Commonwealth calls for collaboration on ‘detrimental’ declines in banking relationships

11 August 2016

Passions ran high as money transfer businesses and smaller financial institutions met yesterday at the Commonwealth Secretariat to address a “detrimental” decline in international banking for many businesses and individuals.

Passions ran high as money transfer businesses and smaller financial institutions met yesterday at the Commonwealth Secretariat to address a “detrimental” decline in international banking for many businesses and individuals.

The public meeting was convened to discuss the report, Disconnecting from Global Finance, which proposes solutions to the trend of financial institutions terminating or restricting so-called correspondent banking relationships (CBRs) with legitimate clients as a way of mitigating legal risks. This practice, which is a response in part to increased regulation, is known as ‘de-risking’.

“Major banks are now avoiding banking customers, or categories of customers, they deem low profit or high risk. The drivers are complex and varied but global regulations that are designed to stop money laundering and the financing of terrorism have contributed to this worrying phenomenon,” said Commonwealth Economic Policy expert Samantha Attridge, Head of Finance and Development Policy.

“Our report shows a worrying rise in CBR closures, doubling year-on-year since 2013. The issue is particularly affecting regions such as the Caribbean, where for example in Belize seven of Belize’s nine banks lost their CBRs, as well as the Central Bank losing one of its CBRs.

“In the Pacific this issue is also particularly acute given many countries depend on remittances. In Samoa, remittances are a lifeline to the population contributing just under 20 percent of GDP but are under threat as nine of Samoa’s 15 licensed money service businesses have had their bank accounts closed.”

De-risking is curtailing countries’ access to essential cross-border financial services such as trade finance and international money transfers, which are essential to many economies. The issue is particularly detrimental to vulnerable economies and small states in the Commonwealth, Ms Attridge said.

Participants at the public meeting on 10 August 2016 included the Executive Secretary of the Financial Action Task Force (FATF), the international anti-money laundering and counter financing terrorism standard setter, as well as senior representatives from the British Bankers’ Association, HSBC Holdings, Santander and the Wolfsberg Group.

Delegates applauded the Commonwealth for proposing measures including setting best practice standards for money service businesses to boost their legitimacy and reputation, and improving guidance and risk-tolerance standards for banks, that balance the need to prevent illegal activity with ensuring smaller institutions in developing countries are not excluded from the global financial system.

Commonwealth Deputy Secretary-General Deodat Maharaj, who chaired the public meeting, stressed the importance of protecting countries and communities from corruption and terrorism, but warned that “a one-size-fits-all” approach to regulation does not serve the needs and reality faced by Commonwealth developing countries.

Mr Maharaj said: “Eighteen of the 24 countries surveyed in our report feel that they’re actually compliant with the requirements, and yet they have been penalised, because the larger financial institutions are saying that it’s just not worth the risk.”

David Lewis, Executive Secretary of the Financial Action Task Force (FATF), said his organisation takes de-risking seriously. He highlighted threats such as underground financial channels, which can be used by criminals and terrorists, but said they are examining the issue to determine whether there was “overzealous application” of the regulations.

“Banks have told us that the cost of maintaining correspondent relationships can greatly outweigh the profits generated. A time-consuming case for the internal compliance team could cost more than several years’ worth of profit,” Mr Lewis added.

He said there are “some real challenges” facing financial intuitions in assessing risk on a case by case basis. “If you’re a bank with something like 50 million customers, telling them that they have to assess their risk on a case by case basis is easier said than done,” he said.

The Disconnecting from Global Finance report also proposes building capacity for financial regulators in developing countries and ensuring they are part of global conversations on the setting of standards and policies.

Paulette Simpson, National’s Executive Corporate Affairs and Public Policy of Jamaica National, one of Jamaica’s largest financial institutions, appealed for an acknowledgement by banks that people’s lives are hanging in the balance. Stressing the urgency of the situation for institutions like Jamaica National, which was given three months to terminate one 25-year correspondent banking relationship, she called for continued dialogue and immediate solutions. 

Mr Lewis stated there is a lot of work to do, and said FATF was already addressing the issue in a number of ways, including issuing guidance on applying risk-based approaches. He stressed the importance of next steps such as technical assistance and capacity building in countries.

He said: “Forums like this are helpful to us in understanding the dimensions of the challenges and discussing ways to address them. We’ll continue to work with the Commonwealth Secretariat, hopefully more closely than we have in recent years, and through the FATF network of regional bodies.”

Mr Maharaj also made a commitment to work closely with the regulator and banks, saying: “It’s not them against us, banks and regulators must be part of de-risking solutions. We need to work collectively as partners to address this issue because I think, if there is a divide as individual institutions, we are not going to make much progress.”

Featured image: (Panellists from left to right): Commonwealth Secretariat representatives - Robbie Hopper, Research Officer G20 and Global Finance System; Samantha Attridge, Adviser & Head, Finance and Development Policy; Reginald Darius, Director, Economic Policy Division and Commonwealth Deputy Secretary-General Deodat Maharaj; Natasha Small, Policy Director, Financial Crime, British Bankers Association (BBA); and David Lewis, Executive Secretary, Financial Action Task Force (FATF)