WP/01/2016

CCMF WORKING PAPER

De-Risking and its Impact:

The Caribbean Perspective

Prepared by the CARICOM Central Bank Governors

Technical Working Group on De-Risking
(Coordinator: Dr. Allan Wright, Central Bank of Barbados)

CCMF Working Papers describe research in progress by the author(s) and

are published to elicit comments and to encourage debate. The views
expressed in CCMF Working Papers are those of the author(s) and do not
necessarily represent the views of the CCMF.
 WP/01/2016

CCMF WORKING PAPER

NUMBER 1, 2016

DE-RISKING AND ITS IMPACT: THE CARIBBEAN PERSPECTIVE

PREPARED BY THE CARICOM CENTRAL BANK GOVERNORS TECHNICAL WORKING GROUP ON
DE-RISKING (COORDINATOR: DR. ALLAN WRIGHT, CENTRAL BANK OF BARBADOS)

JUNE 2016

Published by the
Caribbean Centre for Money and Finance
The University of the West Indies, St. Augustine,
Republic of Trinidad and Tobago
Phone: (868) 645-1174, Fax: (868) 645-6017
E-Mail: [email protected]
Website: www.ccmf-uwi.org

©Caribbean Centre for Money and Finance, 2016

All rights reserved. No part of this publication may be reproduced in any form without the permission in writing of
the publishers.

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Table of Contents

INTRODUCTION ..........................................................................................................................................................3
I. BACKGROUND AND GENERAL FINDINGS...............................................................................................4
II. CARIBBEAN-WIDE IMPACT...............................................................................................................................6
III. WHAT MUST BE DONE? .................................................................................................................................. 13
REFERENCES .............................................................................................................................................................. 15

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INTRODUCTION

The Caribbean Project on De-Risking involves the compilation of information to

document and analyze the impact of de-risking strategies on Caribbean financial systems,
and to prepare a position that will inform a Caribbean perspective on this matter. Our
efforts serve to complement reports by the World Bank (WB), International Monetary
Fund (IMF) and the Financial Stability Board (FSB). So far we have compiled surveyed
information from the jurisdictions of Barbados, Belize, the Cayman Islands, The Bahamas,
Turks and Caicos, the Eastern Caribbean Currency Union, Guyana, Haiti, Jamaica and
Trinidad and Tobago and complemented this information with insights gained from
discussions with local regulators, central bankers and sector specialists.

The goal of our research is to facilitate discussions among all stakeholders, including
global banks, their regulators and law enforcement representatives in globally systemic
countries. Our research recognizes that de-risking decisions are taken by private banks,
and that their decisions are based on a complex of factors, including the cost of
compliance with laws and regulations, and is an unintended consequence of decisions
taken by the official sector in globally systemic countries.

Our paper includes the impact of de-risking throughout the Caribbean; this is outlined in
section II, and preceding this is a background section on what exactly is correspondent
banking and de-risking, along with what are the primary reasons for international banks
applying a de-risking strategy within the Caribbean. Given the release of the Committee
on Payments and Market Infrastructures (CPMI) Consultative Report - Correspondent
Banking, October 2015 report, we briefly examine the technical measures proposed as
recommendations in section III and conclude by discussing what are the next steps and
the way forward.

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I. BACKGROUND AND GENERAL FINDINGS

“De-risking” is an umbrella term used to describe strategies adopted by global banks to

lower the overall risk exposure of their asset portfolio in response to tighter regulatory
standards imposed by national and international regulatory bodies with respect to
prudential risks, AML-CFT risks, tax information exchange risks, and risks of violating
sanctions, as well as to protect the value of their brand. These strategies include
termination of correspondent banking relationships (CBRs) with local banks (World Bank
Survey, 2015; Financial Action Task Force, 2015b), as well as strategic market re-
positioning, withdrawal from selected markets, closing the accounts of selected clients
and classes of clients, and relocation of business (in particular to the US) to take
advantage of regulatory arbitrage.

Our research shows that Caribbean banks and financial institutions have been compliant
with requisite legislation and practices and all Caribbean countries are fully committed
to the official international regulatory oversight processes of the Basel Committee, the
FATF/CFATF anti-money laundering peer reviews and the Global Forum on the
exchange of tax information. All CARICOM countries and British dependencies are also
committed to the international certification process of the Financial Sector Assessment
Program (FSAP) and the region has made commitments under the Foreign Account Tax
Compliance Act (FATCA).

The burden of compliance with these stipulations, as well as sanctions and FATCA, is
now very costly and, in the opinion of banks and many regulators, has gone well past the
point where it can detect behaviour which violates the rules. Furthermore, perfect
compliance is no guarantee of immunity from allegations that tarnish reputation, and is
potentially costly in terms of public relations or legal costs (JPMorgan Chase, 2014;
Standard Chartered, 2014; Swift, 2011). In these circumstances, our research shows that

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the offer to do business with certain classes of clients and economies below a certain size
carries unacceptably high risks of loss compared to the potential profits to be made.

Financial institutions, acting as correspondents, rely on the respondent bank to put

sufficiently robust AML/CFT/Know Your Customer (KYC) frameworks in place to
ensure that their customers are transacting legal business (Financial Action Task Force,
2014).

The peer review system of CFATF, to which all CARICOM and the British dependencies
subscribe, provides certification of countries’ commitment to achieve standards agreed
to internationally with respect to KYC and the effectiveness of the regulatory framework.
However, there is a lack of clarity about the implementation of FATF guidelines, in
particular regarding whether correspondent banks are required to know their customers’
customers (KYCC) (Financial Action Task Force, 2015). Also, there is no international
uniformity of the sanctions regime, and the designation of ‘terrorist’ nations,
organizations or supporters varies by country (Samuelson, 2015; Saperstein and Sant,
2015; Telavance, 2015).

For many international banks, the resulting uncertainty leads to a business decision to
exit countries and/or business lines where there is no potential for profits that could
match the potential fines for which they might be subject, even though the probability of
such fines is low because their compliance systems are robust (Financial Action Task
Force, 2015). To put the matter in strict business terms, the average unit compliance cost
is now so high that it is impractical to continue to pursue certain types of business
(Financial Crime Enforcement Network (FinCEN), 2015).

Based on the findings of our research, what is even more troubling is that, while all
regulatory practices fully comply with FATF and Global Forum standards, and are

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certified by peer reviews and FSAPs, international transactions are at risk for violating
national sanctions and prohibitions in the US and elsewhere.

It is noteworthy that Canadian banks are as stringent as American banks. This may be
due to the efforts of the Canadian regulator or the fact that Canadian banks are also
subject to the US regulators because of their presence in the US. The US tendency is to
levy the largest fines on non-American banks, such as Credit Suisse, HSBC and Standard
Chartered.

II. CARIBBEAN-WIDE IMPACT

Overall the de-risking strategy impact has affected certain classes of business, clientele
and jurisdictions throughout the Caribbean.

In the northern economies, Jamaica’s money service businesses (cambios) have been
affected as a leading local bank no longer accepts foreign instruments and remittances
from some money service businesses (MSBs), while The Bahamas, the Cayman Islands
and Turks and Caicos Islands have lost their cash intensive businesses (money transfers).

Belize’s largest local bank, after termination, has explored the possibility of having the
central bank assist with foreign payments. However the objection of ‘nesting’ was
recently cited by the correspondent bank, resulting in customer migration. Also, all seven
local banks in Haiti have experienced terminations or restrictions in service.

Within the Eastern Caribbean, including Barbados and the Eastern Caribbean Currency
Union (ECCU), Canadian banks have experienced the stringent regulatory controls of the
Canadian Office of Supervision of Financial Institutions (OSFI), requiring correspondent
banks to know their customers’ customers. The international business companies (IBCs)

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have experienced the most significant impact within the Eastern Caribbean, as
correspondent banks have closed entire business lines and terminated or placed onerous
restrictions on accounts of former prime rated customers. The loss of businesses has been
estimated in some instances in excess of several million US dollars.

The southern economies of Guyana and Trinidad and Tobago have also been impacted,
with the total value of foreign correspondent transactions falling by some 27 per cent in
Guyana, while in Trinidad several entities have been ‘unbanked ’ within the past 24
months.

Within Barbados, the Canadian banks are the most affected because of the stringency of
the regulations of the Canadian Office of Supervision of Financial Institutions (OSFI),
which requires Canadian banks opening accounts for Barbados IBCs to submit
information on the IBC’s customers. One bank has closed an entire line of business in
Barbados and the Caribbean and Latin America, which it previously had as a key plank
for its global expansion. So far eight domestic financial institutions have had their
accounts terminated primarily by Canadian and US correspondent banks, and a few
banks from the Netherlands, UK and Germany also.

Several respondent banks and IBCs have had to seek alternative CBRs in other
jurisdictions for some of their lost terminations; however, most of the terminations have
been completely irreplaceable.

IBCs have not only experienced terminations, but also in some cases, restrictions on
existing operations, including the holding for several additional days of wire transfer
deposits while further verification of the recipient details is concluded.

Other IBCs have been forced to wait several weeks, beyond the normal verification
period, before local banks are willing to open accounts, while others have had their

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request for opening accounts refused by local Canadian banks unless the IBC business
has an existing direct relationship or is known to the Canadian parent via the operation
of a subsidiary. One local bank stated that decisions to open IBC client accounts are now
directly dependent on Toronto, and no time frame could be generally given for the
opening of accounts. A leading sector specialist commented that the inability of IBCs to
open foreign denominated accounts and transact business, along with account
terminations, are the greatest threat to the sector’s long term viability at this time. With
these developing trends, it has become very difficult to establish new business within the
sector.

For Belize, the Central Bank of Belize has reported that correspondent banking
relationships (CBRs) have been terminated by their US correspondents in several of the
seven banks operating in the country, including the largest bank, Belize Bank. In the case
of the Belize Bank, the Central Bank has offered limited assistance for the close-out of
customer accounts, with these transactions being properly reported and disclosed. At the
time of this report, Belize Bank is still unable to service its remaining customers, who now
complain directly to the US Embassy about the inability to access their funds.

Results from a Central Bank of The Bahamas 2015 survey confirmed that the risk appetite
for correspondent banking appears to have fallen. The survey data found that at least two
domestic commercial banks and four international banks have been directly impacted by
the loss of a correspondent banking relationship, with changes in the overall risk appetite
of international financial institutions and concerns about AML/CTF risks seemingly
accounting for the actions. Several financial institutions confirmed that they have been
subject to heightened due diligence by their correspondent bank, while still maintaining
their relationships. All institutions were able to find replacement CBRs; however, the
level of difficulty or ease was commensurate with the nature of their operations and
onboarding requirements.

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Fidelity Bank (Bahamas) Limited and Fidelity Bank & Trust International in The
Bahamas have closed their 20-year Western Union franchise in an attempt to “de-risk”
their business, citing unacceptably high risks and declining compensating fees. Western
Union’s operations (at its branches and sub-agent locations) closed in July 2015, with
similar occurrences in the Turks and Caicos Islands.

In the Cayman Islands, there is a similar risk-reward evaluation being undertaken as US

banks have withdrawn from funds sourced from cash intensive business, such as money
vehicle transfer services (MVTS). Specific cases include that of Fidelity Bank that ceased
facilitating Western Union’s operations at its branches and sub-agent locations. In light
of reported unacceptably high risks and declining compensating fees, Western Union
offices closed in July 2015. GraceKennedy Money Services has commenced operations,
including the repatriation of banknotes with the support of their banker.

Correspondent relationships in the Eastern Caribbean Currency Union (ECCU) exist

primarily with international banks in the United States, Canada, United Kingdom and
Europe. Recent relinquishments and restrictions have been felt primarily within the IBC
sector from US and Canadian banks. One correspondent bank has terminated all accounts
involved with downstream correspondent or third party intermediary activity, as well as
closed the accounts of several legal professionals and local charities, all former prime-
rated clientele whose business they would normally seek to retain. Another bank has
closed its entire operation in the Eastern Caribbean, a former focal point for its regional
and global expansion. A local bank was recently told, after attempting to establish a CBR
in Canada for its offshore subsidiary, that currently Canadian banks were not
establishing any new banking relationships in the Caribbean and that local banks should
not do business with money service businesses (MSBs) or cambios (foreign exchange
trading companies).

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In January 2016, the Bank of America (BOA) terminated its CBR with a commercial bank
within the ECCU, citing it was no longer aligned with its current business strategy. BOA
was its only correspondent bank and the commercial bank is now endeavouring to
establish a new CBR with another institution.

Several local banks had to reroute some of their lost relationships with other jurisdictions
and banks, usually at a higher expediency cost and with greater stringency. For local
banks who have maintained relationships, there has been an onerous restriction within
the past 12–24 months, as correspondent banks have increased their standard charges 10-
fold in some cases and only recently another international bank imposed a fee for any
balances above US$6M. Local banks have experienced refusal to clear foreign
denominated cheques, while others have been told that there will be no foreign cheque
clearing for at least the next six to twelve months. There have also been increasingly
stringent regulatory requirements placed on local banks, especially for the opening of
new accounts.

Guyana has also been affected by de-risking. With close to half of Guyana’s
correspondent banking providers, approximately 44 per cent, originating from the
Caribbean (Trinidad & Tobago, Barbados and Jamaica), Guyana has experienced the least
terminations. Two local banks’ corresponding relationships have been terminated or
restricted over the past 24 months. One bank experienced terminations as well as
restrictions of 50 per cent of its correspondent relationships, moving from eight accounts
in 2012 to four accounts at the end of 2014. The number of transactions conducted via the
bank’s correspondent declined by almost 52 per cent, while the total value of such
transactions fell by 27 per cent.

In Jamaica, there have been terminations and/or restrictions imposed by the banks of the
USA, Canada, and the UK. One such example is of a leading US bank, which, in addition
to terminating a relationship with one deposit-taking institution, issued termination

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notices to two others, and has imposed restrictions on four other financial service
licensees, citing strategic misalignment with regard to their risk appetite. The main
drivers for these terminations have been concerns on a high risk customer base
(politically exposed persons, cash intensive firms and money service businesses). Money
service businesses (cambio services) accounted for 46 per cent of all sales in the financial
intermediation market and generated FX inflows of US$470M in Jamaica in 2014. The
regulated non-bank foreign exchange dealers (cambios) which provided an additional
layer of competition in the FX market, have lost some cash accounts with local banks.
(Given the concern of the potential of de-risking expanding to larger groups, Bank of
Jamaica has implemented a six-month moratorium on the surrender requirements of
cambios to the central bank.)

In 2012, a Canadian and a US correspondent bank each gave Jamaican banks notice that
with immediate effect, transactions for the benefit of money service businesses
(MSBs/cambios) are not permitted through their accounts. Between 2014 and 2016 de-
risking trends continued to rise as correspondent banks have voiced concerns about cash
activity associated with the MSBs. In an effort to maintain correspondent accounts, local
banks have been restricting their cash acceptance from some cambios. These
developments have occurred even though Jamaica’s Mutual Evaluation Reports with the
FATF have been positive with regards to MSBs and have never been flagged as an
AML/CFT concern nor identified as having significant weakness to supervisory or
regulatory frameworks. As the principal provider of foreign currency bank note services,
of considerable concern was Bank of America’s notice that it will stop accepting cash
emanating from cambio operations, even though Jamaica’s cambio industry adheres to
the same AML/CFT compliance requirements as the banking sector. Thus far the impact
of de-risking has been largely contained in Jamaica. De-banked institutions have
identified replacement correspondent banking relationships or have been utilizing the
banking relationships of other local banks. Some small volume cambios are now unable

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to deposit foreign currency cash with local commercial banks but have been able to sell
excess foreign bank notes to larger cambios and to the private sector.

Also in Jamaica, Barclays Bank indicated that effective March 2016, it will be terminating
its international payment services with a leading building society in Jamaica, as it no
longer sees a strategic alignment of the bank’s remittance services with its long term goal.

In Trinidad, banks have reported an attempt to avoid risks associated with certain
categories of clients. The Central Bank of Trinidad and Tobago (CBTT) issued a statement
(July 2015) indicating that private members clubs (PMCs) have effectively become
“unbanked” as a large number of their accounts have been terminated over the last 24
months. Some banks have deployed a risk based approach to PMCs and have restricted
international wire transfers to high risk countries. Private members’ clubs account for
over 60 registered entities and provide recreational gaming in casinos, video games and
entertainment through bars and pubs. At the same period, there has also been increased
pressure on MVTS in the conducting of FX transactions and they have been forced to seek
alternative banking relationships. The Government of the Republic of Trinidad and
Tobago, in keeping with AML/CFT requirements, has been working to establish a
framework to address the regulatory and social concerns arising from the proliferation of
PMCs.

Overall, the impact throughout the CARICOM economies and British dependencies has
been extensive, affecting all classes of clients, businesses and jurisdictions. The full extent
of the loss in revenue is yet to be estimated; in addition, there is an incalculable amount
of new business that has been turned away and diverted to industrial countries where
the information and compliance practices are less stringent.

The Committee on Payments and Market Infrastructures (CPMI, 2015) has recommended
several technical measures that are aimed at alleviating some concerns and cost-related

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issues to CBRs and de-risking. In the following section, we critically examine this report
and provide a general feedback on the efficacy of the measures.

III. WHAT MUST BE DONE?

Global regulators and international standard setters (FATF, CPMI, OSFI, UST, etc.) need
to address the complexity of regulations and risk exposures which are contributing to
biases in the incentive structure against certain classes of business. In addition, there are
the costs of ensuring that international transactions do not violate national sanctions and
prohibitions in the USA and elsewhere.

Global regulators need to take specific steps toward a long-term solution to this urgent
policy challenge.

A roundtable meeting hosted by the Central Bank of Barbados, and coordinated by the
FSB, WB and IMF in December 2015, provided an enriched understanding of the
complexity and multi-dimensional nature of the problem of de-risking. The forum
clarified that while the Caribbean community is fully committed to the international
processes of financial reforms, there are circumstances that carry the potential to threaten
the stability of the financial system. It was also suggested that further scenario analysis
could be undertaken on the economic impact of de-risking.

The meeting discussed ways in which further understanding of the major causes of the
changes in CBRs; and the measures that could be taken by regional and international
parties. The roundtable discussion welcomed the FSB’s four-point plan of assessing and
addressing the reduction in CBRs (FSB, 2015). The four-point plan includes a further
examination of the issue, clarification of regulatory expectations, capacity-building in

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jurisdictions where respondent banks are affected, and the strengthening of tools for
correspondent banks to perform due diligence checks.

For respondent banks which have been affected by the termination of CBRs with
international banks, some pro-active response measures may include rerouting
transactions through a regional institution, diversifying currency transactions or utilizing
the Federal Reserve to act as a public service, as they are reported to have offered.

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REFERENCES

Caribbean Financial Action Task Force

https://www.cfatf-gafic.org/index.php/documents/cfatf-follow-up-reports

Cayman Islands Monetary Authority, 2014. “Cayman Islands Remittance Report by

Number of Transactions, by Country & Value.”

Central Bank of Belize, “Foreign Correspondent Banking Relationships.” Accessed

August 4, 2015.
http://belizeinvest.net/2015/04/29/foreign-correspondent-banking-relationships/

Central Bank of Trinidad & Tobago, Committee on Payments and Market Infrastructures.
2015 ”Consultative Report- Correspondent Banking”

FATF. 2014. “Guidance for a Risk-based Approach: The Banking Sector.”

http://www.fatf-gafi.org/media/fatf/documents/reports/Risk-Based-Approach-
Banking-Sector.pdf

FATF. 2014a. “De-Risking: Global Impact and Unintended Consequences for Exclusion
and Stability.” Discussion paper #1.

FATF. 2015. “FATF Clarifies Risk-based Approach: Case by Case, not Wholesale De-
risking.” Accessed October 5, 2015
http://www.fatf-gafi.org/publications/fatfgeneral/documents/rba-and-de-
risking.html

FATF. 2015b. “Drivers for "De-risking" Go beyond Anti-money Laundering/Terrorist

Financing.” Accessed September 23, 2015.
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http://www.fatf-gafi.org/documents/news/derisking-goes-beyond-amlcft.html

Financial Stability Board. 2015. “FSB Chair Co-authors Article on Correspondent Banking
and Financial Inclusion.” Accessed August 10, 2015.
http://www.financialstabilityboard.org/2015/06/fsb-chair-co-authors-article-on-
correspondent-banking-and-financial-inclusion/

Financial Stability Board. ” Report to the G20 on Actions Taken to Assess and Address
the Decline in Correspondent Banking” Accessed January 19, 2016
http://www.fsb.org/wp-content/uploads/Correspondent-banking-report-to-G20-
Summit.pdf

Financial Crime Enforcement Network. U.S. Department of the Treasury “Enforcement

Actions.” Accessed September 2, 2015.
http://www.fincen.gov/news_room/ea/

International Monetary Fund. Caribbean Corner. IMF Newsletter for the Caribbean
Region, September 2014. Issue 4.

JPMorgan Chase. 2014. Annual Report 2014. New York: JPMorgan Chase.

Samuelson, Robert J. 2015. “Great Recession Left Companies, Consumers in a State of

Anxiety.” Accessed August 17, 2015.
http://www.descretnews.com

Saperstein, Lanier and Geoffrey Sant. 2015. “Account Closed: How Bank De-risking
Hurts Legitimate Customers.” Accessed September 2, 2015.
http://www.wsj.com/articles/account-closed-how-bank-de-risking-hurts-legitimate-
customers-1439419093

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Standard Chartered. 2014. Annual Report, London: Standard Chartered.

SWIFT. 2011. “Correspondent Banking 3.0,” White Paper.

http://www.swift.com/resources/documents/SWIFT_white_paper_correspondent_ba
nking.pdf

Telavance. 2015. “Monitoring Correspondent Banking Activity- Risk, Challenges, and

Typologies.” Accessed September 2, 2015.
http://www.telavance.com/advantage/previous-issues/current-issue/monitoring-
correspondent-banking-activity-risks-challenges-and-typologies/

World Bank. 2015. “Withdrawal From Correspondent Banking - Where Why and What
About It -And Report on the G20 Survey on De-risking Activity in the Remittance
Market.”
http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/11/20/090
224b0831efdaa/1_0/Rendered/PDF/Fact0finding0s00de0risking0surveys.pdf

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