Managing the Fallout from Loss of Correspondent Banking Relations

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Jamaican commercial banks and other financial institutions continue to feel the effects when International Banks terminate their Correspondent Banking Relations (CBR). Termination of CBRs comes against the backdrop of the stringent requirements on the banking sector to comply with Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT) regulatory measures imposed. Rather than risk paying the onerous fines and penalties for failure to comply with such measures, the large International Banks opt to de-risk.

De-risking measures involve either complete termination of corresponding banking services to local financial institutions or restricting the types of services they provide to the local banking sector.

What is Correspondent Banking Relations?

A correspondent bank is one that provides services on behalf of another, equal or unequal, financial institution. Corresponding banking services include facilitating wire transfers, accepting deposits, conducting business transactions, and gathering documents on behalf of local financial institutions. Domestic banks use these correspondent banking services for transactions that originate or end in other countries. As such, the correspondent bank acts as the local bank’s agent abroad. This way, local banks do not have to open branches abroad to access the foreign financial markets and service the accounts of their overseas clients. In a nutshell, local banks that do business with overseas clients need a correspondent bank to keep such services going.

Local Banks and Financial Institutions Lose CBRs

In his presentation to the IMF/World Bank Annual Meeting of Small States in 2016, former Minister of Finance and the Public Service, Hon. Audley Shaw stated that over the past five years, international correspondent banks restricted or terminated their relationships with some deposit-taking institutions operating in Jamaica. This move occurred at the same time banks established new relationships. Furthermore, correspondent banks excluded many money service businesses, such as Cambios from accessing global services.

In 2011, RBC (Royal Bank) Jamaica closed accounts held by money service businesses (Sagicor Bank later acquired the RBC / RBTT). In 2013, National Commercial Bank Jamaica terminated its arrangement with most of the licensed Cambio operators. Also, the Jamaica National Building Society (JN) had to seek an alternative arrangement for its money-transfer services to the Cayman Islands. It did so after Cayman National Bank informed it that Cayman’s correspondent bank would no longer take bulk cash transactions. These institutions are among seven local banks that lost correspondent banking relations within the last eight years. According to Shaw, these developments are threats to Jamaica’s objectives of financial inclusion, poverty reduction and sustained growth.

CARICOM Concerned

The matter of the termination of correspondent banking relations has also caught the attention of the Caribbean Community (CARICOM). Chairman of CARICOM, Prime Minister Dr. Timothy Harris of St. Kitts-Nevis noted that the termination of corresponding banking services by global commercial banks is one of the biggest economic and financial challenges facing the 15-member CARICOM group.  He also noted that these global giants are offering services at unconscionable high rates.

“The practice has a harmful effect on the flow of remittances from those living and working abroad to their loved ones and business associates at home who rely on this source of funds to provide for their sustenance”, he said.

This concern is warranted when the contribution of remittances to the nation’s GDP is taken into account. During the period 2000 – 2013, Jamaica’s average remittances received as a percentage of GDP was 15 percent. That puts the island among the most vulnerable territories for any fallout caused by the removal or restriction of CBRs. Jamaica has a large diaspora that sends money using remittance services. Furthermore, the Jamaican economy depends on the continued inflows from remittance from abroad. Ironically, with the withdrawal of correspondent banking services from countries like Jamaica, money will move into the underground economy, thereby increasing the country’s vulnerability to loss and capture by illegal and illicit activities.

Also, as Harris noted, terminating correspondent banking relations harms commercial trading activity, disrupting the flow of payments for services rendered. So, what was once an overnight bank-wire transfer of money from the United States now takes as many as three months to complete.

The Caribbean is Severely Affected

Indeed, the exodus of global commercial banks from the Caribbean severely affected the region. According to a 2015 World Bank Study (cited by Shaw in his presentation), sixty-six percent of the region’s banks reported a decline in correspondent banking relations. The bottom line is that correspondent banks are very hesitant in doing business with remittance companies and money transfer operators in Jamaica and other Caribbean territories.  Global banks and regulatory authorities list Latin America and the Caribbean (LAC) among the high-risk locations for money laundering and terrorist financing activities. For global correspondent banks, the cost of complying with the onerous AML/CFT requirements significantly outweighs the returns from doing business in these smaller territories.

What is being done

In 2017, the Caribbean Development Bank (CDB) Board approved US$250,000 in funding to the Caribbean. These funds are to strengthen financial transparency and to help prevent the loss of correspondent banking relationships in the Region. Designed as a three-year pilot initiative, this project is to be implemented in Jamaica, The Bahamas, Barbados, Belize, and members of the Organisation of Eastern Caribbean States. It has three components:

  • Strengthening the government’s implementation of, and compliance with, international financial integrity standards. This includes updating the required laws and regulations.
  • Increasing the technical capacity of banks and credit unions in the region to carry out customer due diligence, and introduce anti-money laundering best practices. This intervention includes staff training.
  • Improving public-private sector coordination with regulators to more effectively address de-risking and create a mechanism for ongoing dialogue with external regulators and foreign banks.

Meanwhile, in 2018, Jamaica’s two largest building societies, the Victoria Mutual Building Society and the Jamaica National Building Society have implemented measures to prevent the disruptions caused by loss of correspondent banking relations. These measures will allow their UK account holders, including pensioners, to continue funding their Jamaican accounts. This move came after their UK banking partner decided to terminate banking relationships with financial institutions in the LAC region.

Also, Jamaica and other Caribbean territories have been addressing the problem of de-risking by introducing robust AML/CFT regulatory frameworks.

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