Caribbean countries were blindsided about two years ago, by a serious threat to their economies from the loss of correspondent banking relationships (CBRs), more colloquially termed de-risking.
They urged the Washington-based multinational institution, the International Monetary Fund (IMF), to help find a solution to the problem.
The IMF responded, bringing together global correspondent and regional respondent banks — to explore industry and regional solutions to address the problem. At the end of the latest consultative event, held in November in Jamaica, there was consensus among participants that the environment had improved. Indeed, available data point to a recovery in the value of cross-border transactions across the Caribbean since the second half of 2016.
Banks have been able to secure new CBRs. For example, while local banks in Belize had lost two-thirds of their CBRs in early 2016, every Belizean bank now has at least two CBRs and can process transactions in a timely manner.
Progress is attributed to three key initiatives mutually agreed to by the banks at the first IMF event held last February.
First, communication has greatly improved. When the problem of CBR withdrawal first arose, there was little communication between global and respondent banks, with the latter receiving letters indicating accounts were to be closed without any explanation. In contrast, correspondent banks are now providing written statements to respondents describing the risk management practices they expect from respondent banks, and respondent banks making a stronger effort to improve the quality and timeliness of information in response to requests from correspondents.
Second, correspondent banks are providing targeted training to help improve Caribbean banks’ capacity to manage risks. Third, in response to concerns by correspondent banks of low profitability of CBRs with Caribbean banks owing to the typically small volume of business, there has been meaningful progress in consolidation of transactions via a global intermediary bank that has onboarded more than 20 respondent banks in the region. What’s next?
Despite encouraging improvements, the situation is still fragile. Several banks are working with fewer CBRs and any further loss could be catastrophic to commerce; and costs of cross-border transactions have already increased substantially, bearing negatively on competitiveness, growth and financial inclusion. Moreover, new risks have appeared, such as U.S. sanctions on Venezuela which has prompted several correspondent banks to refuse handling of Petrocaribe-related transactions. Here are a few suggestions for additional measures:
▪ Increasing the number of banks offering CBRs in the relatively small Caribbean market will be a challenge. The possibility of establishing or acquiring a regional bank in the U.S. to serve as a correspondent bank deserves careful consideration.
▪ More progress is needed on the consolidation of banks. In the Eastern Caribbean, where 20 licensed banks serve a population of just 600,000, banks are typically too small to efficiently implement the tighter risk management protocols required by correspondent banks. Encouragingly, regional policymakers acknowledge the need for consolidation and a white paper is expected to be issued by the Eastern Caribbean Central Bank on this topic early next year.
▪ Durable solutions are needed for risky but, nevertheless, legitimate activities. Certain sectors or activities, such as the offshore financial sector, gaming and casinos, and money transfer companies, that often support the tourism sector and boost employment, social welfare, and financial inclusion, continue to see their access to correspondent banking restricted. What is the solution?
▪ The Caribbean must find efficient ways to reduce the use of cash in U.S. dollar transactions. Cash, while a convenient means of exchange, does not allow adequate tracking of the underlying transactions, something that has become crucial in today’s world where the fight against money laundering, terrorism financing, and tax evasion, is rightly prioritized. Financial technologies, such as mobile banking or blockchain, could provide helpful alternatives and should continue to be explored.
▪ Offshore centers can enhance their position by implementing robust anti-money laundering and tax transparency regimes, reconsidering high-risk business lines, and engaging in effective international cooperation.
The IMF will continue its ongoing engagement with members to promote needed action by various stakeholders. Additional effort is needed to ensure the effective implementation of the updated international standards on anti-money laundering and combatting the financing of terrorism. The IMF will continue to provide technical assistance and training in this area. Regulators in advanced countries and international standards setters should continue to clarify their regulatory expectations for the correspondent banks. In the Caribbean context, this has once again become important with respect to the banks’ uncertainty surrounding the appropriate reaction to the U.S. sanctions against Venezuela.
Trevor Alleyne and Krishna Srinivasan are the Assistant Director and Deputy Director in the International Monetary Fund’s Western Hemisphere Department.