De-risking is a process financial institutions terminating Correspondent bank relationships (CBR) with clients to mitigate risks related to Low profitability, AML or Terrorism Financing (TF) or Sanctions compliance. CBRs are vital for the well functioning of a country’s financial system. The problem of De-risking began in 2008 during the worldwide financial crisis and slowly it spread to many countries and now has become a major problem for small economies.
The most severe effect of de-risking includes check clearing and settlement, cash management services, international wire transfers, and foreign investment. The financial institutions, agencies and other entities affected by de-risking include money transfer operators and other remittance companies, small and medium domestic banks, small and medium exporters, retail customers, international business companies.
The CBI industry is also affected by de-risking causing significant delays in processing of applications. Currently the majority of banks in the Caribbean region are reduced to only one correspondent bank, and at an extremely high cost. The Caribbean is not alone, it is a worldwide problem.
The IMF 2016 study confirmed the Caribbean region as one of the region’s most affected and as of May 2016 it reported that at least 16 banks in the Caribbean region across five countries had lost all or some of their CBRs.
In a study by Caribbean development bank, the following were the main drivers for the decline in CBRs
- 95% – concerns about money laundering and terrorist financing risks 90% the imposition of international sanctions
- 85% – (a) changes in the overall risk appetite of the correspondent bank; and (b) lack of compliance with AML/CFT or sanctions regulations
- 80% – a) the lack of profitability of certain foreign CBR services and products; and (b) concerns about, or insufficient information about respondent banks’ customer due diligence procedures for AML/CFT or sanction purposes
- 75% (a) the presence of the respondent bank in a jurisdiction that was subject to counter- measures or identified as having strategic AML/CFT deficiencies by FATF or another international; and (b) respondent banks having customer base classified as “high risk” for AML/CFT
- 65% inability or expense/cost required to undertake customer due diligence on the respon- dent banks’ customers
- 45% changes to the legal, regulatory or supervisory requirements
- 40% imposition of domestic enforcement actions
- 35% the sovereign credit risk rating of the jurisdiction(s) of respondent banks
- 30% (a) impact of internationally agreed financial regulatory reforms (other than AML/CFT) and (b) structural changes to the correspondent bank and/or re-organisation of their business portfolio
- 25% compliance with pre-existing legal/supervisory/ regulatory requirements 20% industry consolidation within the jurisdiction
“The de-risking phenomenon in which large banks are engaging, to the detriment of small jurisdictions, cannot be ignored. There is an imminent threat to our banking system and to the financial architecture which supports our hotels, restaurants, shopping centers, tour operators and other businesses “, said Antigua PM Browne.
PM Browne also stated previously most of the caribbean region is reduced to one correspondent bank. This is a grave threat has been hanging over the Caribbean now for almost half a decade; and it shows no sign of abating, said PM Browne recently
The emergence of new Fintech technology can provide solutions to de-risking problems. A cryptographically secure blockchain payment network with public ledger to support cross-border transactions skipping correspondent banks. this will reduce costs making it cheaper and faster.
Using Bitcoin and Cryptocurrencies has been proposed as one solution for de-risking.
Bitcoin is a digital currency that exists on a public network and can be used as an alternative payment method to traditional wire transfers eliminating CBR banks as middlemen. Again Bitcoin is volatile and swings 15% every day. Withdrawing Bitcoin is also essential which banks may frown upon or freeze accounts. Coinbase currently supports withdrawing bitcoin 103 countries. This option is not available in Caribbean CBI countries (eg. Antigua, St Kitts, Grenada etc)
The Eastern Caribbean Central Bank pilot is already testing a pilot scheme of securely minted blockchain issued digital version of the EC dollar (DXCD)
The ECLAC agency UN report recommended the following short and medium term solutions to solve de-risking problems in the caribbean region
- Maintain close relationships with existing correspondent banks and respond effectively to requests for information.
- Financial institutions should join the SWIFT KYC Registry and other information sharing mechanisms to provide a compliance profile within the correspondent bank community.
- Enhance transparency via easy access to current and accurate information on regulatory frameworks, tax transparency and compliance with international standards to ensure information is available to those making decisions about involvement in a jurisdiction.
- Take pre-emptive actions against possible de-risking including by the preparation of de-risking preparedness and response plans.
- “Ramp up” advocacy efforts at all levels to sensitize relevant actors that de-risking is a material financial shock with the potential impact on GDP akin to that of a hurricane shock.
- Launch a transparency and media campaign to address the misperceptions and misreporting on the regulatory frameworks and tax transparency of countries potentially vulnerable to de- risking. This includes fact checking the information available on foreign official websites.
- Consolidate banks and banking systems in the Caribbean to improve the profitability of providing CBS in small countries.
- Examine alternative strategies including the use of digital currency technology and currency substitution e.g. dollarization.
- Strengthen AML-CFT regimes so that they are “water tight” as these requirements evolve as a necessary but not sufficient requirement for maintaining CBRs. Secure greater representation in standard setting fora.
- Collaborate on advocacy initiatives targeting the most senior policy and executive levels to facilitate steps toward a more reasoned approach to the withdrawal of CBS from a jurisdiction.
- Undertake analysis to estimate the actual contribution of offshore financial sectors and export free zones to the economy.
References
- https://www.cfatf-gafic.org/home/cfatf-news/449-de-risking
- http://documents.worldbank.org/curated/en/552411525105603327/pdf/125422-replacement.pdf
- https://www.worldbank.org/en/news/feature/2018/05/02/are-global-banks-cutting-off-customers-in-developing-and-emerging-economies
- https://www.caribank.org/sites/default/files/publication-resources/DiscussionPaper_Solutions_De-RiskingCBRs-5.16print.pdf
- https://antiguaobserver.com/wp-content/uploads/2018/06/PM-Browne-on-De-risking.pdf
- https://repositorio.cepal.org/bitstream/handle/11362/43310/1/S1701290_en.pdf
- https://www.thecitizenantiguabarbuda.com/uploads/4/2/8/5/42857417/the_citizen_oct_2018.pdf
