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Banks ending relationships with customers


Certain non-banking financial institutions, businesses and prominent individuals here may soon have to consider storing their money under their beds, as the international commercial banks with which they have accounts have instructed them to withdraw their money.

Since late last year, some credit unions, building societies, lending institutions, retailers of vehicles, furniture and appliances, real estate agents and prominent lawyers have one by one been receiving letters from CIBC FirstCaribbean and Scotiabank, giving notice that their accounts will be closed.{{more}}

The letters, which in some cases gave clients only one month to wrap up business said the move was necessary owing to a change in internal policy.

“We wish to inform you that owing to a change in our internal policy, relating to correspondent banking and third party transactions, it has become necessary that we bring our banking relationship with you to an end,” the letter from one of the banks to a client said.

The bank informed its clients that should the account not be closed by the date indicated, it would mail a bank draft payable to the client representing the credit balance of their account if any, on that date. The bank also prohibited the client from any further deposits to the account before it is closed.

“Kindly note that from the date of this notice until the date of closure, you will no longer be permitted to send or accept wire payments and we will no longer accept over the counter deposits to this account.”

Most of these institutions and individuals have since transferred their money to the Bank of St Vin­cent and the Grena­dines (BOSVG), the only indigenous commercial bank here.

SEARCHLIGHT spoke with the Financial Intelligence Unit (FIU) and some senior bankers familiar with this development and they explained that the banks have been closing the accounts as part of a phenomenon called “de-risking.”

“De-risking refers to financial institutions exiting or restricting business relationships to avert the risk related to anti-money laundering and terrorist financing. The main drivers of de-risking are the banking institutions, while the affected recipients are money service businesses, credit unions, non-profit organizations and correspondent banks,” Carla James, director of the FIU said in a written statement.

She explained that regulatory standards call upon financial institutions when establishing correspondent banking relationships (CBRs), to perform enhanced customer due diligence on the respondent bank.

“Some argue that the de-risking phenomenon is the result of stronger regulatory practices in the area of Anti-Money Laundering and Terrorist Financing (AML/CFT), and as a result of penalties and fines imposed, international institutions have adopted a new means of addressing deficiencies. That is, to terminate business relationships with certain types of businesses and regions, because of the overall risk posed, rather than managing the risk.”

James was at pains to point out, however, that the cases of financial institutions which were fined hefty sums were “exceedingly horrendous cases involving banks that intentionally breached the laws for decades, and had significant fundamental AML/CFT failings.”

The international banks have explained that they are seeking to protect their CBRs, which enable the provision of domestic and cross-border payments.

The International Monetary Fund (IMF), in a Staff Discussion Note, published in June 2016, entitled: “The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action,” said those most affected by the de-risking phenomenon are smaller emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europe and the Pacific.

According to the IMF, “pressure on CBRs could disrupt financial services and cross-border flows, including trade finance and remittances, potentially undermining financial stability, inclusion, grown and development goals. The current limited economic consequences partly reflect the ability of affected banks to rely on other CBRs, find replacements, or use alternative means to transfer funds. Still, in a few jurisdictions, pressure on CBRs can become systemic in nature if unaddressed.”

One senior local banker, who spoke to SEARCHLIGHT on the condition of anonymity, said what is taking place makes it particularly difficult for indigenous non-bank financial institutions to operate.

“They are going to become unbankable if the indigenous bank where they bank don’t step up on their compliance, and the cost of compliance is really high; it is huge,” he explained.

According to the banker, only one commercial bank in Belize currently has CBRs. “All the others have lost their CBRs. It is closer home than we think,” he said.

The banker also explain­ed that not only are some non-bank financial institutions considered risky by the international banks, but so too are some individuals and businesses.

“If you are in a high-risk business, you will be affected,” he said.

“Until the compliance regime to which they subscribe is good enough to show that their operations are clean, this will happen.

“They are just closing down the space for bad money to be circulated,” the banker said.

The FIU, however, cautioned taking a blanket approach to de-risking.

“What should be avoided at all cost is the wholesale termination of entire classes of customers, without comprehensively and seriously taking into account, the level of risk or risk mitigation measures for individual customers within a particular sector,” James said.

The IMF, in their Staff Note, recommended that countries facing severe loss of CBRs put in place temporary mechanisms. “In countries facing a severe loss of CBRs and diminishing access to the global financial system, the public sector may consider the feasibility of temporary mechanisms ranging from regional arrangements to public-backed vehicles to provide payment clearing services.”