or over a year in the Councils of the Organisation of American States (OAS), Caribbean countries have been warning of the threat to the region’s economic and political stability arising from the withdrawal by US banks of correspondent banking relations to Caribbean banks. Those relations have been in place for over a century, giving significant profits to US banks.
The cost of the correspondent banking relations (CBRs), including the additional costs related to safeguards against anti-money laundering and counter terrorism financing, have been borne by Caribbean banks. Not a cent of it has fallen to the account of US banks.
Factors causing withdrawal of CBRs
It is worth repeating the factors that have triggered the decision by US banks, with a global reach, to withdraw CBRs from banks in the Caribbean.
The first is that the regulatory bodies in the United States have issued guidelines to banks relating to money laundering and counter terrorism financing. Among the guidance, they have provided is that Banks should exercise extreme caution in their relationship with foreign banks because of the risk of money laundering and terrorism financing. As part of the anti-money laundering, counter terrorism financing (AML/CTF) regimes, penalties for offences have increased dramatically. In some case the magnitude of the fines are many times greater than the size of the actual offence.
The second is that uninformed political rhetoric has wrongly labelled the Caribbean area as a ‘tax haven’.
These two factors have caused the US banks to take the position that the rewards they get from providing CBRs to Caribbean banks are not worth the risk of a money laundering or terrorism financing incident that would cost them to be fined millions of dollars. Therefore, all but one of them has withdrawn their relations. The one bank that remains has also given notice of its imminent departure.
The effect of losing CBRs
In effect, the loss of these CBRs is severing the Caribbean from the global trading and financing system. It is isolating the region from doing business with it largest trading partner, the United States of America, and it will affect trading with other countries in Latin America since settlement of accounts with these countries are usually through US correspondent banks.
The importance of CBRs
CBRs are necessary for Caribbean countries to pay for goods and services they buy from the US, purchases of which bring revenue and jobs to the people of the United States. It is significant that for the last 20 years, the US has enjoyed a massive annual balance of trade surplus with the Caribbean. Last year, for instance, the US benefited from a balance of trade surplus of US$5.1 billion with the 14 countries of CARICOM.
So, in the end, the loss of CBRs will hurt the United States, even as it could emasculate the Caribbean if it is left unchecked. But CBRs are also vital for the Caribbean to be paid for the goods and services it sells to the US and other countries in Latin America that settle their accounts through US banks. Among these services are: payment of tourism receipts and remittances from the Caribbean diaspora.
Caribbean – not a tax haven
A ‘tax haven’ is an area or jurisdiction where payable tax is hidden, and where countries, in which such payable tax originates, are prohibited from receiving information on these taxable assets. That description does not fit the Caribbean; it is other countries – some in the Organisation for Economic Cooperation and Development (OECD), but not the Caribbean.
All Caribbean countries have tax information exchange agreements with the US and many other major nations; all but two CARICOM countries are signatories to the US Foreign Account Tax Compliance Act (FATCA) which obliges them to report US citizens or companies that store financial assets with them; Caribbean countries are also signatories to many Mutual Legal Assistance Treaties under which they provide legal and law enforcement assistance to other countries on tax matters and financial crimes. No money or transactions are hidden or protected from investigation.
Strict AML/CTF laws and enforcement
On the anti-money laundering and counter terrorism financing front, every Caribbean country is compliant with the rules of the Financial Action Task Force (FATF). They are also subject to regular reviews of their systems by the FATF and the IMF when it conducts its financial appraisal programmes of individual jurisdictions. It is significant that no bank or other financial institution in the Caribbean has been a party in any of the cases of money laundering or tax evasion prosecuted in the US.
The Security Concern
Three specific difficulties that the complete loss of CBRs would create for the Caribbean are: (i) interrupting the flow of foreign direct investment: (ii) blocking remittances to the poorest and vulnerable in Caribbean societies; and (iii) forcing AML/CTF risks underground and away from regulation and monitoring.
If the Caribbean loses control of the flow of money, the danger is that a pernicious, secret system will take over, emasculating all the valuable work in transparency and accountability that Caribbean jurisdictions have done, and creating opportunities for criminals and terrorists to take advantage of underhanded schemes over which governments have no control. The effect of this will not stop at the borders of Caribbean countries.
Caribbean economies are deliberately wide open to foreign investment. Because their populations are small, there is not enough domestic capital formation in Caribbean states to finance public or private sector development, therefore there is a reliance on foreign direct investment (FDI) to push the pace of growth, create jobs and increase national wealth.
Caribbean small states have much to lose if FDI inflows are impeded by the withdrawal of CBRs. For example, net FDI inflows correspond to 17% of GDP in St. Kitts and Nevis, 14% in St. Vincent & the Grenadines and Antigua and Barbuda, and 11% in St. Lucia and Grenada.
On the remittance side, the loss of CBR’s has already adversely affected agencies that deal with the transmission of remittances from the diaspora to Caribbean countries, causing several of them to close. These remittances are extremely important to Caribbean states which cannot afford comprehensive social welfare schemes. In the case of Haiti, remittances account for 22.7% of its GDP; for Jamaica, it is 16.3%; and for Guyana 10.6%.
The loss of CBR’s, leading to economic contraction, an upsurge in employment and an expansion of poverty, threatens to weaken small economies still further and cause social and political destabilisation. Persons without work and with no other means of support, inevitably turn to crime. The most attractive and lucrative crimes are related to drug trafficking, which knows no national boundaries, and which permeates throughout the hemisphere, directed mostly at the United States and Canada.
Therefore, no country in the hemisphere will be immune from the harmful effects of the withdrawal of CBRs and de-banking that now confront the Caribbean.
The OAS and all its member states should move now to stop this cancer.