De-risking threatens US dollar access for Cayman Banks

| 05/04/2016 | 8 Comments
Cayman News Service

George Town, Grand Cayman

(CNS Business): De-risking by US banks, which left the overseas money transfer services firms unable to operate in Cayman for some time last year, still threatens to cause a much bigger crisis for the financial services industry, with the practice of closing bank accounts deemed to be too risky focused on Cayman banks that could potentially be cut off from the US dollar network. 

The difficulties last summer, when local retail banks were forced by their US banking partners to terminate business relationships with various money transfer firms, were a symptom of a much larger problem, as US banks continue to examine their correspondent banking relationships with the smaller international Class B banks, comprising the majority of Cayman’s $1.4 trillion offshore banking sector.

Over the past five years, US regulators such as the Securities and Exchange Commission (SEC), the Department of Justice and the Financial Crimes Enforcement Network (FinCEN), which is focused on financial crime and money laundering, have paid a lot of attention to such cases, taking a particularly aggressive stance towards correspondent banks.

With tough enforcement actions for falling foul of anti-money laundering regulations, including potential fines and penalties running into hundreds of millions of dollars for just one bad payment, it is no surprise that US correspondent banks are looking to reduce exposure to offshore banks with branches or subsidiaries in Cayman to clear international transactions, where even just the possibility of a problem is perceived.

Banks like JP Morgan, which was previously the biggest provider of correspondent banking services, have cut relationships with banks south of the continental United States, and the Bank of New York has done similarly, although to a lesser extent. By such actions they are effectively saying that the money they make on wire transfer fees for these banks is not enough to justify the risks of doing business with them.

“The complication for Cayman is that the smaller offshore banks may not generate enough revenue for their correspondents to justify the risk that the correspondent may perceive to be associated with providing services to that offshore bank,” said Kobi Dorenbush, former Chief Executive of Caledonian Global Financial Services. ‘The risk for Cayman is that a compliance manager sitting at a US bank in New York could decide that the economics of doing business with banks in Cayman is not worth the risk, and with fewer correspondents providing services to Cayman, then Cayman potentially won’t be able to access the US dollar market anymore. Banks might get 90 days notice if they are lucky,” he said.

In a statement to CNS Business, CIMA’s executive management team said the authority was aware of the “unintended consequences of de-risking”, which presents a “realm of new risks and threats to correspondent relations”.

CIMA said the challenges being faced were part of the “global phenomena”, which is considered to be a priority by both regulators and governments, with discussions having been ongoing for the past 18-months. “To date, there has been no agreed solution,” CIMA added, “as the matter essentially involves a cost and benefit analysis by the financial institutions that offer these services.”

The authority went on to say how major oversight bodies like the Financial Stability Board, the IMF and the World Bank, among others, have said that financial institutions should not embark on wholesale de-risking using group or regional classifications and instead should examine relationships on a case-by-case basis using a risk based approach.

Compounding the problem has been the regular appearance of Cayman banks in the headlines in connection with financial frauds. Cayman National was fined $5 million for its subsidiaries’ role in US tax evasion; Fidelity was connected to the FIFA bribery scandal and Butterfield just recently said it expects to take a near $5 million hit to its accounts in relation to a US tax evasion investigation.

“US banks are de-risking but from our perspective in Cayman we can’t tell what they are thinking about in terms of the sort of revenue they want to make from individual banks,” said Mark McIntyre, Managing Director – Cayman Islands for CIBC FirstCaribbean International Bank and the current President of the Cayman Islands Bankers Association.

“Speaking for CIBC FirstCaribbean, as a Class A bank, we have a strong network of correspondent banking relationships, as I am sure our competitors do,” he said, adding that CIBC FirstCaribbean’s correspondent banking relationships have not changed. “We use Wells Fargo and we had previously used Wachovia, which was taken over by Wells Fargo. I am aware that some Class B banks have had problems establishing new correspondent banking relationships,” he noted.

However, according to Dorenbush, the impact on the banking sector can already be seen in how retail banks in Cayman generally have less correspondent banks to process international transactions, with a reduced operation from Bank of New York, Citibank, Deutsche Bank and Wells Fargo, as the main players left after JP Morgan greatly reduced its relationships south of Miami. JP Morgan has also significantly curtailed its business in providing subscription and redemption accounts for offshore funds, he said.

In addition to the loss of prestige and further downward pressure on the number of banks licensed in the Cayman Islands, the possible consequences of de-risking for could be a reduction in the size of the Cayman banking industry, which could even lose its position of sixth largest financial centre in terms of cross-border assets and fifth globally for cross-border liabilities. While a number of local jobs could potentially be at risk, Class B banks do not tend to be major employers in the jurisdiction.

The loss of correspondent banking relationships could therefore have significant consequences for Cayman. While Brazil has had some of its banks cut off from the US dollar system, the Central Bank of Brazil was able to intervene in those cases and facilitate US dollar clearing services, albeit with some restrictions. The Cayman Islands does not have a central bank and therefore Cayman does not have the ability to provide similar intervention, Dorenbush said.

CIMA said it continues to work with its regulatory counterparts and the relevant regional and international oversight bodies to find a reasonable and fair approach to these matters, while ensuring financial stability and financial inclusion of all relevant and legitimate users of financial services. In the meantime, the authority said it is also in communication with its licensees to ensure that they understand and appreciate the need for continued enhancement to their compliance framework.

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Category: Finance, Financial Services

Comments (8)

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  1. Soldier Crab says:

    It is already more difficult to open and operate a bank account in the Cayman Islands than either the U.S. or U.K.; our banks have gone so far overboard with ‘regulation’ that business is being stifled.
    The CIMA should be reconstituted as a central bank, anyway. Why is there such a wide spread between lending and borrowing interest rates? These should be set by a central authority just as in other ‘advanced’ financial centers.

  2. Kettle Pot says:

    Just remember that it is the tax code of the major nations doing all the complaining about the offshore financial centers that is the real problem. If the tax laws were not riddled with loopholes and special conditions bought and paid for by the politicians “supporters” the tax avoidance benefit of the offshore financial industry would vanish.

  3. Isaac says:

    Here we go again…

  4. Anonymous says:

    Whilst this is obviously very serious for the Cayman Islands and its people, one can only wonder why local news outlets aren’t making the current crisis emoliating the Panamanian offshore business. This will have very serious consequences for Cayman as the UK and the rest of the world discovers the extent of 40 years of tax evasion and avoidance by some of the worlds richest and most powerful people.
    The U.K. Press are reporting calls for direct rule if British Territories fail to comply with all proposed transparency regulations. Whilst it won’t come to that I’m sure, the U.K. is thought to lose £7.2 billion in lost revenue to ‘tax havens’ and politicians are under extreme pressure to recover a large part of UK taxpayers lost revenue.
    This is serious folks and Cayman needs to be prepared for the coming storm.

    CNS: We are working on a story.

    • Anonymous says:

      True! Minister Panton cares!

    • Anonymous says:

      Why worry about banks when you can go fishing at the 12 mile bank…that’s probably what heads at the regulator are thinking.

    • Anonymous says:

      Cayman pretty much has complied with all the transparency regulations. I think all that is outstanding is the register of beneficial ownership

      As an aside to CNS – can you please sort out the up and down shift every 5 seconds caused by the adverts changing their size – it’s making me feel seasick!

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