US warns its banks on Bahamas dealings

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Gowon Bowe

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The US government's call for greater scrutiny of The Bahamas will not have any "immediate or significant fallout" for this nation's key banking relationships, a senior banker said yesterday.

Gowon Bowe, the Clearing Bank Association's (CBA) chairman, told Tribune Business that the US Treasury Department's warning was unlikely to impact the established correspondent banking relationships that Bahamian commercial banks enjoy with their American counterparts because these are already subject to heightened due diligence.

He then called on The Bahamas to focus on what anti-money laundering standards will be "in the future", rather than in the present, as the best means for it to escape being constantly ambushed when international standard-setting bodies change the rules.

The CBA chairman spoke out after the US Treasury's Financial Crimes Enforcement Network (FinCEN), in an October 31, 2018, advisory, warned American financial institutions to apply greater scrutiny and due diligence to commercial relationships and transactions involving The Bahamas where necessary.

The US warning, similar in nature to that issued earlier by the UK Treasury, was issued in response to the Financial Action Task Force's (FATF) listing of The Bahamas among 11 nations with "structural deficiencies" in their anti-money laundering/counter terror financing (AML/CFT) regimes that may pose a threat to the global financial system's integrity.

"The Bahamas, Botswana and Ghana have been added to the [FATF's 11-strong] list due to the lack of effective implementation of their AML/CFT framework," the US Treasury department warned that country's financial services industry.

"US financial institutions also should consider the risks associated with the AML/CFT deficiencies of the countries identified under this section. With respect to these jurisdictions, US financial institutions are reminded of their obligations to comply with the due diligence obligations for FFIs (foreign financial institutions).

"As required, covered financial institutions should ensure that their due diligence programmes, which address correspondent accounts maintained for FFIs, include appropriate, specific, risk-based and, where necessary, enhanced policies, procedures and controls that are reasonably designed to detect and report known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States."

The US Treasury did seek to qualify its advisory by adding: "Such reasonable steps should not, however, put into question a financial institution's ability to maintain or otherwise continue appropriate relationships with customers or other financial institutions, and should not be used as the basis to engage in wholesale or indiscriminate de-risking of any class of customers or financial institutions."

But the US advisory's issuance, and contents, further highlight the potential reputational damage that The Bahamas faces from its inclusion on the FATF's watch/monitoring list, along with the potential increase in costs and time associated with international transactions and commerce.

It may deter investors from coming to or using The Bahamas, while also exacerbating the 'de-risking' trends that have threatened local banks' correspondent relationships that are vital to facilitating commerce for an international business centre such as this nation.

The US advisory also carries more weight than its UK equivalent because the vast majority of The Bahamas' physical goods trade, primarily around $3bn in annual imports, and international financial transactions are conducted with - and cleared in - that country.

Correspondent banks are those that allow Bahamian financial institutions to provide services in their home countries, using their physical and electronic banking infrastructures.

They give Bahamian banks, and their clients, access to the international capital markets and financial system, enabling transactions to clear and be settled on a timely basis, and foreign currency deposits to be taken.

Foreign correspondent banks thus provide a vital gateway to the world economy and financial system for The Bahamas, but perceived regulatory risks - chiefly related to money laundering and other financial crimes - have resulted in the severing of such relationships for many Caribbean institutions.

Mr Bowe, though, told Tribune Business he did not expect the combination of FATF listing, and UK and US advisories, to impact Bahamian commercial banks' existing correspondent relationships because these undergo constant scrutiny by their foreign counterparts.

He revealed that foreign financial institutions have already "drilled down below the country level" when it came to assessing their Bahamas relationships, with such due diligence extending to "on-site inspections"; "monitoring of transaction patterns to understand their nature; and documented anti-money laundering plans to ensure local banks' standards matched theirs.

"The [US] notice for commercial banks is not going to be a significant challenge," Mr Bowe told Tribune Business, "because correspondent banks are already doing substantial due diligence.

"They're aware of the institutions they're providing services to, and they will want to look at your anti-money laundering regime. Most of them are drilling past the country level and have gone to the institution level.

"That is the experience of my institution [Fidelity Bank Bahamas], and is consistent with all of them, having to individually demonstrate compliance with the anti-money laundering/counter terror financing regime they want us to maintain."

Pressed on whether any correspondent banking fall-out was likely, Mr Bowe replied: "I don't expect it to be perfectly honest. The relationships we currently have are heavily managed... and we satisfy each of our correspondents we're of a high calibre.

"From that perspective, it's more damaging to new institutions or new relationships as opposed to maintaining existing ones. I don't think there's going to be an immediate or significant fall-out because, in most cases, people have had correspondent relationships for a period of time and, more important, they maintain those relationships as opposed to having to go out and establish new ones."

The Central Bank of The Bahamas, though, appears to be taking no chances when it comes to this nation's inclusion on the FATF list and the potential consequences.

Charles Littrell, its inspector of banks and trust companies, in his latest quarterly letter to Central Bank licensees said the regulator was prepared to engage foreign correspondent banks directly to ease any concerns they may have.

"You would have seen the FATF's recent addition of The Bahamas to the list of 'other monitored jurisdictions', which was a disappointing outcome," Mr Littrell wrote. "The Bahamian government has committed to continue the comprehensive national approach to improving our AML/CFT standing.

"As one part of this approach, the Central Bank intends to increase its engagement with correspondent banks as follows. If any SFI (supervised financial institution) thinks it useful, bank supervision staff are available upon reasonable notice to discuss our approach to AML/CFT supervision with current and prospective correspondent banks.

"We will [also] shortly consult on a new data collection, which will give the Central Bank a comprehensive contact database for correspondent banks and bankers. This will facilitate more effective communication with this important stakeholder group."

Mr Bowe, meanwhile, urged The Bahamas to focus on where anti-financial crime standards will be "in the future" as opposed to now as the best defence to bodies such as the FATF frequently "moving the goal posts" and demanding more from it.

He acknowledged that advisories such as the latest US warning are "always going to be of concern to the banks because its coded language for greater scrutiny", but said The Bahamas needed to stop waiting until it was "hit over the head" by such adverse listings.

"From a country perspective we have to move as quickly as possible to address the deficiencies that have led to these communications going out," Mr Bowe told Tribune Business. "We have to make sure we are focusing our attention on where is the standard going, as opposed to meeting the standard where it is today.

"We often speak about the moving of the goal posts, but we know there is a heightened level of scrutiny being put on us. We have to be looking at our anti-money laundering regime in 2020, 2021, not 2019; the standard we will be judged on in the future."

The Bahamas has until September 2019 to deliver on the "action plan" agreed with the FATF and its regional affiliate for addressing the so-called "structural deficiencies" in its anti-financial crime regime. Many of the required steps relate to execution and implementations, and include increased money laundering prosecutions, asset confiscations and improvements at the Financial Intelligence Unit (FIU).

Mr Bowe said The Bahamas needed to provide evidence that proves it has successfully addressed these deficiencies, adding that this nation often has "difficulty articulating and highlighting what enhancements have been done".

"As a jurisdiction you certainly don't want to be on any list that reflects negatively on the country, but we can't be seen as cowering from the criticism and negative comments being made because it shows we're unaware or not addressing the deficiencies," the Clearing Banks chairman said.

"We have to be confident in our response, supported by evidence, to demonstrate what has been done so we're compliant in the shortest possible time. We have to bear in mind, as we're waiting until we're hit over the head, our response is always going to be reactive, whereas if we see these blows coming ahead of time we can ready ourselves with a dispassionate response to show we have it under control."