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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.

Peter Parchment is a highly trained professional with twelve (12) years senior executive experience in Policy Formulation, Monitoring & Evaluation, Strategic Planning in the Public Sector, and Social Research. A strategic thinker with strong problem-solving skills, people and resource management skills and the ability to think outside the box. Equipped with sound technical report writing and consultation facilitation skills and knowledgeable in the workings of Government and the Public Service. Experienced in working with rural and urban communities in a variety of locally and externally funded projects. He is also trained in Media and Communications and writes for online clients and publications. [email protected]

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Bankers Urged to Remain Alert to Electronic Fraud

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Bankers, you must remain aware of the different tools that mitigate attempts at electronic fraud. That is essentially the message from Jerome Smalling, Vice President of the Jamaica Bankers Association (JBA). He was speaking at the JBA’s seminar on anti-fraud held recently at the Terra Nova Hotel in Kingston. His warning comes against the background of the increased attempts by criminal elements at defrauding financial services institutions.

100 Seminar Participants Hear About e-Fraud Technologies

Over 100 persons participated in the anti-fraud seminar that was also held in association with the Jamaica Institute of Financial Services (JIFS). International and local experts covered topics including fraud trends, artificial intelligence, data protection, and the use of closed-circuit television images in preventing fraud. Participants got first-hand data and information on the capabilities of existing technology in perpetrating fraud.

Dirk Harrison, the Director of Prosecutions at the Integrity Commission, presented statistics reported by Transparency International that demonstrate the harmful effects of corruption on the progress of governance mechanisms.

Stay Ahead of Fraudsters – Dirk Harrison

Integrity Commission Jamaica

Harrison argued for a solution-oriented rather than a problem-oriented strategy to deal with fraud. “We must stay ahead of the fraudsters, who may ultimately be responsible for programming the same technology and machines on which we are to depend,” he said. Further, the Integrity Commission Director of Prosecutions emphasised how important it is to engage with the youth. He encouraged the seminar participants to reach out to the schools, youth clubs, and the cadet force to reinforce the message of “right and wrong,” and the consequences of choices.

Interestingly, Damian Small, the Director of Corporate Security at Scotiabank, argued that institutions must use a combination of strategies to effectively manage e-fraud. Such an approach, he explained, must be transparent and trustworthy for clients. Strategies must also create awareness on the different social engineering tactics that criminals use to collect data. Furthermore, fraud detection and prevention should also be objectives from an organisational perspective.

Law Enforcement Challenges and Weaknesses

But a report appearing in the media in 2018 highlighted major weaknesses in law-enforcement and the justice system in fighting fraud. Reportedly, in 2017, as electronic fraud spread, banks, and other financial institutions lost $750 million.

Also, the Jamaica Constabulary Force (JCF) data showed that between 2013 and 2018 the police Fraud Squad received reports on almost 3,400 alleged cases of fraud.

Unfortunately, the rate at which fraudsters are convicted in the island’s courts lags the arrest rate. Reportedly, the courts found only 115 persons guilty out of the 1,029 persons held for different rackets.  Even then, more than 50 percent of the convicted persons over the five years received their conviction only in 2017. Also, according to police data, between 2015 and 2016, the police Fraud Squad secured only three convictions for fraud.

Three!

Fraud Officers Sometimes Redeployed

Even arrests fall behind reports. During the five years to 2018, the police Fraud Squad received almost 2,000 fraud reports, but only arrested a little over 900 persons. Distressingly, the situation concerning arrests and convictions for electronic fraud is much worse.

The bottom line is that the Duke Street-based police Fraud Squad is woefully understaffed and under-resourced. Up to 2018, the police Fraud Squad had fewer than a dozen investigators assigned to tackle fraud islandwide. Even with this shortfall, the police high command sometimes redeploys these officers to other duties including Zones of Special Operations (ZOSOs) and the State of Emergency (SOE) in Western Jamaica.

Official Ambivalence Regarding e-Fraud

Interestingly, Lloyd Parchment, an anti-fraud expert at the Jamaica Bankers’ Association, suggested that official ambivalence regarding the crime of fraud contributed to the low conviction rate experienced in Jamaica. For one thing, many see fraud, particularly that against institutions like banks, as a victim-less, white-collar crime.

Parchment suggested that:

 “The justice system does not recognise fraud as a very important area of criminal activity; they do not treat it seriously.”

He further explained that the banking sector has urged the justice system to acknowledge fraud as a serious criminal offence. He also noted that the money gained from it is also fuelling more serious illegal activity. According to the JBA anti-fraud expert, banking sector leaders received only a lukewarm response from the justice ministry when they attempted dialogue on the matter of fraud.

Banks Choose Not to Report Fraud

Consequently, financial industry leaders are not so confident that investigations into the reported e-fraud cases will yield serious results. Furthermore, banks, in some cases, chose not to report fraud incidents to the police Fraud Squad as they do not see the point of doing so. Also, the substantial backlog of reported fraud cases investigated by the Fraud Squad is another disincentive for institutional victims of electronic fraud to report or follow up on fraud matters.

Parchment offered an example of what happened in a recent fraud incident:

“We had a guy recently who reaped millions of dollars in fraudulent funds from the banking industry through debit card frauds, and when we managed to engineer his arrest, and he was brought to court, he immediately pleaded guilty. He was slapped with a $200,000 fine. He then went and stole the money from a customer’s account to pay the fine. It didn’t even come out of his pocket, and he is back working the next day and continues to work right now. I have the evidence of that because we have the camera system.”

Optimistic Outlook

Participants in the recently held JBA/JIFS anti-fraud seminar got an earful on the scale of electronic fraud and the kinds of technology criminals use. Not only did presenters offer their experiences on the various ways financial institutions suffer at the hands of unscrupulous fraudsters, but they also got useful tips on how to address this growing problem.

The existing law enforcement weaknesses and challenges in the justice system, however, threaten any success in addressing the e-fraud monster.

But as an adage goes, “where there is life, there is hope”.

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BOJ Clinches Deal with Bloomberg To Allow Local FX Traders on Platform

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The Bank of Jamaica (BOJ) has clinched a deal with Bloomberg (USA) to access its advertising and trading platform.  BOJ’s arrangement with the international financial and media services provider will enable FX dealers to place Foreign Exchange rates on the Bloomberg platform in local and US currencies. Other dealers will then see them in real time.

The Deal with Bloomberg for B-Match Platform

John Robinson, BOJ’s Senior Deputy Governor announced the deal. He further disclosed that the deal with Bloomberg is an interim strategy. Dealers will, however, be able to use the Bloomberg trading platform come July 1, 2019. While this arrangement with Bloomberg is temporary, the BOJ expects to launch its own comprehensive trading platform in early 2020.

Robinson, in a media interview, further stated that Bloomberg is currently testing its B-Match model. That model enables dealers to trade among themselves. Bloomberg’s B-Match model is a data-driven service that offers information on clients so advertisers may present targeted opportunities. Bloomberg offers the same service to financial entities, such as FX dealers. They will be able to use specified information to match the FX needs of other Foreign Exchange dealers and entities.

Dealers Signing Up

Reportedly, traders and large buyers have already signed on to the Bloomberg platform. They have the advantage of seeing the rates at which other banks and institutions are selling the US dollars. These traders and buyers can see this information through a special terminal linked to the central clearinghouse system operated by the Bank of Jamaica. The BOJ official noted that it is necessary for dealers to have access to the Bloomberg terminal. This access will effectively allow them to work with their large clients who need foreign exchange from time to time.

As described by BOJ’s Deputy Governor Robinson using an example, “say JPS, which want to buy US$1 million, you can come onto the system and see who is selling and for what price, and you can buy through your dealer who will process the transaction using the Bloomberg B-Match model”.

However, in accordance with the deal with Bloomberg, the BOJ must pay a fee of US$2,000 per month for accessing the platform.

BOJ’s Comprehensive FX Trading Platform in the Works

Responding to a question on whether the BOJ would have a supervisory role in the Bloomberg B-Match system, Robinson indicated that the BOJ will coordinate rather than supervise the use of that platform. Each dealer will have his or her own terminal. The BOJ will, however, “shepherd them into sharing all this information”, Robinson explained.

Also, the BOJ’s comprehensive FX platform is still a work in progress. However, it will, in addition to the Bloomberg B-Match system, allow foreign exchange buyers to register and see the FX rates offered by each bank. FX buyers will then get the best price.

Bloomberg, a major provider of round the clock financial information and news, offers a professional analysis of financial data and news, as well as the analytical tools that financial professionals can use. The Bloomberg Terminal is one of its key income streams that is an integrated platform for streaming price data, trading information, news, and financial analysis to more than 300,000 customers globally.

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Sagicor Investments Jamaica Limited to Raise $4 Billion Through IPO

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Sagicor Financial

Another IPO is on the horizon. This time, it is the Sagicor Investments Jamaica Limited that is seeking to raise around $4 billion through an initial public offering. Sagicor Investments is offering shares in the Sagicor Select Funds Limited, which is a fund pool consisting of financial stocks that are listed on the Jamaica Stock Exchange. The public offer will open on July 3 and close on July 17, 2019.

Sagicor Investments Jamaica Limited Offers 2.5 billion Stocks

Investors can purchase a total of 2.5 billion stock units at a price of $1.00 per unit. Also, they have the choice to purchase from an additional pool of 1.5 billion stock units should Sagicor Investments Limited choose to upsize the IPO.

The Sagicor IPO consists of shares in two classes – Class A shares offered to Sagicor Investment Limited clients and Class B shares offered to members of the public who subscribe to this initial public offer. The prospectus from Sagicor Investments Limited stated that the company was structured as a passive equity fund with separate classes of shares listed as a Financial Select Fund.

JSE Financial Index Grows 18%

Presently, the Financial Select Fund has invested $1.1 billion in 11 of the 23 financial stocks that constitute the Jamaica Stock Exchange Financial Index. The funds raised from this IPO will go toward acquiring more financial stocks. Sagicor Investments Limited aims to match the financial securities that constitute the JSE Financial Index as closely as possible.

With the Financial Select Fund, investors can track the Index’s value, the net asset value (NAV) of the Fund, and its market value daily. Such information is published on the Jamaica Stock Exchange website and will be published by the Sagicor Investment Jamaica Limited.

On March 1, 2019, the Jamaica Stock Exchange (JSE) launched the JSE Financial Index. This Index consists of insurance companies, financial and microfinancing companies that are trading on the main and junior markets. On Thursday, June 20, 2019, the JSE Financial Index closed at 118 points, which represents an 18.25 percent growth since it was debuted.

While Sagicor leads the unit trust market with its Sigma branded unit trust packages, its Financial Select Fund focuses on a specific sector (financial). So, investors have the choice of specialising in a sector without suffering the accompanying concentration risk.

Why Buy into an IPO?

Investing in shares offered through an initial public offering is like entering an opportunity on the ground floor. Through this strategy, the investor benefits from significant gains once the shares hit the stock exchange. Once the IPO shares are listed on the stock exchange, it’s all systems go as the normal trading takes effect.

A quick look at the performance of some of the investment opportunities offered through IPOs from 2018 to date shows strong gains in price since they were offered to investors.

Look at this table below:

Table 1: Performance of Companies Offered through IPOs from 2018 to Date

Company Symbol Date of IPO IPO Price Closing Price June 20, 2019 % Change
Elite Diagnostic ELITE Feb. 2018 2.00 3.95 98%
Everything Fresh Limited EFRESH May 2018 2.50 1.49 -40%
Fontana Limited FTNA Dec. 2018 1.88 4.43 136%
iCreate Limited Ordinary Shares iCreate Jan / Feb, 2019 1.01 0.8 -21%
Indies Pharma Ordinary Shares INDIES July 2018 1.50 3.21 114%
Mayberry Jamaica Equities MJE July 2018 7.56 11.31 50%
Sygnus Credit Investments Limited JMD Ordinary Shares SCIJMD May 2018 13.72 13.39 -2%
Wigton Windfarm WIG April 2019 0.50 0.84 68%

 

So, as you consider whether to buy into this latest IPO, read the prospectus and talk with your broker or financial advisor.

 

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