Uncle Sam’s Secret Weapon
Not so long ago the term “global trade” was used to describe the economic activities between multinational companies. Nowadays the term also applies to the activity of individuals, known as “day traders,” using one of the many on-line trade portals from the comfort of their home. Those who are accustomed to trading online or through brokers often neglect to remember that the US dollar, in its function as global reserve currency, is the most important monetary instrument for conducting global trade.
If we accept this fact, we also must accept that it makes the United States of America the most powerful nation in the world. This not because of the size of its economy or its military might but because almost all global trade transactions must be cleared through a vast network of US-based correspondent banks. Banks all over the world must open and maintain accounts with correspondent banks in the United States in order for them to be able to serve the billions of their clients who are engaged in global trade and business.
Another fact that is widely acknowledged is that since September 11, 2001, the era when one could open and operate a bank account with a “fake drivers license” has ended. More and more security regulations and checks have been put in place to avoid misuse of the banking system. However, it is a wrong perception to believe that if you are not engaged in illicit transactions such as drugs, money laundering, and terrorism financing, you have no need to worry about the more stringent security measures implemented after the events of September 11, 2001. Just as you have experienced more stringent security measures at international airports throughout the world, behind the scenes the financial world has also tightened security.
More and more we see that it is becoming increasingly difficult for the so-called smaller banks located outside the United States of America to serve the needs of their clients making use of their international banking services. Due to the pressure of US regulatory authorities, the risk and compliance departments of the US correspondent banks are making it increasingly difficult for small banks located outside of the US to operate and service their clients. There seems to be a tendency for the US regulatory authorities to apply a reverse burden of proof approach to these smaller foreign banks, with the US applying a “shoot first and ask questions later” approach by assuming foreign banks are all legitimate suspects. All it takes for a US regulatory authority is to suspect wrongdoing for a threat to be made or for foreign accounts to be frozen.
The impact on the reputation and ability to function that these actions can have on the small foreign banks’ liquidity can be enormous. The challenge for many offshore-based small banks is that they rarely have balance sheets that are of a similar size to the big banks and that allow the big banks to absorb any impacts without substantial damage. In fact, some of the recent fines imposed on major banks in the US are larger than the entire deposit base of some of the smaller international banks.
In addition, even an allegation of wrongdoing, without any evidence to support it, is enough to create panic among clients and could lead to a run on a bank’s deposits—something that could break one of the smaller banks in a matter of days. As almost all banks in the world need the US corresponding banks to operate internationally, the US has a very powerful weapon that is more effective than almost any other form of economic or financial sanctions.