By: Staff Writer
September 16, 2022
The Prime Minister of Barbados lays case to US government on the importance of correspondent banking to the Caribbean and it becoming “financial pariahs,” as she fights for the “public good” and “human rights,” on financial services access.
Mia Mottley, KC, told the US House Committee on Financial Services that Caribbean economies cannot function on their own as it does not produce its own clothes, food or equipment. “When we were growing up, opening a bank account was a part of our rites of passage and becoming an adult. Today, it is now a gargantuan obstacle for us to have our people do so given that we spend weeks-and businesses come into our region, sometimes weeks and months- just to open a bank account as individuals to live and as companies to trade and do business.”
The loss of correspondent banking is a lingering challenge for the Caribbean as banks from larger, developed countries have decided to not do business with Caribbean banks any longer. Something Ms Mottley summarised as Caribbean banks being too small for the larger developed country banks to waste time and money doing business with.
She continued, “We are here because the listing process that has taken place, whether through the Financial Action Task Force or the OECD (Organisation for Economic Co-operation and Development), or further, as a result of actions taken for enhanced due diligence, by those who take the lessons from the FATF and the OECD.
“It means that those correspondent banks, over the course of the last 10 to 12 years have made a judgment that we are simply too small, as I’ve just told you, in order to get involved, because the enhanced due diligence means increased costs of regulation, increased cost of compliance and rather than do business with us, they say thank you, but no, thank you.”
However, Caribbean economies still need to be able to conduct trade with their partners, which is now becoming more difficult as the correspondent banking crisis continues to spiral out of control.
Without visibility into the governance of a respondent bank’s clients for whom it does business, correspondent banks are prone to abuse. The repercussions can be severe and include large regulatory or criminal, sanctions, reputational and financial damage are some of the other primary reasons why correspondent banking is becoming problematic. “Unless we are able to trade with the rest of the world, we are at risk of becoming financial pariahs,” Ms Mottley said
The International Monetary Fund said in a working paper that large global banks have recently come under increasing pressure to raise their capital, streamline their business models and to re-evaluate their risk exposures. As a result, these banks have been reducing activities in areas that they perceive as either less profitable or, more generally, detrimental to their risk tolerance — a process that is sometimes referred to as “de-risking.” The underlying drivers of this global “de-risking” trend are multi-dimensional. They include advanced country regulators’ attempts to strengthen prudential regulations and enhance economic and financial stability; their concerns about tax avoidance, money laundering and terrorist financing; sanctions; and business decisions by correspondent banks in a new macroeconomic environment characterized by low interest rates and increased costs of regulatory compliance.
Ms Mottley noted: “Almost every country in our region over the course of the last decade, with the exception of two or three have had a loss of more than 30 percent of the correspondent banking relationships.”
Most of these relationships started to fade away when banks have increased their “due diligence” procedures on Caribbean banks Ms Mottley pointed out, adding: “When that happens, they say but guess what? The enhanced due diligence is too costly for us and we need to go and find another bank. It doesn’t only happen with de risking of institutions, it also happens with categories of business.”