Banks challenged by tough global regulations

A few days ago the London Financial Times carried an interesting commentary on the growing problem that financial institutions in smaller nations such as those in the Caribbean are having in establishing or maintaining a relationship with correspondent banks in North America, Europe or other parts of the developed world.

The opinion piece was written jointly by Mark Carney in his capacity as the Chairman of the Financial Stability Board, and by the Managing Director and Chief Financial Officer of the World Bank Group, Bertrand Badré. Mr Carney is also the Governor of the Bank of England, and the Financial Stability Board is an influential international body that monitors and makes recommendations about the global financial system.

In outline, what the article said was that correspondent banking – the arrangement that allows a local bank to have access to the services of a distant financial institution, for example for the transfer of commercial payments, money transfer,  or currency exchange – is in danger of collapse.

The issue, which is increasingly being observed by smaller Caribbean banks, is becoming troubling as such arrangements provide an indispensable link for small nations to be able to use the international banking system in order to facilitate the needs of their customers.

In the past, as the article pointed out, the system has relied on both the local bank and the overseas bank being able to devise systems that would prevent either bank from doing business with criminals or from transferring illicit funds. Unfortunately, these systems sometimes fail and as is now well known, some international banks, deliberately and through internal failures, have provided accounts and services to money launderers who were facilitating the activities of drug gangs or terrorists.

Recently under pressure from central regulatory authorities the correspondent banks, often large global institutions, have been faced with huge fines and a choice between continuing to provide cor­respondent business and finding ways to mitigate the risk of further infractions, or as has been the case in the Caribbean, they withdraw, and cease to provide services altogether.

Speak to bankers and financial institutions in the Caribbean and it is clear that more and more are finding that their correspondent banks are choosing to do the latter, with for example many embassies around the world also finding that the bank in the nation where they are located has unilaterally withdrawn their banking facility.

At its worst has been the situation relating to Cuba whereby in parts of Europe all major banks have refused to transact any business related to the island. Although they will not necessarily say why this is, the reality is that the banks, fearing huge fines or actions against them or their US operations, have chosen to reject all correspondent banking or even provide domestic services to longstanding clients if they are in some way related to Cuba. Moreover, the same banks seemingly remain reluctant to return to providing banking services even after the US has formally lifted its designation of Cuba as a state sponsor of terrorism.

The problem is, as the article pointed out, communities and businesses in the affected economy then find themselves unable to send or receive money from abroad.

In their article, the authors make clear that not only might this response eventually contribute to illegal activity, defeating the narrow purpose of making the financial system more secure, but whole countries could be abandoned by the big banks.

Their solution is to propose that the World Bank Group and others obtain evidence on the extent and consequences of the retreat of correspondent banks and to recommend, ‘clear and consistent interpretation and enforcement of international standards’ and technical measures, such as the standardisation of customer identifier systems. ‘The financial abandonment of whole groups of customers – or even countries – is not something that can be ignored by the members of the G20,’ Mr Carney and Mr Badré noted.

Coincidentally, the article appeared just days after the US had named  six Caribbean banks as having completed wire transfers of large sums of money for many senior FIFA soccer officials and others accused by the US authorities for alleged racketeering, money laundering and wire fraud. The regional banks listed in the indictment were First Caribbean International Bank (Bahamas); Barclays Bank (Cayman Islands); Fidelity Bank (Cayman Islands); First Citizens Bank (Trinidad and Tobago); Intercommercial Bank (Trinidad and Tobago); and Republic Bank (Trinidad and Tobago).

None has been charged with any crime, or regulatory violation, but in a statement reflecting the apparent concern as to what this might mean for already tough international requirements on banking compliance and the possible problems that may arise for correspondent banking arrangements, the Bankers’ Association of Trinidad and Tobago said that it remained committed to working with local and foreign regulators and law enforcement agencies as the investigation progresses.

At the same time three British banks have launched internal reviews of transactions linked to allegedly corrupt payments by FIFA officials outlined in the US indictment. The banks – Standard Chartered, Barclays and HSBC – are understood to be looking into the details of payments. Again the three are not accused of any wrongdoing but are said, in part, to be concerned to ensure that they have complied with anti-money laundering rules.

The news of course followed the unsealing of an indictment in New York on May 27 naming Jack Warner, a former FIFA Vice-President and Trinidadian politician, and Jeffrey Webb, the former President of CONCACAF, the Central American, Caribbean and North American football confederation headquartered in the United States. Both deny any wrongdoing.

While the growing tsunami of allegations resulting from the still emerging FIFA corruption scandal seems likely to continue to sweep across the Caribbean in the coming weeks, the impact on the region’s banking system could be slower and more devastating.

It is also not impossible that the decision by the US authorities to act in such a public way was beyond the immediate accusations, intended to make clear that a line has been reached as far as the US is concerned about corruption in the Americas.

Although the focus is presently on Mr Warner and Mr Webb, the bigger danger is that in days to come, compliance officers and the boards of major US and European banks may begin to look more closely at their correspondent relationship with Caribbean banks.

David Jessop is a consultant to the Caribbean Council and can be contacted at

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June 7th, 2015