CORRESPONDENT banking, which has been a lifeline for many economies, has faced significant challenges due to the perceived risks associated with Anti-Money Laundering (AML) fines, executive director for the Caribbean at the Inter-American Development Bank (IDB) Robert Le Hunte has said.
And to help address this issue, Le Hunte is proposing that an insurance product be tailored to address this challenge.
Le Hunte made the suggestion during the 2023 US-Caribbean Banking Forum titled “Shaping the next decade of regional economic development.”
What Is a Correspondent Bank?
According to Investopedia, correspondent bank is a financial institution that provides services to another one—usually in another country. It acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank.
“We’ve seen the fallout as international banks withdraw from this vital service (correspondent banking), disrupting financial stability in our region. When I was a treasurer at RBL (Republic Bank Ltd) in Trinidad, I witnessed the active pursuit of correspondent banking relationships by international institutions. However, a paradigm shift occurred when the perceived risk of facing substantial fines made this business unattractive,” Le Hunte said.
“And while the perceived risk is not truly reflective of the actual risk in the Caribbean region, the reality is that risk is at the core of the problem. I therefore propose a creative solution—an insurance product tailored to address this specific challenge,” he said.
Le Hunte said insurance has traditionally been a way for the financial sector to manage perceived risks effectively.
“By having an insurance company assess and price the perceived risk associated with AML fines, we can develop a risk premium that will establish a ceiling on the maximum fine a corresponding bank may have to pay if ever charged,” he said,
“The size and level of this premium should be contingent on the insurance company’s evaluation of the AML measures being implemented by the institution. Moreover, the funding for this premium could be sourced from local banks, the US Treasury, or any institution concerned about the adverse effects of the loss of correspondent banking relationships on our region’s economy,” Le Hunte said.
Le Hunte said this innovative solution does not necessitate the creation of new institutions.
“Instead, it tackles the heart of the issue by capping the perceived loss. By doing so, we can encourage the larger banks to reconsider their participation in the region. It’s a win-win solution that safeguards our financial stability and promotes continued economic growth,” he said.
“This insurance-based approach offers a practical and financially feasible solution to the challenge we face. It bridges the gap between perceived risk and the actual risk in the Caribbean region and could be a game-changer in revitalising our correspondent banking relationships. By working together to implement this solution, we can strengthen our financial sector, foster economic growth, and ensure a more secure future for the Caribbean region,” Le Hunte said.
converting discussions
into actionable plans
During the forum, Le Hunte was asked what are the types of resources and partnerships that Caribbean countries, financial institutions, and people need to overcome the challenges and effects of financial de-risking?
Le Hunte said while platforms like the 2023 US-Caribbean Banking Forum are essential for sharing experiences and generating ideas, it is in the working group sessions that allow stakeholders the chance to roll up their sleeves and delve deeper into solutions.
“These sessions provide the opportunity to convert discussions into actionable plans that can make a tangible difference in the lives of Caribbean citizens and the region’s economic landscape,” he said.
“As we look ahead to the conclusion of this conference and our plans for 2024, I share in the hope that the fruits of these working sessions will manifest as tangible draft concepts. These proposals should be practical, feasible, and informed by the collective wisdom and expertise gathered here today,” Le Hunte said.
Le Hunte called for a working group to delve deeper into the proposal for the introduction of insurance to address the challenge of correspondent banking.
“Our collective aim should be to return next year with not just more discussions but with real achievements to celebrate. Let us share stories of successful initiatives, implemented as a direct result of the insights and collaborative efforts born here today,” Le Hunte said.
Le Hunte said the IDB’s mission is to eliminate poverty in the region.
“In pursuing this mission, the Bank confronts complex and expensive challenges head-on. One of the paramount issues the countries of the Caribbean Region is climate change, with severe consequences for our environment, economies, and societies. To mitigate these effects and promote a sustainable future, the IDB is dedicated to investing in sustainable infrastructure. However, let’s not underestimate the cost and complexity of these endeavours,” he said.
Climate change challenges
According to estimates by the IDB, Le Hunte said, the infrastructure and social spending required to meet climate change goals in our region range from seven to 19 per cent of Gross Domestic Product (GDP) by 2030.
“That’s a staggering figure, equivalent to a financial commitment between US$470 billion to US$1.3 trillion in 2030,” he said.
“It is evident that these substantial investments cannot be borne by government spending and borrowing alone. We need the active participation, the capital, the innovation and the expertise, of the private sector, the financial institutions, and the investors,” Le Hunte said.
He, however, said we must actively work towards creating an enabling environment that encourages their participation.
“This is where the IDB emerges as a central player in this endeavour. The IDB’s role extends far beyond just financial assistance. It is a catalyst for change, a force that can foster an environment conducive to private sector involvement. It provides the necessary support, guidance, and frameworks for investments that can drive sustainable development and poverty reduction,” Le Hunte said.
“The challenges before us are immense, and the financial demands are colossal. But the commitment of the IDB, coupled with the engagement of the private sector and financial institutions, and forums like these, offer a promising path forward,” he said.
strengthening financial
inclusion in the Caribbean
Vice president and senior director of the Atlantic Council’s Adrienne Arsht Latin America Center, Jason Marczak, stated that the shared goal of the forum was to come away with concrete solutions to further strengthen financial inclusion in the Caribbean.
The forum took place at the IDB’s headquarters in Washington, DC.
“Today’s forum comes against the backdrop of several challenges facing the Caribbean. Climate change, energy, food insecurity, and rising crime and violence are making regional and international headlines. However, flying under the radar has been financial de-risking and its effects on regional economic development. The effects are potentially devastating and can severely limit economic growth,” Marczak said.
Marczak mentioned that correspondent relations for most Caribbean countries have dropped by more than 25 per cent. This has had an impact on the region’s tourism industry, the remittance sector, and access to foreign trade and investments.
“Fortunately, we are starting to see developments and momentum around these issues, with commitments from several members of the US Congress, leaders across the Caribbean, as well as the US Government. Today, we will look to build on this momentum,” he said.
Marczak highlighted that the goal is to come up with quantifiable steps and marching orders that lead to further critical action.
Due to financial de-risking, addressing issues such as climate change and energy becomes much more difficult, he said.
He emphasised that understanding the gravity of the situation, a task force produced a report last year titled “Financial De-Risking in the Caribbean: The US Implications and What Needs to Be Done.”
Marczak also mentioned that a second report titled “The Importance of Defining Correspondent Banking as a Public Good” was also recently published.
need to make finance more accessible
United States congressman Adrian Espiat, originally from the Dominican Republic, said he feels as though the United States needs to do more for the region.
“I feel very strongly that the United States has sort of turned its head for far too long and not looked at Caribbean issues, and we wander around the world and we have lost our footing and our leadership in the hemisphere and we must retake that. We have great opportunities to do that, I think the pandemic revealed to us what we really already knew which is that the supply chain should be closer to our hemisphere and our production in many ways, and our economic activity, provides a great opportunity and we must be able to set in motion the mechanism to allow that to happen,” Espiat said.
Espiat said access to financing continues to be a major challenge facing the region.
“We see how nations in the Caribbean and the hemisphere continue to incur debt and how their debt service proportion of their budget continues to grow and how in some cases it may even hurt their credit rating so we must address that, we must streamline the process and make it easier for those nations to access finance, easier and more flexible terms that’s the reality, we cannot saddle those countries with a debt service that would break their back we must facilitate their transition,” he said.
Espiat said the voices of the Caribbean are important.
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