ECLAC study affirms widespread impact of de-risking

A regional study using three small economies as test cases has found that two-thirds of their banking systems have been adversely affected by the de-risking strategies of their foreign banking partners, referred to as correspondent banks.

The study by Economic Commission for Latin America and the Caribbean (ECLAC) is looking into the economic impact of de-risking on the economies of the Caribbean.

Its first subjects were Antigua & Barbuda, St Kitts-Nevis and Belize, three small countries whose combined populations amount to less than 500,000 people.

"The survey results, based on these entities which responded by completing the questionnaire, showed that 64 per cent of the banking sector had been adversely affected, while the figure for the non-banking sector stood at 51 per cent," said Dr Ydahlia Metzgen, an economist from Belize who is leading the study, revealed.

The ECLAC study also found that in the non-banking sector, the impact was considerably lower at 35 per cent.

De-risking refers to the action by international banks to sever corresponding banking relationships as a management strategy for containing their exposure to illicit money flows.

Meetings with financial groups

In Antigua, the fallout touched 67 per cent of the responding institutions, according to Metzgen, who just wrapped up a visit to St John's that involved meetings with local, offshore and foreign-owned banks, as well as credit unions, money-transfer operations, financial regulators, and other groups.

However, the economist said that based on the information gathered, it appears Antiguan banks are ahead of others in taking the necessary steps to upgrade their systems and appoint compliance officers, whose role is to ensure that the banks are compliant with the latest advisories coming from local legislators as well as the external banks and watchdog agencies, in tandem with anti-money-laundering guidelines.

In the case of Belize, which was hit early and hard by de-risking, Metzgen said the banks have been able to cope by putting in place updated anti-money laundering/counterterrorism financing, or AML/CTF, processes and by moving to software systems that automatically trigger suspicious activities.

Additionally, the banks have also been in constant contact with corresponding banks as regulators conduct a higher frequency of audits and then get the information out to the wider world that it has, in fact, been strengthening relevant legislation.

"Basically, this means dispensing the myths about the region," the economist said.

Concerning measures that can be adopted to mitigate these challenges, Metzgen said there are two broad recommendations: Caribbean countries have to make it clear that actions have been taken in their jurisdictions for increased transparency; and they need to implement AML/CTF legislation.

"There seems to be a disconnect between what information is available in the developed world about the region and the reality of what really exists," she said. "It's both a communication and a perception problem."

This action by major global banks is being taken mainly out of fear that business relationships will expose them to higher risks due to concerns over the Caribbean banks' perceived vulnerability to money-laundering activities.

- CMC