Bankers and government officials are worried that hasty decisions in the war against money laundering could threaten the financial services industry in small jurisdictions like Barbados. Charles Piggot reports.

Barbadian banks have clearly got the message on money laundering controls, right down to the smallest branch office. Since tougher controls came into force last year under the threat of international sanctions against unco-operative offshore financial centres, customers must present full identification and all cash transactions involving more than B$10,000 ($5025) must be treated as potentially suspicious.

The controls are designed to stop drug and other criminal money entering the international financial system. A less positive result has been an increase in bureaucracy, resulting in longer transaction times and queues.

Resentment builds

While at ground level branch staff are rigorously enforcing the new code, in the higher echelons of Barbados’s financial community there is much resentment at the way smaller jurisdictions have been singled out by the international community. Local bankers speculate that the cost of tougher controls will be slower financial sector growth.

The Financial Stability Forum (launched by the G7 in 1998), Financial Action Task Force (FATF – launched by the G7 in 1999) and the Organisation for Economic Co-operation and Development (OECD) have all issued reports that accuse international offshore banking centres of inadequate supervision, lax money laundering controls and inadequate co-operation in sharing information. Barbados’s most senior political figures portray these initiatives as tantamount to economic blackmail. Offshore centres have also come under increased scrutiny after the terrorist attacks of September 11 and the enactment of the Patriot Act in the US one month after the attacks.

Senior figures, including the central bank governor of Barbados, argue that the anti-money laundering initiatives by the FATF, the OECD and the European Union (EU) have been indiscriminate in an “attack” on the legitimate business conducted in smaller financial centres.

Speaking at a recent conference on Barbados’s financial sector, Dr Marion Williams, governor of the central bank of Barbados, said: “Barbados still suffers from ‘the policemen mentality’ that pervades some international entities that judge the traffic cop on a quiet beat by the number of people caught exceeding the speed limit. That policeman is accused of not doing his duty. Barbados is such a beat.”

She went on: “The recent conclusion of a Financial Sector Assessment Programme by the International Monetary Fund (IMF) showed satisfaction, for the most part, with our regulatory and supervisory systems. However, in one area, which I shall not mention, it was felt that we should have more ‘cops’ watching the traffic as it proceeded quietly and without incident along that particular financial highway.”

Frustration voiced

Other panelists at the conference were less guarded in voicing their frustration. One said: “The attack by left-wing bureaucrats at the EU, in the form of greater rules and regulations for countries like Barbados, should be interpreted in the context of the EU’s ambition to become the top economy in 2010. Fortunately, this initiative has been killed off by Washington, or at least set back several years.”

Many island economies, like Barbados, have been trying to cultivate the international financial services sector as a source of employment and foreign exchange earnings. Barbados’s financial sector has grown steadily in the past decade. The IMF estimates that the offshore sector employs about 3000 people and generates $110m each year in foreign exchange revenue. Offshore companies account for about 40% of the government’s corporate tax revenue.

Central bank figures show that the island now has 20 domestic financial institutions (including seven banks) with total assets of $4.1bn and 56 international institutions with assets of $33.5bn.

Economic impact

Bankers and government officials are concerned about the negative economic impact of the international war on money laundering. Although the number of international business registrations is still rising, a recent survey by Ernst & Young showed business confidence in the offshore sector has fallen in the past year. Despite the fact that Barbados was removed from the OECD’s list of harmful tax havens last year and that recent evaluations by the Caribbean Financial Action Task Force (CFATF) and the IMF have both been broadly positive, only 38% of financial institutions polled described themselves as confident about financial sector development, compared with 59% in 2001.

Dr Williams said: “Our experiences during the past few years have taught us that it will be no easy task to preserve the [international financial services] sector and we can expect that there will be additional challenges ahead. There is evidence that the policy of ‘do as I say and not as I do’ may be becoming too obvious to be ignored, following the recent outcry after the EU directive, which gave countries in the EU choices with respect to information-sharing after having taken a hard line and offering no choices in the approach to dealing with small developing countries.”

Confidence boost

The enactment of a new International Financial Services Act, effective from June of last year, will help to boost international confidence in the country’s financial probity. Last year, the government amended the country’s Money Laundering (Prevention and Control) Act. It has also created the Anti-Money Laundering Control Authority to monitor and police bank compliance with the Act.

According to Cleviston Haynes, director of bank supervision at the Central Bank of Barbados: “The new International Financial Services Act 2002 provides for the onsite inspection of offshore as well as local banks. It is also designed to facilitate information sharing with overseas regulators.”

The Act also raised capital requirements and increased the due diligence procedures for vetting bank directors.

Nanet Moe, compliance officer at Barbados National Bank, says that increased due diligence procedures have had the greatest effect at the branch level. “Following the creation of the new anti-money laundering authority and the revised International Financial Services Act, we have been gathering much more information at the branch level about our customers and their transactions. Banks now have to take more time with each customer transaction and this has increased the workload at the branch level, making it more difficult for branch staff.”

Scrutiny rises

International transactions, like domestic transactions, have become subject to greater scrutiny, particularly as a result of the US Patriot Act signed by President George Bush just 45 days after the terrorist attacks on New York.

Speaking at the Barbados financial services conference, Lawrence Uhlick, executive director of the New York-based Institute of International Bankers, said: “In the very limited time available to pass this comprehensive legislation, members of Congress and their staff simply did not have an opportunity to consider fully some of the provisions both in terms of the substance and the precise language. The Act was passed with minimal hearings and debate, and the political climate made it nearly impossible for affected financial institutions to seek changes in the legislation.”

Higher standards

Foreign and domestic banks that do business in international markets have had to pay the cost of much higher standards of due diligence. Gerald Manwah, director of compliance at Citigroup in New York, said at the conference that the Patriot Act had increased the due diligence process and caused some of the largest banks to jettison some of their correspondent bank accounts.

“As a result of the Patriot Act, [US banks] must ascertain the ownership of each foreign bank whose shares are not publicly traded. They also have to ascertain whether foreign banks provide correspondent accounts to other foreign banks and, if so, identify those foreign banks, including the related due diligence information,” he said.

Bankers in Barbados hope their voices will be heard in the corridors of power before more hasty decisions are made.


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