A GUY'S VIEW

Much concern has been expressed across the Caribbean about the seemingly imminent loss of correspondent banking relationships with our North American counterparts. The escalation of this challenge from fear to reality has the potential to cut off the region from much of the rest of the financial world.

 

Most cross-border transactions are carried out using American dollars, even if the United States is not one of the transacting parties. This requires these transactions to pass through and be recorded in the United States. Caribbean business is conducted in this fashion and this makes it necessary for Caribbean banks to maintain correspondent arrangements, specifically, accounts, with American banks. In this way, they are able to exchange US dollars and conduct related business in the Unites States.

 

To provide a little context on how this is relevant to the man in the street, banks in the region depend on other banks abroad to facilitate the transfer of money both into the region and out of the region to the countries in which those second banks are located. For example, this arrangement makes it possible for Miss Jones’ son who lives in New York to go to his bank in that state and wire money to his mother here in Barbados. Or for Mr. Brown to go to his bank here in Bridgetown and send money to his daughter who is at school in Washington.

At another level, this same kind of arrangement is used to facilitate business transactions of a more significant money value. These banking relationships allow business persons here to pay for goods in Miami so that those goods can be made available to consumers here.

 

Importantly, as well, correspondent banking allows investors from Europe and North America to legitimately move money into Caribbean jurisdictions. All Caribbean states place a high level of importance on foreign direct investment. If these channels are closed, there could be dire consequences for the region.

 

A few reasons have been advanced for North American banks reviewing their correspondent relationships with the region. At the base of these reasons, is the challenge faced by financial institutions as they battle to prevent money laundering and terrorism financing activity from being conducted through their facilities. 

 

Financial institutions are set up to make money. Anti-money laundering and counter financing of terrorism requirements are not money generating activities, so, in some institutions, they are either ignored, to the extent that one may get away with it, or introduced grudgingly, hence, the bare minimum standards are observed. This approach always leaves the financial institution vulnerable to the wiles of clever money launderers, whose efforts at breaching the system are more genuine than those who implement the rules that are designed to stop them. 

Regulators and supervisors, recognising this practice, have moved to a position of imposing sanctions for lax policies. As a result, a number of banks have had to pay large fines when their systems were breached through their inadequate safety standards or simply when a review of their infrastructure disclosed weaknesses. This is neither good for business nor the bottom line.

 

These banks are blaming their correspondent partners for creating an additional level of risk for them. I am not aware of what percentage of their breaches which have been identified thus far may be attributable to events taking place in the Caribbean. Shortly after the September 11, 2001 attack on the World Trade Centre, two Caribbean jurisdictions faced restrictions, but the enhanced monitoring which followed revealed no dangers that have been made public. American banks’ problems with their regulators may tell no Commonwealth Caribbean story, but we may be low hanging fruit.

 

Good business acumen demands proactivity when the need arises. In light of this, one cannot fault North American bankers for identifying their areas of risk and mitigating them. It is wrong, however, for them to treat the Caribbean as a high risk region because of practices in two states rather than dealing with each country as an independent entity. 

Any useful risk assessment should be based on evidence. When discussing this issue with their North American counterparts, regional leaders should ask to see the evidence which informs these potentially damaging decisions. If the evidence does not support the drastic action contemplated, Caribbean leaders must open their minds to other possibilities. Could there be another issue which has not been vocalised? 

 

During every political season in North America, noises are made about billionaires banking their money overseas. There is also talk about trade deals and investments abroad which take away jobs from Americans and enable persons to pay no or not enough taxes in their country. Although the average American may not have a clue about the finer components of these arguments, skillful politicians are able to use these talking points to garner votes or take away votes from an opponent.

The Commonwealth Caribbean is too small to significantly impact the world economy, but some of our jurisdictions have become well known for attracting the money of rich foreigners. Also, some have made a living by allowing persons who take advantage of the services we provide to pay a reduced level of taxes, when compared to what they would normally have to pay at home. 

 

There is absolutely nothing wrong with this. In fact, it makes good sense for those who are in a position to benefit from these arrangements. However, some politicians focus on the direct tax loss and ignore the fact that the increased wealth of their citizens is spent on consumption at home, not in the Caribbean, thus generating economic activity there, and indirect taxation.

 

Talking about these issues have been unsuccessful in getting persons of means to act against their interest and move away from their Caribbean interests. If correspondent banking relationships are severed, this could bring external investment in the Caribbean to a screeching halt. This possibility should be a major focus for Caribbean Governments.

 

Regional leaders now have another question that they must ask. Are North American financial institutions de-risking, or are they de-funding or de-investing? It is one thing to pay attention to risk, but de-linking, as the American banks are doing, is an unprecedented approach.

 

If investment funds cannot be moved through financial institutions, business stops. The world cannot go back to moving money in suit cases or bags. In fact, efforts to rid the world of money as we know it are at an advanced stage. So what will we do without correspondent banking?