By NEIL HARTNELL
Tribune Business Editor
The Central Bank yesterday pronounced that domestic banking presents a "low risk" for financial crime, with the main vulnerabilities stemming from three industries - gaming, real estate and money transmission.
The regulator, unveiling findings based on a study of 2018 deposit cash flows in the Bahamian commercial banking industry, said the real estate sector's size - together with the cash-based nature of web shop gaming and money transmission services - made them the greatest domestic anti-money laundering/counter terror financing (AML/CFT) risks.
While acknowledging that the proceeds of crime inevitably found there way into the domestic banking system, the Central Bank argued that this was largely confined to "Bahamian petty criminals self-laundering illicit proceeds from their crimes" and was too small to represent a major systemic risk or threat. It said the three industries identified are all subject to regulation.
"In the Bahamian domestic banking context, the major AML/CFT risks are likely to reside in real estate, gaming and money transmission, and the risks in the first two of these segments are shared between domestic and international clients," the Central Bank concluded. "As regards money transmission, the Central Bank is taking steps to lift the intensity of its supervision in this industry.
"With the above exceptions, the Central Bank's view is that domestic money laundering risks in the banking sector are quantitatively small, and in character (excepting small-ticket self-laundering) are qualitatively low risk.
"This leads to the conclusion that the Central Bank, in conjunction with other Bahamian authorities, should focus its AML/CFT efforts on the relatively few areas of the domestic banking system that may present material risk, while concentrating most of our efforts upon the much larger international financial sector."
Web shop gaming and money transmission businesses were deemed more vulnerable than other industries in the 17 sectors analysed because cash-based transactions accounted for 93 percent and 73.8 percent of their total Bahamian dollar deposit flows respectively.
Of $187m in total customer deposits received by web shops in 2018, some $173m were in cash, while for money transmission businesses the total amount was $80m out of $108m. "The data suggests that cash-based money laundering risks are a more material exposure for gaming and money transmission activities," the Central Bank added of its study's results.
"In this area, however, the Gaming Board has recently published a study demonstrating that although the domestic gaming houses generate a great deal of cash, there is immaterial evidence of money laundering. It is also the case that the Central Bank requires the domestic bank (Bank of The Bahamas) providing deposit services to the gaming houses to conduct special testing of this risk. There is no current evidence that retail gambling in the gaming house sector is a material money laundering risk."
The Central Bank added that the real estate industry's sheer size meant its potential for abuse by financial criminals cannot be ignored, given that it touches attorneys, developers and real estate brokers and agents. Between the three, they accounted for $3.589bn of the $6.17bn in Bahamian dollar deposit inflows analysed in the study.
"Attorneys and legal firms are by some distance the largest segment among the 17 under consideration, with close to half the deposit inflows. This reflects the legal industry's engagement in real estate settlements," the Central Bank added.
"Real estate-related deposits comprise more than half the deposit flow across the 17 sectors. The real estate industry, broadly defined, is big enough to constitute at least a potential threat. That threat could arise from either Bahamian dollar or foreign currency flows, but evidently not from cash-based transactions."
While churches and religious organisations received almost 50 percent, or $77m out of $155m in Bahamian dollar deposit inflows, in cash, the Central Bank argued that there was no evidence the sector presented an AML/CFT risk - especially given that there were no foreign currency inflows.
"Churches and other NGOs (non-governmental organisations) have been raised from time to time as money laundering or terrorist financing risks," the regulator acknowledged. "In The Bahamas, churches are a reasonably large and cash-heavy business, but have essentially zero incoming foreign currency flows.
"In the absence of any evidence of AML/CTF crime in the church sector, the local facts suggest that this segment is not an AML/CTF risk. Similar considerations apply to other NGOs, which are about the same size as the church sector, with much less cash, a bit more international funds flow, but zero evidence of support for terrorism."
The Central Bank added that the survey was undertaken to enable it to better focus supervisory resources on industries that pose the greatest financial crime threat to the Bahamian financial system. While in keeping with its efforts to implement a more risk-based approach, its findings and comments will also likely raise questions with some observers.
For example, churches and NGOs will likely question why they are being subject to more stringent regulations in the Non-Profit Organisations Bill that the Attorney General's Office hopes to have ready by July/August if they are deemed to be a "low risk" when it comes to abuse by financial criminals.
The Central Bank study also backs the notion that the Bahamian dollar is unattractive as a money laundering currency because of its non-convertibility, backing arguments that The Bahamas needs to split the domestic economy from its international counterpart when it comes to regulatory intensity.
While many will question why the domestic banking system needs such intense regulation based on the Central Bank's findings, it is equally unclear whether they will play well with the likes of the Financial Action Task Force (FATF), European Union (EU) and other standard-setters on anti-money laundering and counter terror financing.
Such bodies have been responsible for The Bahamas imposing increasingly stringent regulation, with this nation still on the FATF monitoring list of countries deemed to have "structural deficiencies" in their anti-financial crime regimes.
Meanwhile, turning to other sectors, the Central Bank added: "In the Central Bank's assessment the wholesale jewellery, diplomatic, pawnshop, and crypto-asset sectors are simply too small to pose a material financial crime threat to the Bahamian domestic banking industry.
"Automobile and maritime dealers have sometimes been suggested as vectors for money laundering via cash purchases of vehicles and boats. The evidence to hand suggests that these sectors are heavily non-cash based. In separate work, the Central Bank received data from the Bahamas Customs Department. This data documents few incidences of expensive or exotic car imports to The Bahamas."
The regulator added: "There are doubtless many cases of Bahamian petty criminals self-laundering cash proceeds. Bahamian authorities prosecute and secure convictions on several such cases per year. There is little if any evidence, however, of wholesale, third-party cash money laundering in the domestic banking industry.
"It is worth noting that there is no cash money laundering in the international banking and trust sector, which absent rare exceptions is barred from accepting cash deposits or investments."