Written by Bruce Bowen
Over the past few years the Caribbean Financial Institutions have faced the loss of Correspondent Banking Relationships, with some Fl’s no longer able to process USD transactions. Correspondent Banking Relationships (CBRs) are important to financial system stability because they enable international transactions, like international wire transfers, and having a limited number of CBRs may limit the options for customers or result on increased fees.
CARICOM heads of government and Caribbean regulators have made this a major priority for the region. While there are many reasons for this, the underlying issue for banks providing CBRs is that their regulators require them to understand and assess the compliance risk of each bank individual relationship. Accordingly, the risk is perceived as too high relative to the profitability of maintaining the CBR. Until banks providing CBRs are confident that the risk of providing services to a Financial Institution (FI) is manageable and this can be demonstrated to their regulator, de-risking will continue to be a problem for the Caribbean.
Reducing the Risk to Banks Providing CBRs
U.S. Regulatory guidance provides factors to consider when assessing risk of each CBR. Banks are required to assess the risk of criminals using any CBR to bring illegal funds into the international payments system. The following would allow banks to better assess risk, and therefore be more comfortable servicing a given Fl.
Assessment of Country risk:
While U.S. Regulators identify jurisdictions deemed ‘higher risk’ for money laundering & terrorist financing, most Caribbean countries are assessed higher risk, with no way for banks to assess the relative risk of individual countries. Caribbean Financial Action Task Force (CFATF) performs periodic country evaluations and prepares reports, however, banks are not likely to review these reports in detail given the small size of the markets. This means that the risk that three Caribbean countries are facing of being grey listed by the EU is not just a country problem, but a regional one.
The EU Commission creates their own draft blacklist, using the FATF grey list as the baseline. This draft is then submitted for EU Council approval and becomes the EU blacklist. In the Caribbean, The Bahamas has been part of the FATF grey list for a while and is working on the agreed action plan to enhance AML/CFT controls. And, as of February 21st, 2020, Barbados and Jamaica were grey listed, and have made a political commitment with the FATF to also work on the agreed-action plan. In the meantime, these 3 Caribbean jurisdictions are at reputational risk just by being part of the EU Commission´s draft, which is particularly challenging with the economic slowdown due to covid-19.
Assessment of FI’s inherent business risk:
U.S. Regulators advise banks providing CBR’s to assess the inherent risk of a Fl based upon a variety of factors; nature of the Fl’s business, types of customers targeted, geographic markets covered, services provided, quality of management, etc.. This is typically assessed based upon visits or interviews with the Fl, which can be costly relative to the expected earnings from the services provided.
Confidence in KYC due diligence and customer risk ratings:
The foundation of any Anti-Money Laundering & Anti-Terrorism Financing (AML/ATF) program is ensuring that Fls know their customers and have identified those high-risk customers requiring enhanced due diligence. KYC requirements are defined by regulation in every jurisdiction and across the Caribbean reflect FATF guidance. However, FIs do not consistently maintain complete and up to date KYC information, which may limit the opportunity for ongoing risk assessment. It is difficult, especially for smaller FIs, to put in place systems and controls to ensure quality KYC information.
Confidence in suspicious activity identification and reporting:
Notwithstanding strong KYC compliance every Fl will on occasion have customer transactions that are unusual. The FIs obligation is to identify these unusual transactions, investigate to understand the transaction and if it is suspicious report it to the relevant authorities in the jurisdiction. However, FIs often do not have robust systems and procedures to identify unusual transactions or infrastructure in place to investigate them.
Increased clarity on expected due diligence for FIs:
U.S. regulatory guidance regarding correspondent banking is high level with no objective standards. With more detailed guidance indicating what is a reasonable approach to due diligence assessment, banks would have greater confidence that they will not face regulatory criticism for providing services for an Fl.
An objective 3rd party could support the risk assessment of each bank individual relationship and help mitigate risk. ADVANTAQ was founded exactly with this spirit, to help close the gap by supporting FI’s KYC quality assurance and providing insights into the risk that is being assumed by the institution. ADVANTAQ delivers concise reports that summarize the relative risk in critical areas, correspondent banks would be able to assess individual FI risk more easily. ADVANTAQ would have access to KYC information and evidence the efforts done to mitigate risks, being able to report that on behalf of the FIs.
A Caribbean Strategy to Strengthen AML/ATF Controls
The large U.S. correspondent banks see the Caribbean as a largely homogeneous region, and they are not going to take a different approach to managing their risk on a country by country basis. As every country faces the same problem the only way to effectively address the issue is with a regional solution. This solution has four key components.
A. Caribbean Regional Compliance Ratings
Establish an objective ‘3rd party’ agency that will produce and maintain compliance risk reports and ratings for countries (based upon CFATF reports) and individual Fls. The agency will work with U.S. correspondent banks to build standard reporting formats and the methodology to assess Fl risk. FIs are not required to undergo compliance assessments by the agency, but correspondent banks will seek the reports as a cost effective and objective way to assess their risk. Establishment of the agency and its methodology will require oversight/input from regional regulators.
B. Centralized Compliance Control Services
Due to their small size, most indigenous FIS do not have the technical resources nor the systems capacity to maintain an AML/ATF program with the controls that would be required in developed markets. As a result, the risk that criminals will successfully use smaller, regional FIs to access international payment systems is greater than U.S. regulators would like. ADVANTAQ was founded with the vision to strengthen regional AML/ATF compliance. We create the scalability required to have centralized control functions for KYC due diligence and transaction monitoring, employing top talent and investing in world-class systems to mitigate this risk while doing so at a lower cost than FIs are incurring today.
While FIs cannot delegate their responsibility to manage their compliance risk, ADVANTAQ maintains KYC data quality assurance, confirming file completeness, verifying information against external databases and ensuring high risk accounts are flagged and enhanced due diligence completed. Similarly, centralized transaction monitoring could leverage world class systems to ensure that alerts are identified and objectively actioned to agreed standards, and STR’s filed when appropriate.
C. Regional Regulatory Oversight
As compliance risk ratings and control services centralize, regional regulators will need to take a coordinated approach to AML/ATF compliance oversight. Regulations and reporting requirements will have to be largely aligned to ensure efficiencies are achieved for FIS and that controls are effective. The agency and control services entity will require regulatory oversight, and this must be provided on a centralized or coordinated basis.
D. Dialogue with U.S. Regulators
U.S. banks (and those in other jurisdictions) providing CBRs require more specific guidance from their home regulators regarding what level of due diligence is reasonable when assessing the risk of individual Fls. Regional regulators need to engage with U.S. regulators to explain the controls being implemented to reduce risk and to agree that correspondent banks can rely upon these controls and reporting to assess compliance risk. Ultimately this must be communicated to U.S. banks in terms of more detailed guidance issued.
Key Issues to be Addressed
- Privacy of Customer & Fl Data: Fls, Regulators and policymakers in each country will require that the confidentiality of customer and Fl data held by the control services entity be maintained. While this is achievable with robust systems and controls, all parties will be required to review and sign off on the systems solutions. In addition, the entity will require annual SAS70 audits and other periodic testing to confirm that the system controls are effective.
- Confidentiality of Fl Compliance Reports & Data: To assess compliance ratings and prepare compliance reports for FIs the rating agency will need to complete examinations/audits of Fls. FIS and regulators will require that privacy of information be maintained and that individual ratings be confidential and used only by correspondent banks to assess their risk levels. Protocols will need to be developed to balance the need for confidentiality against the need to provide comfort to correspondent banks.
- Regulatory Approvals: Caribbean regulators are responsible to ensure that FIs are properly managing AML/ATF risks and for overall financial system stability in their market. Both the Regional Rating Agency and the Centralized Control Services Entity and the relationships between them and FIS will all require regulatory approval. This should be a coordinated process across regulators.
- Political Will for a Regional Solution: This proposal will require much coordination and commitment across all countries. While there is significant motivation across the Caribbean to address the DeRisking issue, it will require political will to gain consensus and implement a solution.
About the Author
Bruce Bowen is a retired banking executive and a businessman with ample experience in the Caribbean region. He is also the founder of ADVANTAQ, a company dedicated to the provision of KYC/AML services to the Caribbean Region. ADVANTAQ leverages people, technology and insights to build a strong solution for FIs and help them mitigate risks originating from KYC/AML processes by ensuring up-to-date and quality information is maintained through managed services. ADVANTAQ also provides ongoing monitoring, alerts management and risk-based remediation services.
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