The Bahamas may have to reform its data and confidentiality regimes to mitigate the threat posed by the loss of correspondent banking relationships to the financial sector and wider economy, the Central Bank’s governor has warned.
John Rolle suggested this nation may need to modify the laws and protections provided in this area to enable financial institutions to “pool”, and better share, client due diligence and Know Your Customer (KYC) details.
He explained that a ‘shared’ KYC/due diligence database would reduce compliance costs and paperwork, particularly for smaller institutions, enabling them to become more competitive and survive.
And, given that anti-money laundering and counterterror financing concerns were among the principle reasons why major global banks are terminating their relationships with counterparts in the Caribbean, Asia and Africa, Mr Rolle suggested that such a facility could ease these fears where the Bahamas is concerned.
“The information sharing regime may need some attention,” the Central Bank governor said on Friday, suggesting that there could be “cost sharing” between institutions when it came to IT platforms used to monitor clients and their transactions.
“Part of the suggestion is to look at reforms to the legal system so that the capture of customer identities, due diligence is shared between institutions and multiple jurisdictions,” he added.
The suggestion for a shared customer KYC/due diligence database appears to have come from the private sector itself, with the idea specifically referenced in the Central Bank’s second correspondent banking survey, the results of which were released last week (see other article on Page 1B).
The regulator, having sought its licensees’ opinions on how to respond to correspondent bank ‘de-risking’ trends, said: “There were also some interesting proposals/suggestions that went a bit beyond the surface.
“One suggestion is the establishment of a centralised electronic KYC system that would be accessible by all licensees and which, subject to the appropriate domestic legal provisions, would facilitate the exchange of information with parties both inside and outside the Bahamas.”
Mr Rolle picked up on this proposal, adding that there could be “a focus on harmonising systems between Caribbean countries so smaller institutions can take advantage of a pooled system”.
Such cross-border information sharing of client data would require strict confidentiality and data protection safeguards, given the Bahamian financial services industry’s reliance on legitimate privacy.
Acknowledging this, Mr Rolle said: “The legal system will come into play in reducing the level of de-risking or allowing institutions to afford solutions to come into compliance.
“The kind of investment banks need to put into an IT system to consider customer on-boarding, the setting up of new customer relationships, is a very expensive undertaking. It may mean looking at ways for how the regime of data protection and privacy is set up.”
Mr Rolle said the Central Bank was working on multiple fronts to reduce the Bahamas’ exposure, and that of its financial institutions and wider economy, to the global correspondent banking ‘de-risking’ trend.
He pointed, in particular, to the ongoing Bahamas’ National Risk Assessment (NRA), headed by the Attorney General’s Office with support from all financial services regulators, and which is designed to identify and solve gaps in this nation’s anti-money laundering and counter terror financing regime.
“It’s really a comprehensive look at the Bahamas’ economy and systems to identify areas where activity could put the Bahamian financial system more at risk of being used for criminal purposes,” Mr Rolle said.
“It will provide a template for more intensive work that will look to close vulnerability gaps.”
Besides putting forward policy reform suggestions to the Government, and building capacity within the Central Bank and among industry compliance officers, Mr Rolle said the regulator was also “pursuing” its own areas for improvement - including written guidance notes issued to its licensees.
It also intends to “reduce the exposure of financial transactions to being infiltrated by criminal elements” by pushing Bahamian businesses and consumers towards the electronic payments system.
In particular, Mr Rolle said the Central Bank wanted businesses to “pivot away from relying on cash transactions and rely on electronic solutions”.
The fact all their financial activities are now traceable would place businesses “into a lower category of risk profiling for the monitoring of suspicious activity”.
Mr Rolle added that the Central Bank was also seeking “to promote more financial inclusion”, and “develop a system to provide the highest number of consumers with access to the formal banking system, so that they’re not engaging in transactions outside the system which criminal elements can infiltrate”.
The Central Bank is also looking at applying international standard profiles to different forms of corporate entities, thereby matching businesses to their likely ‘money laundering risk profile’.
“One of the important considerations is how we can have a sanctions regime if there are infractions, so that the Central Bank can enforce its regulatory requirements with a bit of teeth as a consequence of deficiencies in a bank’s internal systems,” Mr Rolle said.
The Central Bank’s focus is on strengthening the Bahamas’ defences against financial crime, given that one of the most frequently-cited reasons for terminating correspondent relationships is the perceived anti-money laundering/counter terror financing risks present in this nation and others.
Mr Rolle said Bahamas-based institutions were presently going through their files to ensure they had the necessary KYC details on each client.
“That is an exercise that is very active in local banks,” he added. “Where the customer has not been forthcoming, the bank has tightened up on the relationship, or sent notice to them to do business with another institution.”
Mr Rolle said it was vital for Bahamian institutions to understand the source of each customer’s earnings and wealth, given that they were effectively acting as a correspondent bank’s ‘agent’ in conducting KYC due diligence - and could be called upon to provide such details at a moment’s notice.
Pointing out that confidentiality does not “trump” the law where suspected financial crime is concerned, Mr Rolle said: “Confidentiality is not the same as meaning you don’t have to provide your bank with all the disclosure that it needs.
“Some of that disclosure allows your bank to facilitate payments abroad on your behalf. If someone in that chain asks questions, and your bank is unable to answer them satisfactorily, your payment might not move through those channels.”
While the Bahamas has yet to be impacted by correspondent banking ‘de-risking’ to anywhere near the extent Belize has, Mr Rolle said the loss of such relationships could impact the clearance of Bahamian credit card payments, and transfers abroad for the likes of medical services and tuition fees.