The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

An International Monetary Fund (IMF) yesterday praised The Bahamas' efforts to strengthen its financial crime defences as a necessary safeguard against further loss of correspondent banking ties.

Carolina Claver, a senior IMF financial sector expert with the IMF, addressing an anti-money laundering/counter terror financing conference, said correspondent bank "de-risking" has yet to reach a level where it can threaten the overall stability of the Bahamian financial services sector.

"That is important. We would be in a serious situation if the phenomenon reaches that level of impact," said Ms Claver. She noted that foreign banks have cited money laundering and terrorism financing concerns, and their overall risk appetite, as the main reason for terminating correspondent relationships.

Pointing out that ultimately it is a "business decision" banks make based on profitability and risk, Ms Claver said of the Caribbean: "You face the same challenges facing other small states, such as lack of economies of scale, but other challenges as well which have to be put into consideration.

"Most of the Caribbean countries have a strong reliance on tourism, trade, remittances and foreign direct investment flows. Unfortunately, you are highly exposed to natural disasters, which is another challenge. A disruption in correspondent banking relationships could negatively impact your economy through different channels."

Ms Claver suggested that reduced international trade, a negative impact on remittances and investments, a higher cost for doing business as well as a direct negative impact on key sectors such as the offshore financial industry, could be among the likely results of correspondent banking relationship disruption.

"Some correspondent banks have disclosed in their conversations at regional events that the IMF organised that they don't sometimes feel comfortable in the way that some respondent banks manage and mitigate their risk. We all know that risks are out there but the question is whether the mitigation measures and the risk assessment framework is in place to properly manage the risks identified," said Ms Claver.

The Caribbean Financial Action Task Force's (CFATF) July 2017 Mutual Evaluation Report (MER), an assessment of this nation's defences against financial crime, had identified numerous legal and practical deficiencies in the regime. In particular, The Bahamas' was found to have "low" effectiveness in six out of 11 anti-money laundering/counter terrorism financing categories.

Ms Claver said: "Since then, I have closely followed The Bahamas's case, and it has done a lot on many fronts. There were a lot of initiatives that placed you in a much better place now to deal with the new report that you will have to provide to the Caribbean Financial Action Task Force."

Correspondent banking is critical to the very survival of The Bahamas' economic model, as it enables local companies and residents to conduct commerce and settle transactions with clients and suppliers in overseas countries. Without such relationships with overseas institutions, The Bahamas' "wheels of commerce" would grind to a halt.

Correspondent relationships allow Bahamian financial institutions to use the physical and electronic infrastructure of foreign banks to conduct business in their countries, enabling transactions to clear and be settled on a timely basis, and foreign currency deposits to be taken.

Yet banks in major industrialised countries have frequently severed correspondent relationships in recent years, with the Caribbean region among most heavily impacted.

The move is being driven by the "risk/reward" analysis, with developed country banks perceiving correspondent relationships with their Caribbean counterparts as too "high risk" when compared to the financial rewards.

They are especially concerned that Caribbean banks are susceptible to financial abuses, such as money laundering and terror financing, which could lead to financial sanctions being imposed on themselves by home country regulators.