Question

Over the last couple of years, there has been a trend towards limiting the correspondent banking relationship with the closing of the bank accounts of clients perceived as high risk, Account closure continue across the USA, the UK and Australia. These closures have significant humanitarian, economic, political and security implications. Today the Caribbean is being impacted by this phenomenon. Students will be required to critically analyze and provide policy direction on how to address this issue is the Caribbean.

As such students are expected to outline:

1. The reason why de-risking is taking place of and its impact on banking industry in the Caribbean

2. The risks, products and type of customers that are affected by de-risking and the rationale for your selection.

3. The scale and scope of de-risking in the Caribbean?

Provide examples of the countries and entities that are most affected. What policy recommendation would you propose to address the issue of de-risking? Which Caribbean and International organizations would you collaborate in providing the necessary assistance to deal with the issue of de-risking in the Caribbean? Why?

Answer 1

1. Global financial institutions are increasingly terminating or restricting business relationships with remittance companies and smaller local banks in certain regions of the world – a practice that is called “de-risking”. The most severe effect of de-risking in the Caribbean has been the termination of correspondent banking relationships which includes check clearing and settlement, cash management services, international wire transfers, trade finance and conducting foreign currency denominated capital or current account transactions.
2. Risk of De-Risking may threaten progress that has been achieved on financial inclusion. It also has the potential to reverse some of the progress made in reducing remittance prices and fees, if banks close or restrict access for money transfer operators. lost access to financial services can be result of de-risking. The inability to get humanitarian assistance to refugees from political conflicts or natural disasters could result in death from starvation, exposure, and disease.

Customers effected by de-risking are the financial institutions, agencies and other entities affected by de-risking include money transfer operators and other remittance companies, small and medium domestic banks, small and medium exporters, retail customers, international business companies, e-gaming/gambling.

3. International and regional institutions has noted that Latin America and the Caribbean appears to be the region most significantly affected by de-banking practices. The vulnerabilities of Latin America and the Caribbean to derisking practices are again emphasized when one examines the region’s dependence on this inflow of cash, as opposed to countries like the Unites States of America.
4. Countries most affected by de-risking are Latin America and Caribbean. Policy recommendations are Rigorously assess the unintended consequences of AML/CFT and sanctions enforcement at the national and the global level, Generate better data and share data to facilitate regulatory impact assessments, Strengthen the risk-based approach, Improve compliance and clarify indicators of lower risk, Facilitate identification and lower the costs of compliance.Latam and Caribbean banks can work to relieve pain of de-risking. Caribbean is being proactive in upgrading AML/CFT regimes, most jurisdictions have implemented recommendations from the CFATF. Respondent banks in the region have also been rerouting transactions through regional institutions. Caribbean countries should also consider greater use of fintech (financial technology) in the region to offset some of the downside risk from de-risking.