The ‘De-Banking’ Element

By

Ricardo Swire

Financial institution gurus term the trend “de-risking” or “de-banking.” Over the past five years several major international banks discarded longstanding Caribbean relationships. Barbados, the Bahamas, Eastern Caribbean Currency Union (ECCU), Guyana, Haiti, Jamaica and Trinidad & Tobago all had Correspondent Bank Relationships (CBR) terminated. That US dollar transactions underpin commerce is a unanimous worldwide rule.

Globalization and a more able movement of goods around the world opened new avenues to money laundering and financial crimes. CBRs give Caribbean banks a dedicated internet portal to worldwide financial systems. Funds are transferred, currencies valued and exchanged. International financial institutions once revered Caribbean islands as the ideal “correspondent bank” partners. CBR involves a financial institution in one country, facilitating special services for a bank in another country.

International CBRs provide Caribbean respondent banks with admittance to a variety of “financial services and products” not directly available. On Thursday April 30th 2015 Bank of America (BOA) announced the end of its thirty-five year CBR with Belize Bank. Part of the domino effect from BOA or the US second largest bank’s failed risk audit. ScotiaBank Belize, Atlantic Bank, CIBC FirstCaribbean and Heritage remain on Belize Central Bank CBR list. The international extensions continue offering foreign exchange by wire transfers, bank drafts, letters of credit and bank guarantees on the island.

In February 2016 Moody’s Investor Service forecasted an eighty percent loss of Belize banking system’s CBR and credit card settlement services, by the middle of the year. In June 2016 Citibank severed its CBR connection with Belize. Simultaneously the International Monetary Fund (IMF) listed five Bahamian financial institutions with one or more detached CBR. The equivalent to nineteen percent of the Bahamas banking system’s total assets.

The IMF document further informed as of May 2016 sixteen banks, spanning five Caribbean islands, dropped all or some CBRs. Barbados lost eight relationships with American, Canadian and European banks. Belize maintained Canada’s Scotiabank and America’s Atlantic Bank. Scotiabank manages three hundred and fifty ATMs across the Caribbean. Such bilateral connection allows Belize’s banks to continuously finance trade, process credit card payments and legitimize American currency contracts.

Fidelity Group recently stopped its twenty year Western Union franchise agreement with Cayman Islands National Bank and JN Money Services Ltd (JNMS) in Jamaica. At the end of March 2016 BOA concluded its CSR affiliation with one Antiguan financial institution. Security concerns about foreign banks “nesting,” to gain American financial systems access, heightened regulatory vigilance. Patterns show some Caribbean corporate transactions, previously conducted in American currency, are now settled in Euros or Chinese Yuan.

“Nesting” occurs when a foreign bank opens an account at another offshore bank, which has a CBR with an American bank. Such dealings allow offshore or respondent banks to capitalize on CBR arrangements, without directly opening a US account. De-risking is a high level business decision that has serious consequences for Caribbean foreign trade, tourism and remittances. Statistics reflect Money or Value Transfer Services (MVTS) process over ninety percent of global remittances.

In 2014 the United Nations recorded that developing countries received more than US$400 billion in remittances from wayfarers. A year later other global statistics tabulated US$431.6 billion remitted by the same category. The Bahamas is a main source of transmittal to other Caribbean islands. On Hispaniola seventy-five percent of remittances, transferred from the Bahamas to Haiti, are paid and received within twenty-four hours.

Sophisticated transnational threats, morphed with new technologies, challenge individual Caribbean governing powers. Adherence to the Foreign Accounts Tax Compliance Act (FATCA), submission to the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) controls, systematically tighten a global regulatory noose. De-banking, as a method to counter CBRs, results from vast geographical distances between some cash originators and benefactors. A hindrance for AML due diligence.

Competencies of internal security and safety officials are routinely quizzed. The UN estimated between two and five percent of global Gross Domestic Product (GDP), or US$800 billion to US$2 trillion, is laundered worldwide every year. On one occasion Commerzbank AG, Germany’s second largest financial institution, was identified as part of a massive accounting fraud. The organizer a Japanese publicly traded medical device manufacturer.

The Japanese company used Commerzbank AG’s New York branch to hide operational losses worth millions of US dollars. The Federal Reserve Bank and New York State Department of Financial Services (DFS) faulted Commerzbank AG’s inadequate due diligence. Especially on business conducted by offshore banks, via Commerzbank New York’s CBRs. Multiple dealings were facilitated through Commerzbank AG’s New York accounts, ending at its Singapore branch.

In May 2016 BSI, one of Switzerland’s largest private banks, had its Singapore Central Bank license revoked. BSI specializes in wealth management. As of Wednesday December 31st 2014 BSI held an estimated US$95.9 billion of assets under management. The bank also declared a Swiss franc 2.2 million profit. In April 2015 Falcon Private Bank’s CBR was shuttered by Singapore’s Monetary Authority (MAS). Falcon Private Bank is another Switzerland based financial institution. Both dismantling were assisted by a 2013 US Department of Justice (DOJ)/Swiss government agreement.

The FATCA’s updated “2009 Guidance on A Risk-Based Approach for Money Services Businesses,” now corresponds with official 2012 recommendations. The de-banking element embraces AML and financial crimes interdiction. In August 2016 one “Emerging Terrorist Financing Risks” report exposed the Gaza Operations Manager of World Vision, a Christian charity organization. The senior employee arrested and charged for committing several financial crimes. He illegally channeled approximately US$9.9 million annually to Palestinian militant group Hamas.

Emerging Terrorist Financing Risks is the intergovernmental organization, tasked with Anti Money Laundering (AML) policy development and promotion. Another noteworthy financial crime uncovered during a southern Thailand national security operation. The mission identified a domestic Islamic school, doubling as a terrorists’ shelter. Royal Thai Police found illegal guns, categorized by ballistic verification, instrumental in staged terror attacks. Forged stationary and teaching supplies’ receipts were attached to the fraudsters’ government reimbursement solicitations.

Ricardo Swire

Ricardo Swire is the Principal Consultant at R-L-H Security Consultants & Business Support Services and writes on a number of important issues.