‘De-risking’ is a term used to describe the strategies adopted by global banks to lower the overall risk exposure of their asset portfolio. This comes in response to tighter regulatory standards imposed by national and international supervisory bodies. The Caribbean Center for Money and Finance identifies such strategies as the termination of correspondent banking relationships with smaller local banks, strategic withdrawal from selected markets, closing the accounts of selected clients and classes of clients, and the relocation of business to take advantage of regulatory arbitrage. In essence, these, strategies terminate or the restrict corrupt business relationships to prevent risk-related money laundering and terrorist financing from occurring.
Because of deficiencies identified within frameworks for anti-money laundering (AML) and counter-terrorist financing (CFT)—which come along with financial penalties—international financial institutions are subject to regulatory censures. One simple way to address these deficiencies is by dismissing relationships with businesses and regions considered to be high risk, such as the Caribbean. Even if a region may not experience specific AML/CFT issues, many large international banks consider their business within that region as either high risk or unprofitable. As explained by a Reuters’ investigation, Caribbean populations are so small that they offer miniscule profits to large American or Canadian banks, so most do not see the benefits outweighing the risks posed by offshore banking, such as susceptibility to money laundering, tax evasion, and the Latin American narcotics trade. A 2015 World Bank study revealed the Caribbean to be the worst-hit of all regions by the de-risking trend.
The global payment and financial system – or the network of international transactions such as remittances, credit card payments, foreign direct investments, and international trade in goods and services – contributes significantly to the Caribbean’s growth and development. The region depends especially on remittances, which is where firms transfer funds sent by migrants. The de-risking trend has led banks to close accounts for certain money-remittance services, and the loss of these relationships within the global payment and financial system could threaten the region’s banking sector. Such a threat would additionally stymie trade, meaning Caribbean countries would be unable to import essential basic goods like food and medicine. Caribbean economies depend disproportionately on trade, and the loss of banking ties to the United States endangers the region’s economic stability. The loss of businesses caused by de-risking in the Caribbean is already estimated to be, in some instances, more than several million US dollars.
In addition to the economic risk, the complications of de-risking are numerous. Many customers are unable to access their funds within local banks, and many business owners have had to rethink their business plans as a result. Without proper access to credit from the banks, many industries are driven into the less-regulated world of cash transactions, making it more difficult for officials and law enforcement to track money flows, which in turn will only make the region appear riskier.
The Financial Stability Board has proposed a four-point plan to reach an understanding of the complexity and multidimensional nature of de-risking:
- A further examination of the dimensions and implications of the issue
- Clarification of regulatory expectations, including more guidance by the Financial Action Task Force (FATF)
- Domestic capacity building in jurisdictions where respondent banks are affected
- The strengthening of tools for correspondent banks to perform due-diligence checks
The Caribbean Community, or CARICOM, has embraced the plan, and their Committee of Finance Ministers has proposed the establishment of a global forum in the Caribbean to bring the various stakeholders together, including correspondent banks, respondent banks, regulators, policymakers, and non-government organizations that have been adversely affected by de-risking. Caribbean regulators have also implemented strategies that are specific to their respective jurisdictions, such as allowing local banks that are cut off from international transactions to reroute transactions through a regional financial institution that still has access to correspondent banks.
As a result of the 2008 financial crisis and the scandals involving HSBC and BNP Paribas, large banks are keen to avoid extra scrutiny. While the risks involved in the Caribbean are valid, the termination of relationships by American and Canadian banks leaves the region extremely vulnerable. Caribbean officials have raised the issue during forums in Washington and the Caribbean, pressing every official on every level. Usually met with sympathy, the region has yet to see any action to follow.
Without direct pressure for action in Washington, the Caribbean states move further and further towards economic endangerment, and only through the strengthening of a secure society made up of secure sectors can the region begin to address the issues which make it a haven for illicit financial actions.