De-risking – which involves the cancellation of correspondent relationships by large international banks – has slowed on a global level. However, the threat remains in the Latin America and Caribbean region. Lucien Chauvin reports.

Luigi Wewege

Luigi Wewege

Luigi Wewege is breathing a little easier today after a major scare at his bank earlier this year. 

Mr Wewege, senior vice-president at Belize’s Caye International Bank, watched as one by one, the bank’s correspondent banking relationships disappeared as its partners cut ties. UK-based Crown Agents Bank ended its correspondent relationship in November 2018, for example, while Moneycorp, a UK foreign exchange company, did the same in January 2019. 

“We were hit hard. We lost our card programme; we lost our clearance service; we literally lost every service at one point – but we have been able to pull ourselves back from the abyss and we are stable. The worst is over,” Mr Wewege tells The Banker

The bank, located on Ambergris Caye, has forged two new correspondent agreements in 2019, with TS Bank of Iowa of the US, and Bancredito Puerto Rico. The agreements have enabled Caye International Bank to remain viable and it is now the only Belize bank that is internationally focused; the other two, Choice Bank and Atlantic International Bank, went into liquidation in 2018. “We were able to use personal contacts to establish new correspondent relationships. I think that banks that have personal relationships are those that are going to survive,” says Mr Wewege. 

Caye International Bank beat the odds, but the loss of correspondent banking relationships – a trend widely known as de-risking – remains a major threat to the financial sector in a number of countries in Latin America and the Caribbean. 

aribbean epicentre 

In a 2017 policy paper, the International Monetary Fund (IMF) identified the Caribbean as the region most severely affected by de-risking, given the number of big banks that have pulled out of the area. Caribbean countries, however, are not the only ones to suffer. 

De-risking has been around for years. It has grown more acute throughout the past decade with policy changes in the US and internationally increased regulations on anti-money laundering and counter-terrorism financing (ALM/CTF). Conditions have become more complicated for small and large countries alike as regulations have increased in scope and penalties have grown, despite efforts to meet requirements. 

Regional countries belong to the Financial Action Task Force (FATF) associate member the Caribbean FATF, which reviews money-laundering regulations and provides guidance for complying with AML/CTF standards. But despite their efforts and commitment, they continue to see local banks lose correspondent banking relationships.

Countries that are considered to have problems with corruption and transnational crimes, such as drug trafficking, are the ones to suffer the most. Big banks fear getting caught up in potential illicit transactions and facing fines that could be larger than revenue generated from a specific jurisdiction. Yet so far, smaller countries without major crime problems appear to have paid the highest price. 

Large international banks, in many cases, have simply decided that the risk-reward relationship is skewed more towards risk and have walked away. This has disrupted not only how banks operate, but created problems throughout economies, affecting remittances, trade financing and tourism, which is the economic life blood of most of the region’s small countries. Caribbean countries that count gambling as part of their tourism offering have come under intense scrutiny, in particular, as gambling is viewed as a prime destination for illegally obtained money. 

Perceptions of risk

Roberto de Michele, a specialist focusing on correspondent banking relations at the Inter-American Development Bank, says the impact on Latin America and the Caribbean is serious and has multiple causes. He adds that some large international banks have withdrawn for market and commercial reasons, while others have stepped back because of reputational considerations and the way countries have implemented financial regulations. 

“Countries and regions with weaker financial regulations, not just in quality but also enforcement, have a harder time. If a jurisdiction has a financial regulator seen as barely covering basic responsibilities, it may be perceived as a riskier jurisdiction,” says Mr de Michele. 

For Manuel Orozco, director of the migration, remittance and development programme at the Inter-American Dialogue think-tank, a large part of the problem comes down to perception and subjectivity. He says it is easy for a large bank to simply leave a country because it perceives a risk or considers a sector, such as remittance companies, risky despite evidence to the contrary. 

“The real story is the lack of correlation between actual risk and perceived risk for making decisions,” says Mr Orozco. “It is discretionary. When a bank asks why a correspondent relationship has ended, they are told because of third-party liability. No actual reason is given.”

Benefiting from scale

While some large countries, such as Mexico, have been affected by de-risking, the impact comes down to economies of scale. Mexico is a huge economy, housing many banks and an increasingly large number of non-banking financial institutions. According to research by Mr Orozco, the number of non-banking financial institutions in Mexico increased from 25,000 in 2000 to 240,000 in 2017. 

If several banks or non-banking institutions, such as remittance companies, in Mexico were to close correspondent relationships it would hurt the companies and their customers, but would neither cripple the economy nor prevent importers and exporters from having access to foreign currency. However, for countries such as Belize, with less than 500,000 people and only one internationally focused bank, the loss of a correspondent relationship is much more dramatic. The IMF reported a year ago that between 2013 and 2016, Belize had lost 83% of its correspondent banking relationships (the Central Bank of Belize has lost three of its five correspondent relationships).  

Mr Wewege says that some countries in the Caribbean are hanging by a thread, with only one or two banks that still have correspondent relationships and that if they go, their economies will take a big hit. “This will only stop in some places when they are completely isolated from the financial system,” he says. He adds that banks losing correspondent agreements are reduced to using payment companies or a card system, “putting money on a card so people have access to their funds. They lose what it means to be a bank.”   

Even some larger Caribbean islands with diversified economies, such as Jamaica, have felt the pinch. Though Jamaican banks are generally strong, authorities say few international banks are providing correspondent relationships. The key player in the country today is Bank of America, which would create a huge dent if it were to withdraw. The Jamaican government in July signed the FX Global Code, a set of 55 principles for best practice. Jamaica hopes it will ease threats, even if not great right now, of de-risking. 

Brian Wynter, who stepped down as Jamaica’s central bank governor in mid-August, said in a statement that the global code indicates “commitment to ethics, governance, execution, information sharing, risk management and compliance”.

Greater selectivity  

De-risking has come in waves and at present the conditions appear calm after several years in which banks quit countries in quick succession. “I think we have seen the toughest part of de-risking happen already and from now on we are likely going to see a more selective de-risking process, either by sector or specific countries,” says Mr de Michele. 

While not as dramatic as losing a correspondent relationship, bank costs for maintaining them have risen as AML/CTF regulations have become stricter and more protocols added. “The fees that existed
for correspondent banking six or seven years ago are now much higher. Increased compliance results in higher costs,” says Mr de Michele.

Mr Orozco at the Inter-American Dialogue fears that regulations and decisions by banks to cut ties rather than work in smaller economies might increase country risk if countries become isolated from the global financial system. He says transparency, which AML/CTF is supposed to improve, could actually suffer if countries lose correspondent banking relationships and have to rely on cash-based operations. “Just imagine what would happen if a country were forced to fly in plane loads of dollars because it no longer had correspondent banking relationships,” he adds. 

Bankers and researchers say that efforts by tax agencies around the world to increase transparency and establish cross-border links could leads banks to take a different approach to correspondent banking relationships. 

While de-risking has not been an issue in Ecuador and its dollarised economy, Santiago Caviedes, director of investment bank GBS Finance, says greater international connections are making asset laundering globally more difficult each year. 

“Tax authorities internationally are collaborating more, which is making it harder for people trying to hide assets. Tax havens will continue to exist, but international regulations are increasing the capacity for monitoring,” he says. 


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