Services include Offshore Business Set Up, Offshore Company Formation, Registration and Offshore Business Bank Account Introduction in Curacao.

Publications by

De-risking: A Really Serious Threat

Not so long ago, the US Treasury's Financial Crimes Enforcement Network (FinCEN) and the New York State Department of Finance imposed large penalties or sanctions on some banks for infractions connected with the recent financial crisis, money laundering irregularities, and violations of political embargoes. The fines imposed ran in the hundreds of millions of dollars. As a direct result of this, many banks made huge investments to implement and maintain systems and procedures to monitor the profile and activities of their clients in order to manage and avoid potential exposure to these hefty sanctions and fines. As a logical next step, risk reward analysis was conducted by these banks to determine the return on these investments. The result of these analyses conducted by certain large banks, revealed that the income they are generating providing services to certain clients, specifically foreign banks located in certain small economy countries are lower than the costs to monitor these accounts.

As a consequence, recently certain banks decided to end corresponding services to some banks located in small economy jurisdictions such as the Caribbean and Central America because the profit they make is not enough to justify the expense of monitoring the activity. In summary, it costs these banks more to control and manage the risk of servicing these accounts than the income they are generating by servicing these accounts. The decision to stop providing services is called “de-risking.”

This has been happening quietly but recently it reached front page, when Bank of America, the second largest American bank, stopped providing services to the Bank of Belize, that country’s largest bank. This announcement came as a wake-up call, as suddenly many became aware of the real potential negative impact on-going de-risking decisions can have. The Bank of Belize is not the only bank confronting this problem but it is the most notable one thus far, as it accounts for a very sizable part of the economy and financial infrastructure of Belize.

The recently published, “Department of State's International Narcotics Control Strategy Report” identified over 60 countries, many of them located in the Caribbean region, as “countries of primary concern” for money laundering and financial crimes. Here, one must realize the fact that the financial and trade architecture of all Caribbean countries “cannot survive” the withdrawal of US correspondent banking relationships. The economies of Caribbean countries are so interconnected to the US economy that a lack of access to US dollars can seriously impair their ability to conduct transactions and international business.

What makes this all rather peculiar is the fact that almost all Caribbean nations are engaged in the delivery of international financial services, services which nowadays can only be delivered by countries with very strict anti-money laundering (AML) and counter terrorism financing (CTF) laws and practices. To bring this into perspective, one must realize that access to US correspondent banking services is needed by all who conduct payments and other business activities in US dollars. So, without US correspondent banking services, it will become difficult, if not impossible, to pay for certain goods and services. This could lead to scarcity of goods, inflation, poverty, an increase of non-regulated cash-based transactions, and other adverse social and economic consequences. As one analyst from Belize was quoted, “Rather scary stuff, good that we did not reach that point, at least not yet. But it is a very real threat”.

It is obvious that the de-risking problem ranks very high on the agenda of many leaders in the Caribbean, Central, and Latin America. Many political and diplomatic efforts are currently being devoted with the aim of finding a solution for this imminent problem. However, if one considers the facts that 1) the anti-money laundering and terrorist finances efforts will not become less and 2) that banks are private institutions in the business to make money for their shareholders, it becomes doubtful that a political-based solution would be found.

We here at Sadekya believe that a potential solution should be sought by lowering the expenses for the banks, while providing them with the tools to effectively control and manage their risk. Perhaps organizations such as Financial Action Task Force and the OECED and other similar supra-national bodies could develop and implement a centralized data center, to which banks can outsource the data collection, storage, number crunching, data mining, and management needed to control and manage their risk.

Sadekya Fiduciary Partners.

Rudsel. J. Lucas TEP, Managing Director
The Triangle Office Building, Hoogstraat 20-22
P.O. Box 4750
Curacao
Telephone: 599 9 4652698
rudsel.lucas@sadekya.com