The recent trend of banks canceling their correspondent banking arrangements with other banks for fear of taking on too much money laundering risk, amid ever increasing compliance costs, has hit the Caribbean and especially money service providers hardest.
The so-called de-risking has had an impact on trade and the ability to make cross-border transfers in many countries of the region, with few solutions in sight.
For Christopher Louard, director of Bank Supervision at the Eastern Caribbean Central Bank, one possible answer is the introduction of a regional digital payment system based on blockchain technology.
This concept would effectively lead to the digitalization of the countries’ Fiat currencies through the creation of a regional digital currency and a multilateral clearing system built on a distributed ledger or blockchain technology.
Speaking at the annual conference of the Caribbean Regional Compliance Association in Cayman last week, Mr. Louard quoted reports by the German central bank outlining the benefits of the new technology in terms of operational efficiency and financial inclusion.
While this solution requires in-depth research, and may be many years away from implementation, there are prospective benefits, Mr. Louard said. The distributed ledger technology could, for instance, reduce cost and complexity in the settlement of financial markets transactions.
“This may be the region’s answer to de-risking and the loss of correspondent banking relationships,” he argued.
A survey by the Financial Stability Board earlier this year concluded that banks have cut their correspondent relationships by 6 percent worldwide between 2011 and 2016. The number of active correspondent banks for U.S. dollar and euro transfers fell by as much as 15 percent.
Mr. Louard said although digital currencies are a new field that generates reservations, regulators must conduct more research now, because Singapore or countries in Northern Europe are already light years ahead in their trial of central bank issued digital currencies.
“We want to be ahead of the curve. Why do we have to wait until it is already implemented?”
A “wait and see” approach would come too late and be too expensive, as Caribbean countries would be forced to follow the leader, he argued.
Questioning the idiosyncrasies of a cross-border payment system that requires a payment from St. Kitts to Trinidad to be routed through the U.S., he said a central bank issued digital currency at a multilateral central bank in the Caribbean would not only allow for direct payments, but it is also one of the key areas to address the issue of de-risking.
To tackle the increasing cost of compliance and growing operational and compliance risks, he noted, investment in technology is necessary in other areas, too.
The St. Kitts-based regulator named KYC utilities and leveraging big data as examples.
A KYC utility is a central third-party repository that stores the data and documents that financial institutions need to carry out their know-your-customer due diligence. Once a customer’s data has been entered into the system, member financial institutions can access the information for their own KYC needs.
Because a lot of KYC data is available on government systems, such as national security systems or driver’s license information at traffic departments, it is also possible for financial services firms to investigate ways of connecting to the data that already exists. However, this would require an individual’s pre-approval at collection.
In addition, Mr. Louard called for a change in perspective when it comes to compliance.
As opposed to establishing a compliance culture and setting the tone from the top, a current buzz phrase in the compliance industry, he said “we must combine the right organizational culture with corporate social responsibility.”
Because as a regulator he had seen too many organizations “whose actions are not in line with their words,” the corporate culture should be derived from a value or ethical system.
“An ethics-based compliance program is far more effective than a rules-based program,” he said.