Q: What is derisking?
A: Derisking is the termination of or the restriction of business relationships to avert risk related to money laundering and terrorist financing, according to a definition by the Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against these threats.
Q: Why should the Caribbean pay attention to derisking?
A: International financial institutions have been the subject of regulatory censures as a result of deficiencies identified within their frameworks for anti-money laundering (AML) and counter-terrorist financing (CFT). Penalties and fines have increased and, as a result, financial institutions have looked for ways to address these deficiencies. One of these ways is to terminate business relationships with certain businesses and regions considered to be high risk.
A 2015 World Bank study revealed that the Caribbean appeared to be the region most severely affected by this derisking strategy. International “correspondent” banks have either ceased to offer their services or have restricted the type of services offered to a number of domestic “respondent” banks in the region in the last four years. This has happened to at least eight financial institutions in Barbados, seven in Jamaica, five in Belize and others in Antigua and Barbuda, Montserrat, and other states, according to the Caribbean Community (CARICOM). While the derisking may not have resulted directly from AML/CFT issues, many large international banks consider their business with the region as either high risk or unprofitable.
Q: How much of an impact does derisking have on people and businesses in the Caribbean?
A: Globalization and technology allow countries to conduct business, despite the distances between them. International correspondent banks facilitate international transactions by providing access to the global payment and financial systems. These transactions—including remittances, credit card payments, foreign direct investments, and international trade in goods and services—contribute significantly to the Caribbean’s growth and development. Therefore, the loss of these relationships could threaten the region’s banking sector, as local respondent banks would no longer be able to conduct international transactions on behalf of their customers.
Furthermore, trade facilitation would be stymied, with the result that countries would be unable to import essential basic goods such as food and medicine, which could ultimately destabilize regional economies.
Derisking has already affected certain classes of business, customers, and jurisdictions throughout the Caribbean. One correspondent bank has ceased to conduct business with currency exchange businesses and businesses that handle money transfers. Some regional branches of international banks have also started derisking in the jurisdictions where they operate. These branches no longer offer services to credit unions or building associations, or third-party transactions on behalf of lawyers and other service providers.
Q: Do people in the Caribbean understand what’s happening?
A: Derisking has generated much discussion among international and regional financial institutions, including Caribbean central banks, the Financial Stability Board (FSB), World Bank, International Monetary Fund, as well as CARICOM, to reach an understanding of the complexity and multidimensional nature of derisking. The FSB has proposed the following four-point plan:
»a further examination of the issue;
»clarification of regulatory expectations;
»capacity building in jurisdictions where respondent banks are affected; and
»the strengthening of tools for correspondent banks to perform due-diligence checks.
Q: What are Caribbean governments doing about derisking?
A: CARICOM is fully committed to international financial reforms and has embraced the FSB’s four-point plan for addressing derisking. At its most recent meeting in July 2016, the CARICOM heads of government agreed on a new approach for addressing the problem: the CARICOM Committee of Finance Ministers proposed the establishment of a global forum in the Caribbean to bring the various stakeholders together, including correspondent banks, respondent banks, regulators, policymakers, and non-government organizations that have been adversely affected by derisking.
Furthermore, the committee has communicated with the U.S. Treasury Department and other U.S. government officials, seeking clarification about the issues giving rise to the heightened risk aversion by U.S. regulatory authorities towards Caribbean financial transactions. Also, banks, regulators, and others affected by derisking in the Caribbean have raised the issue at high-level forums, including the World Bank, International Monetary Fund, FSB, and meetings of CARICOM heads of government and central bank governors.
Q: What are Caribbean regulators doing about derisking?
A: Regional regulators have participated in high-level discussions with international financial institutions, as well as with international regulators. Caribbean regulators have also implemented strategies that are specific to their respective jurisdictions, such as allowing local banks that are cut off from international transactions to reroute transactions through a regional financial institution that still has access to correspondent banks.
A CARICOM central bank governors’ technical working group was established to document and analyze the impact of derisking strategies on regional financial systems. The group prepared a background paper on the issue of derisking, which was recently published by the Caribbean Centre for Money and Finance.
Q: Is it too late for the Caribbean?
A: While some regional banks have already received official notification of the imminent termination of their relationships with correspondent banks, most of the affected banks have already begun establishing new relationships with other international banks. However, more international banks may eventually choose to derisk rather than expose themselves to the possibility of being fined or otherwise penalized.
A version of this post appeared originally in the Caribbean DEVTrends blog.
From the Multilateral Investment Fund Trends blog