Countries within the jurisdictions of the Caribbean, Africa, Central Asia and the Pacific have expressed concerns to the International Monetary Fund (IMF) that their financial lifeline is at risk when it comes to correspondent banking. The decline in this regard spans several continents.
But the problem is one which has many dimensions.
According to IMF Boss, Christine Lagarde, corresponding banks, which are mostly private banks, make their own business decisions every day. There are the regulators who are concerned with economic and financial stability. They also try to limit the abuse and exposure to financial systems which may finance terrorist activities.
Lagarde said that managing all these dimensions is not an easy task, to put it mildly.
With this in mind, she insists that it is important to understand the concerns of all parties. She said that this is why IMF staff has recently embarked on a fact-finding expedition. Lagarde said that they met with representatives from impacted countries, with regulators in key financial centers, and with major global banks.
The outcome of this expedition is documented in a paper that has recently been published by the IMF.
Here is just a taste of those crucial findings.
AFFECTED COUNTRIES
Below is just an example of the countries that are at risk of being cut off from the global financial network.
- In the Caribbean – as of May this year – at least 16 banks across five countries have lost all or some of their correspondent banking relationships.
- In Liberia, global banks have terminated almost half of the existing 75 correspondent relations, severely affecting the ability of local banks to conduct U.S. dollar transactions.
- In the case of Samoa, the decision by banks to terminate accounts of Samoan-linked money transfer services agents increased the fragility of the remittances corridor. Samoa is a small island in the Pacific where remittances account for 20 percent of GDP.
With some of these countries, the decision of larger banks to withdraw was motivated by concerns about lagging efforts in upgrading compliance with international anti-money laundering standards.
In other cases, however, the pull out was driven by low profitability or other considerations.
Lagarde stressed that some might dismiss this as just an issue for small countries. She warns that this would be a mistake. She said that the IMF also heard from bigger countries like Mexico and the Philippines, where remittances play an important role. Lagarde said that it is people in rural and remote regions that are hardest hit by closure of accounts that facilitate the flow of remittances. She believes that this is truly a cause for concern.
THE REGULATORS
Was the cutback in banking relationships the result of tighter regulation after the global financial crisis or it is the collateral damage due to the imposition of stricter rules related to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) in recent years?
This was a question posed to the IMF during discussions with banking regulators.
Lagarde said that the regulators were of course very aware of both issues, and it was agreed that there is need for adequate financial supervision and curbing money flows into criminal activities.
Undoubtedly, the IMF Boss said that bank regulators have also made significant efforts to disseminate to the public information on regulations and enforcement actions. The U.S. Treasury Department, for example, has put considerable resources into educating financial institutions on the precise nature of transactions and individuals that are subject to sanctions.
She said, “Our conversations also revealed that bank supervisors have not asked financial institutions to terminate specific relationships or business lines. Nor did regulators feel that there were excessive demands on banks to ‘know your customers’ or ‘know your customers’ customers,’ which is where some of the violations occurred that led to large fines in the past.”
Lagarde said that indeed, high-profile enforcement actions have focused on cases where the violations were repeated, systematic, and egregious. She said that they were not aimed at pursuing accidental one-off episodes due to insufficient information or lapses in judgment.
“Our overall take away from the discussions has been that regulators are following a generally reasonable approach. It is of course based on proper implementation of domestic regulations and designations of sanctions, albeit using a risk-based approach to enforcement. In other words, ensuring compliance with greater efforts where the risks are highest,” the IMF Boss expressed.
