The Tribune

Credit unions’ “over-grading” of the financial crime threat posed by customers has gone too far in the opposite direction with the percentage classified as “medium risks” near tripling in 2020.

The Central Bank of The Bahamas, unveiling its analysis of anti-money laundering data collected from its licensees, revealed that the industry had previously been automatically “over-classifying” clients - especially those with $30,000 or more in their bank accounts - as “high risk” prior to 2019.

While that issue was corrected last year, with the percentage of clients deemed “high risk” dropping from 3.1 percent in 2019 to just 0.7 percent, those rated as posing a “medium risk” increased threefold year-over-year - rising from 5.4 percent to 16.2 percent.

A significant number of “low risk’ account holders were moved into the “medium risk” category, with those enjoying the former classification dropping from 91 percent to 82.7 percent year-over-year.

“Given its focus on personally known natural persons within The Bahamas, the credit union sector is not inherently a high risk,” the Central Bank said. “As at 2019, the sector was over-classifying its account holders as high risk.

“One reason for this outcome was that many credit unions automatically classified moderate balance account holders (such as exceeding $30,000 in deposits) as high risk. This “‘over-grading’ issue was largely corrected by 2020.:”

However, the Central Bank added: “In 2020, the majority of customers (83 percent) were rated low risk, reflecting a decrease from 2019 when approximately 91 percent of customers were in this category.

“The proportion of medium risk increased threefold from 2019, while the proportion of high-risk customers decreased. It seems that largely solving the problem of too many high risk customers has migrated into very many medium risk customers. The Central Bank will continue to work with the sector on these issues.”

The credit union sector filed just three suspicious transactions reports (STRs), covering a collective $81,000, in 2020 compared to six reports involving a cumulative $721,000 in 2019.

“The reasons given for these STRs being filed included negative news, structuring transactions to avoid reporting requirements and unusual or suspicious transaction involving cash,” the Central Bank said. “All these STRs were filed by one credit union. The credit unions reported taking an average of 2 days or less to file a STR with the FIU.

“There were 275 unusual transactions reports (UTRs) reportedly received internally by money laundering reporting officers (MLROs) of the credit unions, which represents a conversion rate of one percent.

“One credit union reported the vast majority of these transactions, but filed no STRs. Comparing the above numbers to the banking sector suggests that credit union STR and UTR practice has considerable room for improvement. The Central Bank will work with credit unions to improve their transaction reporting practices.”

Turning to the credit union industry’s growing size, the Central Bank report said: “As at year-end 2020, the credit union sector reported 49,686 customers, 79,279 accounts, deposits of $418m and loans of $226m. In comparison to 2019, the credit union sector experienced increases in each of these categories....

“Credit unions reported 17,299 inactive accounts amounting to $15m, and 5,616 dormant accounts of $1.9m in 2020. The number of inactive and dormant accounts increased by 73 percent and 78 percent, respectively.

“Of note is that approximately 22 percent of accounts were categorised as inactive. These large increases are likely due to more attention by the credit union sector to accurate reporting, rather than an increase in actual dormant or inactive accounts.”

As for the money transmission businesses (MTBs), the Central Bank said there was an 89 percent increase in inbound transmissions that were rejected in 2019 due to anti-money laundering issues. Some 418 transactions, involving a collective $304,000 or less than percent of transmissions received, were impacted.

“This represented an almost threefold increase from the previous year,” the Central Bank said of the value involved. “There were 115 outbound transactions suspended by the MTBs due to anti-money laundering issues (an eight-fold increase from 2019), valued at $550,000 (less than 0.5 percent of the value of transactions sent).

“In 2020, the MTBs reported terminating 58 customer relationships due to anti-money laundering-related issues, valued at $501,000, a reduction of 18 percent from 2019. Two MTBs reported such terminations. There were no sanctions hits reported.”

As for suspicious transactions reports, the Central Bank added: “The MTBs reported filing 86 STRs, an increase of 19 percent from 2019. The aggregate value associated with those STRs was $105,000 compared to $437,000 in 2019.

“One MTB reported 63 percent of the STRs for 2020. The MTBs reported that 288 unusual transaction reports (UTRs) were reported internally, which represents a conversion rate of 30 percent.

“The MTBs reported taking between five to 45 days to file their STRs. Two MTBs reported taking seven days or less to file these STRs, while 2 MTBs reported taking between 30 to 45 days. The Central Bank will work with the industry on this point.”

As to the sector’s size, the Central Bank said: “During 2020, the MTBs collectively reported serving 162,769 customers (2019: 165,807), conducted 484,540 transactions (2019: 696,000), sent funds totalling $125m (2019: $152m), and received funds totaling $ 36m (2019: $39m). Transaction volumes were probably somewhat depressed due to COVID-19 unemployment, and somewhat increased due to inter-family support payments across borders.

“During 2020, the majority of the value of transactions were sent to Haiti, Jamaica and the United States of America, similar to 2019. Inter-island Bahamian transfers accounted for approximately 5 percent of transactions sent by the MTBs. There was a small increase in the value of transactions sent to the US, and there was a slight decline in the value of transactions sent to Jamaica.”