The De-risking Dilemma: It’s time for private-sector solutions

March 28, 2017

“Every day for three years we have been talking about de-risking,” said the Governor of the Eastern Caribbean Central Bank during the annual FIBA AML Compliance Conference. In fact, the topic of de-risking was one of the leading items covered during the pre-conference private-public workshop and select panel discussions at this year’s conference. Even attendees who visited our booth in the exhibition hall brought up the challenges of de-risking.

In an ever-expanding global regulatory environment, local Caribbean banks confront unprecedented headwinds. The efforts of US authorities to combat money laundering, terrorist financing, and tax evasion have led to unintended consequences, in particular, making correspondent banking relationships far more expensive and less attractive to global financial institutions. Their appetite for providing correspondent banking services to foreign financial institutions has soured for several reasons: increased regulatory enforcement, uncertain regulatory expectations, and the potential for large fines. The Caribbean is particularly disadvantaged by local privacy laws in many jurisdictions which prevent information sharing about a bank’s customers; the numbers impacting this region are sobering.

The most candid conversations at the conference on the impact of de-risking occurred during the Caribbean Roundtable breakout session. According to the Eastern Caribbean Central Bank which its members are comprised of Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines, there are eight banks that have no direct correspondent banking accounts, 17 banks that have just one correspondent, while nine others have between 2-3 correspondent banks. The small and mid-cap banks that have zero correspondent banking accounts are forced to deal with downstream correspondents. These intermediaries that do have relationships with correspondent banks may create a buffer between US correspondent banks and the island banks, but they do not necessarily mitigate the risk for US correspondents, who should be dealing directly with the ultimate customer.

Unfortunately, so many business decisions by US bankers are driven by US regulators. “They have poisoned the well,” remarked one of our clients. On the one hand, “the OCC criticizes de-risking by correspondent banks in the Caribbean and other markets while the regulators continue to consider working in the region as high risk based on jurisdiction.” He said regulators need to cut banks slack and view correspondent banking relationships on a case by case basis rather than cast a negative judgment on jurisdictions.

We think the private sector can help. What is needed is fresh thinking – an entrepreneurial approach by intermediaries (qualified and reputable consulting firms) who have a foothold in the US and the Caribbean that can facilitate bank-to-bank relationships and act as a vetting solution to provide US banks with an increased comfort level and the respondent with a suitable advocate for its institutions.

It is past time for this ongoing conversation about de-risking to end.