A shortage in U.S. cash could lead to devaluation of the Cayman Islands currency, but Financial Services Minister Wayne Panton said Monday that he expects the shortage will be temporary.
Money transfer companies, used primarily by expat workers to send cash overseas, started shipping U.S. cash off island after Cayman National Bank stopped providing banking services for the transfers.
The minister, speaking on Radio Cayman, said Cayman National had to stop offering the cash transfer services or risk losing its own access to the U.S. banking system.
Mr. Panton said Cayman’s banks are having trouble getting U.S. cash at the standard 84-cent exchange rate, with some banks having to pay as much as 88 cents CI per U.S. dollar. “If it became a long-term issue, it would have an impact on our economy, a negative impact,” he said.
JN Money Services, which handles the transactions for the remaining cash transfer agencies in Cayman, stopped accepting Cayman dollars at the end of August when its account with Cayman National was closed. The transfer companies are currently restricting transactions to US$500.
The issue for money transfers companies such as MoneyGram and Western Union is related to increasing regulation in the U.S. over concerns that cash transfers could be used to launder money or fund terrorism. When Fidelity Bank stopped offering Western Union services over the summer, executives there cited higher risk and costs of compliance, along with declining fees for the transfers.
Earlier this month the International Monetary Fund, presenting on these issues in St. Kitts and Nevis, called on Caribbean states to come up with a regional strategy to address correspondent banking for money transfers. In the short term, Charles Enoch and Jacques Bouhga-Hagbe noted in their presentation, central banks could step in to provide the banking services.
The IMF reports that 10 banks in at least five countries had pulled out of corresponding banking relationships as of June, following a global trend of banks getting out of the cash transfer business.
In an article in the IMF’s September Caribbean Corner newsletter, Mr. Bouhga-Hagbe wrote: “The potential loss of correspondent banking relationships could destabilize financial systems and economic activity in the Caribbean.”
JN and Cayman National, along with Mr. Panton’s ministry, the Cayman Islands Monetary Authority and other banks in the area were involved in negotiations for weeks in August trying to find a solution that would allow the remittance companies to continue operating even after the bank closed the account.
The current solution, Mr. Panton said, involves flying the cash to Florida to deposit in a bank there, but that has caused a shortage in U.S. currency in Cayman. The minister described bank restrictions on U.S. dollars as an “overreaction” to a short-term problem.
Some banks have restricted U.S. cash withdrawals only to customers, while other banks are charging fees to non-account holders to get U.S. cash. He said there could be “a bit of profiteering going on.”
Minister Panton said he has heard some reports of hoarding U.S. currency and said some banks are having to import U.S. cash.
People in the Cayman Islands sent almost $180 million overseas as remittances in 2014. Most of that, more than $110 million, went to Jamaica through cash transfers. More than $23.5 million in remittances went to the Philippines.
Mr. Panton said his ministry continues to work with JN to find a solution so that the company will not have to ship the cash off island. One possible solution, he said, could include working out a model so that the Cayman Islands Development Bank could start taking the deposits and acting as the correspondent bank to move the deposits into the U.S. banking system.
“Everybody is trying to find a solution to this,” the minister said.
Fidelity Group shut down its Western Union operations in Cayman, Turks and Caicos and the Bahamas in July. Mr. Panton said his ministry is working with Western Union to reopen here.
***Editor’s Note: This story was updated at noon, Sept. 22, to describe accurately JN Money Services’ relationship with the remaining cash transfer agencies in Cayman.***