The Central Bank of Belize hosted the 40th annual conference of the Caribbean Group of Banking Supervisors, whose members collaborated on the ongoing challenge of removing a global financial noose.
The agenda of the conference in San Pedro, Ambergris Caye, included topics such as implementation of supervisory frameworks, financial inclusion and regulation, and achieving Financial Action Task Force (FATF) effectiveness under the theme of Resilience in Changing Times.
“Academics and journalists have been writing about financial ‘de-risking’ in the Caribbean region for at least a decade, and how it has been getting worse over time. Simply put, de-risking is where foreign banks perceive that the risks of doing business in a region outweigh the rewards,” according to The Guardian (November 11, 2022).
The conference, June 7 to June 10, brought together participants from central banks and other supervisory agencies across the Caribbean.
Special guests included representatives of the International Monetary Fund; United States Federal Reserve; U.S. Federal Deposit Insurance Corporation; World Bank; SWIFT, a Belgian cooperative society whose main function is to serve as the main messaging network through which international payments are initiated; CFATF (Caribbean Financial Action Task Force), and Alliance for Financial Inclusion, a policy alliance of member central banks and financial regulatory systems in developing nations with the objective of financial inclusion, reported The Central Bank of Belize (June 10).
Enhanced security on financial fraud and new regulations to stem money laundering and terror finance are all at play in banking in the Caribbean, reported Reuters (July 12, 2016).
According to America’s Quarterly (July 20):
“To be sure, the Caribbean is rightly known for its tax havens and as a center for money laundering. But financial wrongdoing also occurs in the U.S. and Europe, where much of the money comes from in the first place; even U.S. Treasury Secretary Janet Yellen said recently that “the best place to hide and launder ill-gotten gains is actually the United States.”
Alex Cobham, director of the Tax Justice Network, a transparency advocacy group in the United Kingdom, argued that financiers from the United States and Europe established tax havens in the Caribbean in the first place. Now, their countries are imposing harsh penalties on the Caribbean while leaving their tax havens, from Luxembourg to Wyoming, not scrutinized, even though U.S. and European countries enable more money laundering and tax abuse than anyone else, according to Tax Justice Network’s Financial Secrecy Index.
“The de-risking movement has triggered a collision of interests: As banks tighten controls, small, poor countries most dependent on trade say they’re being unfairly cut off from global finance,” reported Reuters.
Channing Mavrellis, director of the illicit trade area at the Global Financial Integrity think tank in Washington, D.C., said in America’s Quarterly that given the limited resources of Caribbean economies, it is not just to hold to the same standards as prosperous nations:
“The huge challenge in Caribbean countries is capacity . . . It is wrong that we expect so much from them (given) what they’re working with.”
At a Western Union counter in a Belize City grocery store are the granddaughters of Yvonne Williams, a nursing assistant in Boston who is building a home in Belize for retirement. Williams, 63, said she recently tried to send $700 from the U.S. to Belize for construction. The transaction was delayed, and she could not pay her workers. “The last couple of times I tried to send money, Western Union said they couldn’t send it. I had to wait a couple of days. And it affected my work here.” (Photo by Jose Cabezas/ Reuters (July 12, 2016)
Belize Lost 83% Correspondent Banks
Belize was hard-hit when U.S. authorities tightened bank regulations and enforcement in the wake of the 2008 financial crisis.
In 2015 and 2016 alone, Belize lost 83 percent of its correspondent banking relationships, as international banks “de-risked”, leaving the country due to higher due-diligence costs and fears of penalties for operating in a country with poor controls, according to America’s Quarterly.
The International Monetary Fund (IMF) reported that this de-risking made Belize’s banking transactions slower and more expensive; lowered the value of wire transfers; hurt importers and exporter, and caused a sharp drop in deposits in domestic banks.
Belize is now progressing through a Financial Action Task Force (FATF) evaluation, which could take years until completion.
In the Caribbean, overlapping and opaque standards are a part of the problem.
The Financial Action Task Force has made its criteria clearer over the past few years, but the European Union’s transparency criteria remain non-transparent, said Andrew Dalip, a lawyer who specializes in anti-money laundering policy in the Caribbean and is supporting Belize in its FATF evaluation.
“I can’t tell you how many examples I am aware of where transactions between us in the Caribbean and people of EU (European Union) territories are blocked,” Marla Dukharan, an economist from Trinidad and Tobago, told America’s Quarterly.
“We’re subject to all kinds of unjustifiably enhanced due diligence, penalties for the reputation, like visa restrictions and loss of investor confidence and, ultimately, socio-economic costs heaped upon already “struggling economies”.
Bank of America ended its 35-year relationship with Belize Bank in April 2015, reported Reuters. Bank of America officials cited a “complex matrix of factors”, Glenford Ysaguirre, then Governor of The Central Bank of Belize, told Reuters (July 11, 2016), and that there was nothing Belize Bank could do to maintain its dealings.
“They were saying that they are compelled to do what they are doing because of the pressure from their regulators,” said Ysagguire.
Shortly after, Bank of America dropped two other Belizean banks.
Belize Bank began its own de-risking campaign, closing accounts for remittance services catering to people without access to traditional banks often because they do not meet the financial criteria.
Migrants use these services to send earnings home. In Jamaica, remittances as a percentage of gross domestic were 16.9 percent in 2015, according to the World Bank. The figure was 7.7 percent in the Dominican Republic and 4.8 percent in Belize.
Caribbean states are both recipients and sources of remittances: Central American immigrants in Belize, for example, send earnings back home.
Dilip Ratha, a World Bank economist, said:
“It is really detrimental to the bottom-of-the-pyramid crowd. Remittances were one simple form of financial transaction that often brought them to the periphery of the financial system.”
“Nobody Wants to Be the Next HSBC”
The 2008 financial crisis spotlighted banking misdeeds and provided an incentive for regulators to attack financial fraud. HSBC and BNP Paribas stood out.
In 2012, HSBC agreed to pay nearly $2 billion in fines to U.S. authorities for allowing itself to be used by cartels to launder drug money coming out of Mexico, among other lapses, and acknowledged that it had failed to conduct due diligence, according to Reuters (July 11, 2016).
Analyst Jim Antos of Mizuho Securities said that while the fine was huge in cash terms, the settlement costs were “trivial” in terms of the company’s book value, reported Reuters (December 11, 2012).
In December 2021, HSBC was fined again for money laundering failures, this time for almost £64 million by the United Kingdom’s Financial Conduct Authority, according to Sky News (December 17, 2021).
Also, in December 2021, NatWest was fined £265 million by the U.K.’s financial watchdog for failing to stop a drugs gang from laundering hundreds of millions of pounds, including a £700,000 deposit brought to the bank in trash-bin bags, reported Sky News (December 13, 2021).
In 2014, a nearly $9 billion penalty was levied against BNP Paribas to resolve accusations that it violated U.S. sanctions against Sudan, Cuba and Iran, according to Reuters (July 11, 2016).
In July, the Belgian National Bank’s Sanction Committee gave a €15 million fine to BNP Paribas Fortis for breaches of anti-money laundering legislation, reported The Brussel Times (July 10)
“There is a sense that for a period of time now, it’s been open season on the banks,” Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, told Reuters. “Nobody wants to be the next HSBC or BNP Paribas. You’re not going to take a risk.”
The Caribbean appears to be the worst-hit of all regions by the new scrutiny, a World Bank survey found in 2015.
Caribbean states – with their small populations and economies – offer miniscule profits for banks and are seen as hubs for offshore banking, susceptible to money laundering, tax evasion and the narcotics trade flowing from South America. Most banks do not see it as worth their while to do business against these risks, experts said to Reuters (July 11, 2016).
“We were told by one large bank that if your bank does not have about $2 billion in assets, it is not feasible for us to do business with you,” said Glenford Ysaguirre, Governor of The Central Bank of Belize (2008-2016).
Belize’s total assets were $1.85 billion in May, according to The Central Bank of Belize.
Prime Minister of Barbados Mia Mottley arrives at the International Monetary Fund’s headquarters in Washington, D.C. on April 12. (Photo by Stefani Reynolds/Getty Images)
Barbados National ID Card
Barbados Prime Minister Mia Mottley testified before the U.S. Congress in September 2022 on the harms done in the Caribbean by international financial regulations, reported America’s Quarterly. She said, for example, that it could take “weeks or months” for locals and foreign investors to open bank accounts.
To solve the problem, Barbados began issuing a national digital identification card in 2022, which cost millions. Barbados “has had to divert money away from social spending and critical infrastructure spending to ensure that we do not have our banks cut off from the rest of the world.”
The total assets of Barbados were 7.54 billion in March, according to the Government of Barbados.
Kareem Michael, Governor of The Central Bank of Belize, since 2021
The Central Bank of Belize
The Central Bank of Belize, established in 1982, was the successor of the Monetary Authority of Belize (1976-1981), which had replaced the Board of Commissioners of Currency (1894-1976). The Central Bank is responsible for monetary policy, which includes maintaining a stable exchange rate as well as promoting credit and exchange conditions that encourage growth in the Belizean economy. Since May 1976, Belize has maintained a fixed exchange rate of BZ$2.00 to US$1.00.
Established in 1983 under the auspices of the CARICOM (Caribbean Community) Central Bank Governors, the Caribbean Group of Banking Supervisors serves to enhance and coordinate bank supervisory practices in the English-speaking Caribbean with the goal of aligning them with internationally accepted standards, according to The Central Bank of Belize (June 10).
The Caribbean Group of Banking Supervisors has been accepted by the Basel Committee for Banking Supervision whose membership includes banking supervisors from 17 regional jurisdictions.
Herstatt Bank Crisis
The Basel Committee was established by the central bank governors of the Group of Ten countries in 1974 in the aftermath of serious disturbances in international currency and banking markets, notably the failure of Bankhaus Herstatt, in Cologne, West Germany.
Herstatt had made wrong bets on the direction of the U.S. dollar, which had experienced significant volatility in 1973 and 1974. By June 1974, it had accumulated DM470 million in losses compared with capital of DM44 million. On June 26, German regulators forced the bank into liquidation, meaning that counterparty banks that had released payment of Deutsche Marks to Herstatt in exchange for U.S. dollars did not receive their payments because the bank was closed at 16:30 German time, which was 10:30 New York time. Herstatt ceased operations between the times of the respective payments.
Backstop for Quota Resources
Most countries belong to the International Monetary Fund, which has 190 members. Cuba, North Korea, Taiwan and Vatican City are exceptions. Liechtenstein applied for membership in May.
The Group of Ten refers to the group of entities that agreed to participate in the General Arrangements to Borrow (GAB), which provides the International Monetary Fund (IMF) with additional funds to increase its lending ability.
The General Arrangements to Borrow (GAB) was established in 1962, when the governments of eight IMF members – Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom and the United States – and the central banks of Germany and Sweden. Two years later, Switzerland, then a non-member of the IMF, joined the group.
The IMF used the funds to rescue the pound sterling in 1964. Between 1964 and 1970, for example, the General Arrangements were activated six times to finance four drawings by the United Kingdom and two by France amounting to US$2,155 million, all of which had been repaid by August 1971, according to The General Arrangements to Borrow (1984), International Monetary Fund.
GAB participants agreed unanimously that the agreement should lapse after its final term ended in December 2018, according to the International Monetary Fund (December 26, 2017). The General Arrangement to Borrow had not been activated in 20 years. Participants also agreed not to renew the associated agreement with Saudi Arabia.
The General Arrangements to Borrow (GAB) may be activated only in limited circumstances where a proposal to activate NAB has not been accepted by NAB participants.
The New Arrangements to Borrow (NAB) was established in 1998 between the IMF and 38 member countries and institutions, including the Group of Ten as well as several emerging markets, such as Chile, Bangko Sentral ng Pilipinas (Philippines), Brazil, China, India, Malaysia, Mexico, Russian Federation and Thailand.
There are no Caribbean nations in the New Arrangements to Borrow.
NAB participants agreed to specific amounts of credit arrangements in Special Drawing Rights (SDRs), which are international reserve assets created by the International Monetary Fund in 1969 to supplement its member countries’ official reserves. The SDR is not a currency. It is a basket of currencies (U.S. dollar, Euro, Chinese yuan. Japanese yen and the British pound.) Its value in terms of the U.S. dollar is determined daily based on the spot exchange rates at around noon London time.
Among the New Arrangements to Borrow participants, the least amount in credit arrangements was 340 million SDRs from Bangko Sentral ng Pilipinas (Philippines); Bank of Israel; Cyprus; Hong Kong Monetary Authority; Malaysia; New Zealand; South Africa, and Thailand.
There are no Caribbean nations in the New Arrangements to Borrow.
Reform Global Financial System
“Unless there is a rethink of one, debt sustainability; two, trade strategy, and three, how we preserve macroeconomic stability and growth, we are not going to make it in this world,” said Barbados Prime Minister Mia Mottley in an International Monetary Fund discussion (January 26).
Prime Minister Mottley is an architect of the 2022 Bridgetown Initiative, which demands reform of the international financial system because it underserves many and overlooks some. It calls for urgent and decisive action for an unprecedented combination of crises: cost of living, stemming partly from the COVID-19 crisis and the war in Ukraine; developing countries’ debt crisis following climate disasters and COVID-19, and the climate crisis as glaciers melt and storms and droughts intensify.
There are three steps. The first step is for the International Monetary Fund to provide emergency liquidity; the second step is to expand multilateral lending to governments, and the third step is to activate private sector savings for climate mitigation and fund reconstruction after a climate disaster through new multilateral mechanisms.
Since the release of the Bridgetown Initiative in September 2022, one of its proposals, the Resilience and Sustainability Trust, has been operated by the International Monetary Fund. The trust helps low- and middle-income countries increase their resilience to long-term shocks, such as climate disasters and pandemics. It is financed by Special Drawing Rights from developed countries.
By January 2023, Resilience and Sustainability Trust Agreements had been made with Barbados and Rwanda.