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Archive -Seychelles

Understanding the Correspondent Banking Risk |25 March 2017

"The G8 and G20 are urging countries to take action on several fronts: strengthening their anti-money laundering regimes, enforcing greater transparency of company ownership, and supporting efforts to trace, freeze and recover stolen assets. They are also committed to automatic exchange of information to tackle tax evasion. And given the interconnectedness of our economies, global compliance is required to tackle many of today’s challenges."

OECD

Foreword from Illicit Financial Flows from Developing Countries

 

There is a real concern expressed by many countries that their financial lifeline is at risk: in Africa, the Caribbean, in Central Asia, and in the Pacific. The risk arises because the international banks, known as correspondent banks, that act as intermediaries for a country's domestic banks when they are receiving funds or making payments on behalf of a business or personal customer, are increasingly declining to do business with countries where the value of doing business is not worth the risk of doing business with that country. Correspondent banks services are the lifeblood of international trade and are critical when people and businesses need to pay or receive payment for things, or pay in a currency other than their own.

At its simplest, the international correspondent banks are looking at two issues for each country that they do business with and weighing them against each other. They consider the value of doing business with a given country and against the risk profile of that country. From these they then make a decision on whether the value of the business is worth the risk or not. For many countries, particularly smaller countries, they simply decide that the risk is too high and decide to cut off that country from their services. This is placing the financial services in smaller countries offering international financial services, such as Seychelles, at particular risk.

There are different stakeholders with differing interests in this growing problem. First of all the corresponding banks themselves, which are overwhelmingly private banks, that make their own decisions on whether to de-risk from a given country or not. Then there are the regulators in that country who are concerned with economic and financial stability and integrity. There are also the finance ministries and treasuries that are concerned about tax revenues and money laundering and finally law enforcement agencies that try to limit the abuse of the financial system to finance terrorist and criminal activities and the breach of UN sanctions.

The value and risk of doing business for a correspondent bank varies from country to country but a critical fear shaping the decision to de-risk from a country is the risk of being sanctioned or fined a huge amount of money for inadequate anti money-laundering measures or the breaching of UN sanctions. Seychelles is a small country and has always offered a relatively small volume of business to international banks. While small, in the past this volume has been sufficient to interest them however as tourism continues to grow and foreign direct investment has prospered in the last decade. So why would they lose interest in us now? It may be because the risk has changed significantly. Since 2008, large banks have begun to be fined billions of dollars by US, UK and EU authorities for failing to prevent money laundering, tax evasion and the breaching of UN or other sanctions.  Some examples of the fines made by the US and the UK in recent years are listed in the accompanying table.

 

 

 

Public fines of such magnitude threaten the very existence of these large international banks. They are reacting by reducing the risk. Based on the risk profile of a country and its financial services sector, international banks are increasingly making decisions to cut off banks and countries from their international banking services which they evaluate as being too high a risk.  

Seychelles’ role in the international financial services sector is almost exclusively in the wholesaling of offshore companies to intermediaries in other financial centres. These intermediaries then sell the companies on to third parties without the Seychelles authorities knowing who the owners of the Seychelles registered offshore companies are. Many of these anonymous companies have been used to set up bank accounts for money laundering, tax evasion and even terrorist and proliferation financing. With so many criminal investigations leading back to Seychelles, it has become the perception of the international banks that the country is facilitating money laundering and terrorist financing through a weak legislative framework for regulating the offshore. The risk is too high for their business appetite and they are opting out of doing business here.

Seychelles is not the only country with a tarnished reputation. In recent years Panama and the British Virgin Islands have also been criticised, but they have responded more quickly than Seychelles to emerging new standards of practice and introduced tighter regulations, particularly in relation to the State centralising information about the true directors and owners of all companies registered in their countries. In contrast, recent proposed amendments to Seychelles legislation being driven from within the industry are being assessed as weakening rather than strengthening Seychelles commitment to preventing money laundering and terrorist financing. The international banks can be expected to react negatively if these amendments pass into law.

Both the IMF and the World Bank have conducted detailed studies in relation to the de-risking phenomenon. It is worth noting what they have to say about the country or clients affected.

"Clearly, the affected countries themselves need to be called to task. They need to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, especially in the areas of AML/CFT and tax transparency. "

 

Christine Lagarde

Managing Director IMF

Address to New York Fed Jul 2016

 

“Factors driving de-risking tend to be a combination of cost/benefit considerations and concerns about AML/CFT risks. That is particularly acute for clients that generate low volumes, but present significant AML/CFT risks.”

 

World Bank

October 2016

 

Contributed by A. Mondon

 

 

 

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