Many small island states in the Caribbean have been stigmatized as major tax havens and money laundering centres. But, the small size of these jurisdictions and the relatively minuscule volume of transactions, disprove this fallacious classification.
Antigua and Barbuda, for example, has under five billion in total onshore and offshore banking assets, with less than a few dozen remittances daily.
It is instructive that there is a presumption of money laundering involving Citizenship by Investment flows to the Caribbean, while the very investors can move funds seamlessly, to invest in the Investment Residency programmes of developed states without any such characterization.
Interestingly, it is in these very developed countries from which de-risking is being pursued, that 95 per cent of global illicit flows take place.
The focus on microstates in the Caribbean while side-stepping the major money laundering centers in developed countries, is counter-productive. The problem of money laundering and counter-terrorism financing must be tackled in the countries where the problem is greatest and most prevalent.
The creation of the perception that the Caribbean region is high risk and susceptible to financial crimes and tax evasion, has driven up the costs to both the domestic and international banks of providing the most basic banking services.
In addition, the time to complete transactions, which were once measured in hours or days, now takes weeks and months to be processed, because of new and cumbersome due diligence requirements.
As a growing number of small banks no longer have CBRs in a global money centre, they are forced to establish relationships with smaller banks in Central America, Asia, Africa and the Middle East. Therefore, the transfer process is lengthened and cumbersome.
This lengthened process has proved to be expensive and prone to errors, resulting in information delivery gaps and, sometimes, non-acceptance of payments. This is confirmed by a recent study conducted by the International Finance Corporation of the World Bank Group.
Recently, some Caribbean banks have noted that certain global banks have decided not to accept transfers that include an intermediary bank. If this practice continues and widens to include other correspondent banks, many local Caribbean banks would be put out of business, thereby de-banking the region and increasing its vulnerability to foreign-owned banks.
Thus, de-risking has resulted not only in the closure of banks but also in loss of new business relationships, because of the inability of existing banks to establish correspondent banking relations. De-risking undermines competitiveness and is an impediment to trade, investment, growth and development.
The overall impact of de-risking has been revenue losses for all Caribbean governments, thereby undermining their ability to meet their financial obligations. It has also caused job losses and an increase in unemployment and poverty; increased transaction costs; reduced competitiveness in the global community; and a decline in the ease of doing business.
The opportunity costs of loss of business from de-risking, though unquantified, are significant.
It should be noted that de-risking is a policy tool to sanction rogue or uncooperative states. De-risking should never be utilized as a tool to punish innocent people in cooperative and compliant countries in the Caribbean.
In any event, de-risking in its present construct is not an effective long-term solution to Anti-Money Laundering /Combating the Financing of Terrorism (AML/CFT) and tax transparency.
In its present form, the ultimate result of de-risking will be the marginalization of states, especially Small Island Developing States in the Caribbean, undermining their capacities to attain the UN-mandated Sustainable Development Goals (SDG’s).
To whom much is given much is expected; therefore, the multi-national correspondent banks that control the international payment systems, have an obligation to provide corresponding banking services to all.
This is so, since small vulnerable states in the Caribbean, do not have access to any alternative international trade settlement hard currency and correspondent banking architecture, to settle their trade and investment transactions.
They are at the mercy of these multi-National correspondent banks that are centralized in developed countries and on whom they are completely reliant for correspondent banking relations.
For instance, the IFC has observed that, “De-banking of money service businesses can impact global remittances, a vital source of finance for poorer countries that totals some $440 billion a year—over three times the amount of foreign aid disbursed”.
Clearly, there is no justice in the de-banking and barring of these countries from the international payment system. It undermines their ability to meet their development agenda without cause and injures them without any mechanism for remedy.
The withdrawal of CBRs as part of a de-risking strategy is counterproductive to fighting the scourge of AML/CFT and other financial crimes. An effective strategy requires the commitment, inclusion and participation of all.
De-banking the majority of innocent masses in Caribbean countries, and elsewhere, to fight the risks of AML/CFT violations could never be a sustainable solution. Also, de-banking countries and regions based on profitability conflicts with the overriding social and moral responsibility of correspondent banks to provide all countries and regions with the mechanism to settle their trade transactions.
The exclusion of countries and regions from the international payment system will ultimately undermine the fight against illicit financial flows, by driving these payments underground, where they are likely to go undetected. Additionally, alternative informal payment mechanisms will be developed and utilized to cover these illicit transactions without traceability.
The effective management of financial crime risks, including AML/CFT, requires the inclusion and commitment of all stakeholders, in all countries and regions, if not the world is put at risk. Consequently, governments, regulators and the private sectors.
Money laundering, the financing of terrorism and other financial crimes are global problems that demand a global response. Such a global response will not be achieved by a handful of countries, however powerful they may be, unilaterally creating rules that they impose on others.
A better, more sustainable response is one that takes account of the views and circumstances of all and, in that context, develops a universally acceptable strategy for addressing the problem.
Caribbean countries have not been averse to participation in wider efforts to tackle the problems of financial crime. All of them have participated in the Global Forum on Transparency and Exchange of Information for Tax Purposes of the Organization for Economic Co-operation and Development
(OECD) and, through the Caribbean Financial Action Task Force (CFATF) in the implementation of the rules, euphemistically described as ‘recommendations’, of the FATF.
They have each done so at great cost to themselves, including financing the legislative and enforcement machinery and through the loss of revenues and employment from businesses that have been sacrificed, and the higher costs to businesses they have managed to retain.
Indeed, as of February 2018, only one Caribbean jurisdiction has been listed by the FATF among the “Jurisdictions with strategic deficiencies”, and even in respect of this jurisdiction, it has been acknowledged that it “has taken steps towards improving its AML/CFT regime, including the approval of the Counter-Terrorism Strategy by the National Security Council, the issuance of a Case Prioritization Policy, and advancing legislation in a number of areas”.
With regard to the OECD’s ratings for cooperation with the international standard on exchange of information on request (the EOIR standard), again only one Caribbean country has been found to be non-compliant. Most of the Caribbean countries are “largely compliant” (the same category as the U.S., the U.K. and Canada) or “provisionally largely compliant”.
Costs of compliance, that the Caribbean incurs, are not limited to implementation of OECD and FATF requirements. Additional costs have been incurred to comply with the U.S. imposed Foreign
Account Tax Compliance Act (FATCA) that compel our jurisdictions to report to the U.S. Internal Revenue Service (IRS) on U.S. related assets in our financial institutions, as well as with the European Union’s Base Erosion and Profit Shifting (BEPS) framework.
It should be noted that scarce resources have been expended on compliance with all of these organizations and governments. To provide those resources, Caribbean jurisdictions have had to forego spending on health, education and much needed development infrastructure.
Therefore, there can be no question about the Caribbean’s co-operation in the effort to address financial crime in a meaningful way.
De-risking and the loss of CBR’s adversely impacts the Caribbean’s trading partners and the companies that export goods and services to the region.
For instance, the U.S. enjoys a balance of trade surplus with the Caribbean region that is annually more than six billion dollars. That sum of money represents both revenues and employment to the U.S. When Caribbean countries cannot pay for the goods and services they purchase from the U.S., jobs are lost, and income is sacrificed.
Especially affected will be the travel agents, tour operators, airlines and cruise ships that send passengers from the U.S. and elsewhere into Caribbean ports. They too need correspondent banking relationships to pay for the holidays and business trips of their passengers to a region that ranks very high on their tourism map.
Similarly, affected will be the agriculture and manufacturing communities from whom the Caribbean imports a significant quantity of food, construction material, and other goods and services.
If the region cannot pay for the goods and services that it imports and cannot be paid for the goods and services it exports, including tourism receipts, it will be constrained to seek markets elsewhere simply to survive.
This trade diversion will not be a swift process and, in any event, will be expensive since direct transportation links do not exist even with neighbouring countries in Central and South America.
Consequently, in the transition period, Caribbean economies will deteriorate, and their vulnerability will increase.
By the same token, revenues and employment in existing trading partners, particularly the U.S., the U.K. and Canada, will also decline.
The Way Forward: 10 Ideas
The sustainable solution to de-risking is multi-faceted and requires a cooperative approach by all stakeholders in developed and developing countries alike.
Below, are 10 ideas concerning the elements of what would be an acceptable and fair global approach to de-risking that does not simply target Caribbean and other developing countries but also encompasses OECD and European Union member states.
- The international community should recognize the importance of balancing the appropriate steps to prevent illicit actors access to financial services with ensuring continued or expanded access to finance for companies, small businesses, households and individuals.
- There should be cooperation among governments, regulators, the private sectors, respondent and correspondent banks to strengthen the AML/CFT, tax transparency framework with harmonized rules in pursuit of their common interests. This alignment of interests in managing and curbing international financial crime risks should negate the need for any hostility or harmful knee-jerk de-risking decisions.
- Policy implementation timelines set by the FATF and the OECD Global Forum should be based on national capacity and not the one-size-fits-all implementation policy that is widely practiced.
- De-risking should be restricted to rogue, uncooperative institutions and countries, and not jurisdictions that cooperate with the OECD Global Forum and the FATF.
Entire regions should not be broad-brushed as being “highrisk”.Jurisdictions should be assessed according to their own merits.
- Correspondent Banks should focus on managing financial crime risks instead of risk avoidance. They too should build their capacity to manage the risks of correspondent banking instead of de-banking countries.
- Where appropriate, correspondent banks should give respondent banks sufficient time to remedy any deficiency in their AML/CFT and tax transparency framework
- There should be improved dialogue between respondent and corresponding banks to promote cooperation and to build capacity.
- Within developing countries, respondent banks should improve their risk management processes including strong KYCC.
- In the particular case of the U.S., there must be continuous efforts to alert the agencies of the Government and the U.S. Congress of the harmful effects of its annual INCSR which, year after year, wrongfully list Caribbean countries as ‘major money laundering jurisdictions’, thereby
encouraging the withdrawal of CBR’s from Caribbean banks.
- Technology should be introduced and utilized by correspondent and respondent banks to include: Fintech, block chain technology, for KYCC, to identify suspicious transactions and to ensure full traceability.
On the final point of technology utilization, it is worth noting the observation of The Bipartisan Policy Center on the implementation of block chain:
“Block chain could give banks and regulators access to far more detailed transactional and cross-institutional data than is currently available, allowing them to peer deeper into financial networks to identify bad actors. Furthermore, the distributed nature of blockchain technology makes it difficult for criminals to falsify transactional data to cover their tracks. All of this could take place in real-time, giving law enforcement the precious time they need to identify terrorist plots before they happen. However, this
additional speed would need to be balanced against privacy concerns that could arise depending on how such a system were implemented.”
Caribbean jurisdictions have to be realistic and practical in their own response to the severe problems caused by de-risking and the loss of correspondent banking relations. Part of such realism and practicality is recognition that the 10 ideas presented in this paper may not be taken up by global stakeholders.
What then are Caribbean jurisdictions to do? Set-out below are some of the options that might be considered:
- Changing source markets for imported goods and services;
- Trade bartering with a wider group of countries than those that are now the Region’s major trading partners;
- Holding central bank reserves in a balanced portfolio of currencies, instead of concentrating reserves in any single currency;
- Development of alternative payment systems through the use of digital currency, including crypto currencies; and
- Establishing a Caribbean owned correspondent bank in major capitals to settle transactions emanating from the region.
Representatives of Governments of the OECD countries must cast aside the policy briefs seen through an AML/ CTF lens only. They have to see the problem of de-risking more broadly and realistically.
That means not limiting the discussion only to AML/CTF considerations but widening the scope of responses to recognize that: (a) no country should be excluded from the global finance and trading system; and (b) success in reducing poverty and curbing economic inequality requires international co-operation, including correspondent banking relations.
The ideas set-out for tackling de-risking and its consequences in the section above, titled, The Way Forward: 10 Ideas, are the least of what should be done by global stakeholders.
Such global stakeholders would be regulatory bodies and global banks in the U.S. and UK, the FATF, the OECD Global Forum, correspondent banks and regulators in the Caribbean, the Financial Stability Board, the IMF, the World Bank and the Inter-American Development Bank, the Caribbean Development Bank, representatives of Central Banks and Finance Ministries, and private sector companies.
The IMF has the convening power to gather such stakeholders to address the consequences of de-risking in a comprehensive manner. We urge that the IMF convene such a gathering, sooner rather than later.
Until an appropriate meeting is organized to discuss the de-risking issue and to devise a fair, equitable and global approach to resolving its harmful consequences, it will continuously be studied with little practical action being taken.
That would be nothing short of global neglect – a neglect that the Caribbean cannot afford, and that will ultimately have undesirable international consequences.
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