Local banks pass anti-financial crime 'shadow shopping'

The Central Bank of the Bahamas.

The Central Bank of the Bahamas.


Tribune Business Editor


The Central Bank yesterday hailed the results of a 'mystery shopper' style survey of Bahamian financial institutions which found "rigorous evidence" they were in full compliance with efforts to combat financial crime.

The regulator, in a statement, said it had hired Evaluasi, a specialist consultancy in the anti-money laundering world, to pose as a potential client seeking to establish a bank or trust account with multiple Bahamas-based institutions. Describing this as a "shadow shopping" exercise, the Central Bank suggested this was the first time it had been done a the behest of a regulator to test its licensees' Know Your Customer (KYC) or onboarding processes.

Of the 50 institutions initially approached by e-mail, the regulator said just 16 - or 32 percent - responded to some 250 solicitations to establish a client relationship. "This demonstrates that The Bahamas is not a particularly welcoming jurisdiction for unsolicited potential client approaches," the Central Bank added.

"Most happily, 100 per cent of the engagements between the 16 responding firms and the 'shadow shopping' team evidenced that the responding institutions provided upfront disclosure of the relevant anti-money laundering requirements, notably the Know Your Customer (KYC) rules coupled with FATCA (US Foreign Account Tax Compliance Act) and CRS (Common Reporting Standards) reporting requirements.

"This result is similar to a 2020 multi-country exercise conducted by the Evaluasi researchers, in which a smaller set of Bahamian institutions also recorded a perfect compliance result. The Bahamas was one of only four jurisdictions to do so." The survey findings also come close behind last December's findings that The Bahamas has achieved perfect '40 out of 40' compliance with the Financial Action Task Force's (FATF) anti-financial crime recommendations.

"The 2023 shadow shopping result, in addition to the 2020 result, gives good assurance that Bahamian banks and trust companies demonstrate a strong compliance culture," the Central Bank added. "Furthermore, banks and trust companies are only willing to on-board clients that can satisfy the relevant KYC as well as FATCA and CRS reporting requirements consistent with international standards codified in the legal and policy frameworks of this jurisdiction.

"These results are also consistent with the Central Bank’s examination and supervision results. Broadly, the Bahamian international banking and trust sectors do not welcome dubious new clients." Evaluasi, in its full report, said the findings showed potential clients either have to undergo a full KYC check or else they would be unsuccessful in opening a bank or trust account in The Bahamas.

"Of course, this study is not an exhaustive examination of compliance and regulatory processes in The Bahamas and should not be interpreted as a blanket determination that Bahamian financial institutions are compliant with the full range of their regulatory obligations," it added. "However, it does constitute rigorous evidence that there is broad-based compliance with important preliminary processes that would impede or prevent attempts at illicit financial activity.

"The finding of no non-compliance in our sample of Bahamian licensees suggests a number of avenues for further investigation. First, are other similar country contexts as compliant, or does The Bahamas stand out as a high performer? It would be valuable to implement the same 'shadow shopping' exercise in other, similar contexts.

"Second, will this behaviour change over time? Can we expect Bahamian institutions to maintain this high level of compliance as economic, financial, institutional, international and other variables change? It would be especially interesting to investigate how the next MER (Mutual Evaluation Report) and CFATF (Caribbean Financial Action Task Force) may change compliance," Evaluasi continued.

"Third, it would be useful to expand the study to corporate service providers (CSPs). CSPs may be engaging some of the banks that did not respond to our inquiries, and may provide a back door to anonymous banking or trust formation. Fourth, changing the profile and/or depth of the approach to make the non-compliance more appealing for the banks could lead to crucial additional knowledge about compliance. In sum, the high compliance uncovered in this study offers helpful but narrow comfort about the state of anti-money laundering compliance in The Bahamas."

The fake 'clients' purported to come from a variety of countries and regions, including Europe, Latin America and Asia. Evaluasi said: "We received 33 responses from our 238 initial inquiry e-mails (a response rate of 13.9 percent). We found no non-compliance.

"All e-mail inquiries were coded into one of the following categories: direct reference to KYC regulations (5 percent), e-mail conversation ends before we have all information (9 percent), or there is no response to our initial inquiry (86 percent). We consider all of these to illustrate a lack of non-compliance....

"Ten responses explicitly stated their commitment to KYC regulations; 13 of the responses specifically referenced the need for certain information to meet KYC requirements; 13 requested an in-person or phone meeting; and nine referred us to a tax lawyer. There is clear overlap in these elements. For example, most responses that stated a commitment to KYC rules also requested information/documents to comply with these requirements."

Evaluasi continued: "From our engagement with the licensees, it seemed that they were invested in knowing and clearing their customers prior to opening business relationships with them. The study showed that banks are wary of unknown customers and prioritised a meeting or phone call.

"They are also reluctant to engage with areas outside of their expertise, as we learned from the low response to the commercial bank account request and from the consistent referrals to a tax lawyer. The low response to the bank account request may be a result of banks feeling suspicious of a potential customer and choosing to avoid the question of compliance by refusing to engage altogether, though this conclusion is speculative.

"There is also the consideration that Bahamian institutions as a group are more focused on cross-border trust and funds management business than on cross-border banking business. What this approach does not show us is how banks would respond when asked for a compliance breach by a known and high-wealth customer, or when engaging with someone who presents themselves as a more knowledgeable and/or higher value customer."

John Rolle, the Central Bank's governor, said in a statement: “This 'shadow shopping' exercise demonstrates that the Central Bank will take a more proactive and more holistic approach to assessing the state of anti-money laundering compliance within this jurisdiction supplemental to its traditional supervisory tools.

"We want our industry to demonstrate exemplary anti-money laundering compliance, which in this instance they have done. This is not to say that our supervised institutions are perfect in an anti-money laundering compliance sense, but this and many other findings suggest that Bahamian banks and trust companies are among the stronger groups globally when it comes to avoiding new clients who cannot demonstrate clean sources of funds.”


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