The Financial and International Business Association (FIBA) Inc. appreciates the opportunity that we were given to have Executive Committee member Wayne Shah testify before the House Financial Services Committee on the important issue of de-risking in the Caribbean. As the leading voice for international banking in the U.S., Latin America, and the Caribbean, FIBA was the first to raise concerns about the potential loss of support for correspondent banking in the Caribbean region and created the Caribbean Roundtable in 2007. Over the next several years, FIBA focused on this issue inviting stakeholders from Caribbean governmental agencies, Caribbean financial institutions, the U.S. Treasury Department, U.S. financial institutions, and U.S. regulatory agencies, to debate the causes and potential solutions1
Over the years of de-risking, FIBA could not find any empirical evidence to believe that Caribbean banks had lesser abilities regarding BSA/AML. In fact, our view was that the Caribbean banks that remain in the market have invested heavily in BSA/AML compliance enhancements and risk management measures and are currently highly compliant with international guidelines and industry best practices. Yet they are always weary that reality does not always reflect perception.
From the FIBA perspective, U.S. national security depends on prosperity and stability in the hemisphere. By fostering an inability to establish financial links to our neighbors, we weaken the region, our alliances, and ultimately ourselves. Healthy business relations facilitated by correspondent banking is an essential cog in that wheel.
The observations made by FIBA were clear signs that there has been a change in perception of the risk the Caribbean region poses, driven largely by regulatory changes and the financial crisis of the time. FIBA noticed the following trends:
- Please see addendum presentation made to the Association of Supervisors of Banks of the Americas “De-Risking: How is it impacting correspondent banking in the region and what are the solutions?”
- Correspondent banks were primarily concerned about getting their BSA/AML house in order during the crisis, rather than sharing their concerns and improvements with their customers.
- New regulations and the fear of large fines created a big push by global correspondent banks to shore up their risk management infrastructure. The result is a new and excessively high standard for risk appetite. Concern regarding BSA/AML Compliance was driven by massive regulatory fines for noncompliance and correspondents were moving to a zero-tolerance model.
- High risk products offered by correspondent banks were under scrutiny and sometimes not offered or exited. The move by correspondent banks to eliminate the use of check clearing services is one such example.
- Exaggerated concerns over narco trafficking, human trafficking, tax havens, and rampant corruption made a case for extended scrutiny and exits. The International Narcotics Control Strategy Report (INSCR) was being used as a reference for wrongdoing by Caribbean nations, even though most nations were not appropriately engaged to respond to the concerns expressed therein.
- Correspondents were using published grey and blacklists to justify reduction of services or to exit.
- Correspondents wanted respondents to mirror their over-scaled infrastructure for risk management and not being able to implement expensive technologies or respond immediately to policy adjustments was seen as a cause for concern.
- Correspondents passed on the cost of their U.S. AML infrastructure spend to the smaller jurisdictions, claiming that the cost of compliance and monitoring was too high even though the per transaction costs were absorbed and spread across global flows.
- De-risking was initially limited to indigenous banks who were small in scale and had a reduced opportunity to deliver lucrative short-term revenues. These banks had no voice or alternative except to accept a 30-day notice of closure.
FIBA’s Caribbean Roundtable was successful in identifying the cause and effect of early de-risking which served to alert members to the phenomenon at large. Diligent discussions with all stakeholders over the years raised awareness and caused Caribbean banks to up their game regarding BSA/AML. FIBA was instrumental in providing much needed training courses, webinars, and leadership. As the organization identifying and responding to the phenomenon of de-risking, FIBA actively participated and was a key contributor to the
efforts of a variety of organizations that also became active in the de-risking space. FIBA’s contribution to the work surrounding de-risking is noted in the support of findings by the Caribbean Association of Banks (CAB) and International Monetary Fund (IMF – 3 sessions), and most recently BAFT and the Atlantic Council.
As de-risking continued and U.S. correspondent banks began to shed relationships, FIBA noticed that the de-risking was disproportionately geared to the smaller banks in the smaller islands. The impacts were clear, and the pains severe, as smaller banks were no longer able to support their customers international business via:
- Access to international markets.
- Foreign payments and trade services.
- Cross border credit cards.
The other financial services necessary to support tourism, net foreign investments, international payments, and trade finance continued to be available through the larger unaffected financial institutions. Alternatively, FIBA did not observe stakeholders from the region complain of wholesale desertion by U.S. correspondent banks during the peak of de-risking.
Canadian banks with branches and subsidiaries in the Caribbean were unscathed by de-risking, and large indigenous systemically important banks were able to retain and maintain multiple correspondent relationships. International flows of commercial activity from the de-risked banks made its way naturally to the larger respondent banks that provided support to local economies.
In FIBA’s opinion the advent of de-risking as documented has long been over. The remaining major challenges about financial inclusion for the Caribbean are:
- Making sure history does not repeat itself and de-risking does not affect the larger banks.
- Creating a mechanism for correspondent banks to return to servicing the region in a wholesome and prudent way.
- Sustaining a view that the Caribbean is a region of safety and soundness for financial services and inclusion.
- Working with correspondent banks to perform independent country and counterparty risk analysis instead of obscure publications that may or may not be substantiated by fact or corroboration.
- Open-ended regulatory mandates for AML/CIP/KYC leave too much discretion with regulatory rulemaking and create unascertainable cost analyses for small-to-mid sized community banks wishing to develop these correspondent ties.
- Avoiding unintended consequences of new regulation and legislation. Examples are section 6308 of the Anti-Money Laundering Act of 2020, which provides broadened subpoena authority to the Department of Justice, and the proposed lowering of the threshold of the Travel Rule for cross-border transfers. Such mandates can exert undue pressure on correspondents and respondents.
We also are prepared to support Chairwoman Waters’ proposed AML Examiners Training Academy and applaud the inclusion of “employees of foreign governments” including “agencies of foreign governments which supervise financial institutions” therein. Due to our diverse membership which includes banks from the U.S., Europe, Latin America, and the Caribbean that are involved in international banking, FIBA has extensive experience training regulators, government officials, and bankers internationally on the application of U.S. and international AML/CFT standards. This includes, the Caribbean and Latin American regions, through our AML compliance certifications launched in 2007 with Florida International University, bank board trainings, and other continuing education events. This culminates in an exchange of ideas at our Annual AML Compliance conference now in its 23rd year.
There were questions posed to Mr. Shah and other panelists during the hearing that we wish to address here.
- If U.S. financial institutions are exiting from correspondent banking who is stepping into the Caribbean market? Any other commercial banks that have stepped in from Europe or elsewhere? We have seen payment processors and banking type organizations such as Western Union, MoneyGram, and Crown Agents stepping in.
- Can cryptocurrency and/or CBDC solve the problem? This was discussed during the hearing, however, we felt that it was important to revisit the issue. De-risking was
not about having access to currency but access to the U.S. banking system. It was agreed that the reasons for de-risking were concerns over the adequacy of compliance programs, country risk, and scale amongst others which cannot be resolved using cryptocurrency or a CBDC. As concluded during the hearing, the latter are solutions in search of a problem and de-risking is not the appropriate problem.
One final idea that we would like to submit for consideration that we raised several years ago: consolidate the flows from the de-risked jurisdictions through a bank chartered in South Florida that would be supervised and regulated by a U.S. Federal Functional Regulator. As correspondent banking is a highly specialized line of business, we would recommend that the institution be staffed with experienced local correspondent banking, operational, and compliance personnel to ensure a strong AML/CFT program that would make the bank an attractive respondent. Capital contributions would come from the affected jurisdictions.
FIBA and its members are committed to working with the Caribbean region in support of the region’s growth and will continue to be a thought leader and steward for financial inclusion. We stand at the ready to assist in any way necessary to move this important initiative forward.
Submitted on behalf of the Financial & International Business Association
