Financial stability and correspondent banking: the CBS perspective |10 July 2018

Amid the dynamic developments in the international payment landscape, a key component of international payments remains the use of payment intermediaries. Such intermediaries are known in the payments world as correspondent banks, and these consist of the major global banks (including JP Morgan, CitiBank, CommerzBank, and DeutscheBank, just to name a few of the large ones) with which commercial banks have to hold accounts in order to be able to effect international payments.

Like locally-based commercial banks, these global banks have procedures in place to manage their relationship with their customers. One of those procedures, which is causing a stir in the financial sector, is known as de-risking. De-risking is the process by which these global banks evaluate their customers (of which banks in Seychelles are included) to assess whether the risk being taken on to manage these accounts meets their risk appetite - i.e. the level of risk associated with the customer that the global banks are prepared to accept - and whether those risks are in proportion to the returns received from those customers.

The Central Bank of Seychelles (CBS) has previously raised de-risking as a threat to correspondent banking relationships within Seychelles and other jurisdictions. Within Seychelles, de-risking has threatened or resulted in the end of several correspondent banking relationships. Consequently, under the mandate of ensuring financial soundness and financial stability, the Central Bank undertook measures to attempt to mitigate the threat and impact of de-risking. Such measures included a roadshow to key countries in Europe and to the United States in September/October 2017. The roadshow, conducted by the Central Bank and the Financial Services Authority (FSA), engaged with correspondent banks and foreign regulators to address the concerns pertaining to Seychelles in general and the Seychelles financial sector in particular, in an effort to ensure that existing correspondent banking relationships are maintained and that those that had been severed could be reconsidered. During the roadshow, the Seychelles team had the opportunity to emphasise the measures in place as well as those being deployed to ensure that Seychelles is not used as a channel for money laundering and terrorist financing.

In addition to the roadshow, other measures employed over the course of 2017 included the establishment of the High Level Committee on De-risking, as well as the raising of the country’s concerns pertaining to de-risking and correspondent banking relationships for small island states by the ministry responsible for Finance and the CBS at the 2017 Spring and Annual Meetings of the International Monetary Fund (IMF) and World Bank.

Furthermore, work is ongoing through means of technical assistance from the IMF relating to the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) framework and additional endeavours to strengthen the framework. Examples of these endeavours include the December 2017 and April 2018 IMF visits to Seychelles whereby focus was on legislative amendments and strengthening of the AML/CFT Supervisory Framework. As per standard policy, CBS is liaising with relevant regulatory stakeholders and upon completion of the reviews will bring on board other key financial sector stakeholders. In addition, there is an ongoing review of the Financial Services Strategy, with focus on the International Financial Services. The main objective of this review, which is being done by various stakeholders from the government, regulatory authorities and the private sector, is to ensure the continued existence of the financial services industry, as well as the industry’s adherence to key global developments in standards and best practice.

More recently, the Central Bank has secured the engagement of Crown Agents Bank from the United Kingdom, on a consultancy basis to encourage capacity building, enhance the compliance frameworks of the participating banks and to allow access to international payments. This undertaking is viewed as one of several measures to address the loss of correspondent banking relationships experienced by banks in Seychelles and forms part of the broader strategy to tackle the threat of de-risking to the domestic financial sector.

This arrangement has been made possible by the fact that the business model of the Crown Agents Bank allows for engagement with smaller institutions who may have higher compliance costs but lower returns due to smaller volumes of transactions, and the cost will be borne jointly by the Central Bank and banks participating in the programme. The process of engagement involves on-site reviews by the compliance team of the Crown Agents Bank to ensure that the practices and standards of the banks are in line with international best practice and Crown Agent Bank’s requirements. Following positive completion of the reviews, the banks will be able to utilise the correspondent banking services of the Crown Agents Bank.

The loss of correspondent banking relationships to the domestic banking sector, as a whole or in part, will have adverse implications on economic activity and financial transactions for government, individuals and corporates alike. Consequently, the Central Bank and other relevant stakeholders will endeavour to maintain any progress made thus far, to address deficiencies in the legal framework and ensure that the required structural changes are made to permit the successful implementation of any necessary policy or legislative amendments. As such, the Central Bank of Seychelles continues to monitor the threat of de-risking and is proactive in mitigating this risk that the financial sector is currently facing, in order to ensure the financial stability of the country.

Contributed