There also remains ambiguity around the criteria for derisking actions and a lack of uniformity in its implementation across institutions," she told the conference, while noting that the scale and impact of derisking needed to be analysed.

The Financial Action Task Force, the IMF, and the IDB have begun, Manley added, to address the issue in a way that reflects "an abandonment of boundedly rational behaviour in favour of a fully rational and well-thought-out approach to derisking."

The AML/CFT conference was co-hosted by the Jamaica Bankers Association and the Jamaica Institute of Financial Services.