* Vital financial links endangered if banks accept monies

* Banker warns nation against 'throwing caution to wind'

* Could result in parallel financial system like web shops

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas faces being "cut off from the US" economy and financial system if its banks accept monies generated by a marijuana/hemp industry, top financial executives warned yesterday.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, and Kenrick Brathwaite, the Clearing Banks Association's (CBA) head, told Tribune Business that Bahamian institutions were informed last year their cherished correspondent relationships with US banks would be endangered if they took deposits from this sector even if it was legalised here.

This, they explained, is because US federal law still treats the cultivation of marijuana and its recreational use as a crime. US-based banks, especially multinationals and those subject to federal oversight, will thus automatically refuse to deal with foreign banks that accept marijuana-related funds for fear they will become tainted and accused of committing a criminal offence.

The Bahamian banker duo yesterday voiced surprise that this issue had seemingly not figured more prominently in both the National Commission on Marijuana, and the Economic Recovery Committee's (ERC), reports and discussions even though Mr Bowe said he had raised the potential obstacles with both the former body and the Government.

Pointing out that Canadian banks catering to that nation's multi-billion dollar medical marijuana/hemp industry are already experiencing problems conducting cross-border transactions with the US as a result, Mr Bowe warned that The Bahamas and its COVID-battered economy "will die without" the correspondent ties its banks presently enjoy with their American counterparts.

As a nation that imports virtually all it consumes, with most goods originating from or transiting the US, access to US dollars is vital for Bahamian companies and individuals to execute and clear these transactions. Access to US currency, and such clearing and settlement facilities, is exactly what is provided by these correspondent relationships.

In effect, correspondent banking is the element in the Bahamian financial system that lubricates the economy and its international business centre model. Mr Bowe said the key question for The Bahamas is whether it should "throw caution to the wind", and endanger these banking ties, by pursuing a medical marijuana and/or hemp industry as part of its COVID-19 recovery plan.

Suggesting The Bahamas must be sure the benefits from doing so outweigh the likely economic loss caused by the severing of correspondent links, Mr Bowe revealed there had been banking industry discussions on the feasibility of this nation purchasing or setting up its own US-based correspondent to ensure it retains US dollar clearing and settlement access.

Mr Brathwaite, meanwhile, warned that The Bahamas could see a repeat of what happened with the web shop gaming industry if it proceeded to legalise a medical marijuana/hemp industry but the commercial banks refused to conduct business with it.

Just like the web shops pre-legalisation, he warned this could result in the creation of an "underground" or parallel financial system where the marijuana industry's potentially vast proceeds remained outside the formal banking system - a development that would likely bring increased scrutiny upon The Bahamas from the world's anti-money laundering overseers.

"There is one concern that no one is commenting on," Mr Brathwaite said yesterday. "Marijuana is still a US federal crime, and as such any industry will become an 'underground' industry just like the numbers industry prior to it being legalised.

"Any bank in the Caribbean that decides to bank the proceeds will risk losing their losing their correspondent bank relationships. This was conveyed to the Caribbean Banks Association meeting which was held in Florida in summer 2019." The Clearing Banks chief said this "unequivocal" and "unambiguous" message was delivered by a US State Department official.

While not necessarily sending proposals for a Bahamian medical marijuana and/or hemp industry completely up in smoke, the threat to The Bahamas' US correspondent banking relationships represents a major obstacle.

Mr Bowe, who said he had warned potential funders and financiers of medical marijuana about this problem, added that Canadian banks were having to "ring fence" accounts and monies linked to that nation's legalised marijuana industry from participation in US cross-border transactions.

Branding this as "very difficult and a tall order", as well as a sign of what The Bahamas may be faced with, Mr Bowe said the signal from the same Florida conference was that Bahamian and Caribbean banks should "only take on clients acceptable to correspondent banks.

"As it stands," he added, "US banks are not prepared to take on any respondent banks that have the [marijuana] industry as a client," he added. "Whilst it is a wonderful conversation to have in terms of what we believe this industry can produce, there are a lot of underlying factors that have to be recognised and set out if it's to be a a meaningful sector.

"It's a golden rule. As long as the US is opposed to it at a federal level, because we are reliant and heavily dependent on them for correspondent banking, imports and trade, we'd have to consider how we find an alternative to this if we go down this path because we will not have the same easy access to the US as we currently enjoy. It's not as simple as people think...

"Is it a multi-billion industry for The Bahamas that is so worthwhile throwing caution to the wind, and taking it on, because it compensates for everything we lose on the other side? That is to be the debate before we take it on."

Mr Bowe recalled a seminar he attended in Jamaica, which legalised medical marijuana some five years ago, and the challenges it was having in developing the sector. He said the major dispensaries and "players" in Canada talked about how technology was allowing them to "produce far more potent strains than they produce naturally" which raised questions about The Bahamas' potential competitiveness.

Asked what would happen should The Bahamas lose its US correspondent banking ties, Mr Bowe replied: "Without them you die. We would literally be back to personal savings institutions where only Bahamian dollar transactions take place.

"Any banking institution that is not a co-operative whose intended purpose is to conduct transactions wholly in Bahamian dollars will not exist without a correspondent relationship. And if we import 90 percent of what we consume, and if we pursue this, think about not having US currency and access."

The Fidelity Bank (Bahamas) warned that the loss of US correspondent banking links would leave Bahamians unable to obtain US dollars from local commercial banks, or use credit/debit cards and wire transfers to pay for purchases from Amazon and other online sites.

Warning against "cutting off our nose to spite our face" over the medical marijuana/hemp proposal, Mr Bowe said community and state banks that typically did not conduct transactions across state lines were being used to accept the industry's funds in the US and avoid coming under the remit of US federal law.

He added that there had been talks among Bahamas-based commercial and private banks over the creation of a US-based correspondent to serve the industry here, but this would still come under the oversight of federal regulators.

Mr Brathwaite, meanwhile, said even medical marijuana was still treated as a federal crime based on the US State Department official's explanation at last year's conference. "People think this is an excellent way to make money," he added, "and build our economy, but there some challenges to that. We all need to be careful with this if we're going to be involved in this kind of industry.

"Just think of a bank where you cannot transfer funds, transact business in the US and all your expenses. How do you deal with that? You cannot send wires throughout the US without a correspondent connection. You are cut off from the US. I don't think anyone wants that."

Mr Brathwaite pointed out that Bahamian banks' US correspondent relationships had already been under pressure for some years, as their counterparts moved to 'de-risk' and drop links to institutions where the perceived risk of being exposed to regulatory breaches - and multi-million dollar fines - outweighs the potential earnings reward.

Warning that medical marijuana/hemp could worsen this trend, he added that any refusal by Bahamian commercial banks to accept deposits and transactions with the sector could create "an underground economy" similar to that of the web shops pre-legalisation where "the proceeds and profits did not go through the banking system".

None of this was addressed in the Economic Recovery Committee (ERC) report, which simply recommended that all Bahamas-based companies involved in the production, manufacturing, sale and export of cannabis must have a "minimum" of 50 percent Bahamian ownership.

It also called for the Government to "make Crown Land available to Bahamians to cultivate cannabis (with special provisions for small-scale farmers and the Rastafarian community), and manufacture cannabis-based products".

"The Government should avoid over-regulation of the market, which will have the effect of sustaining a black market for smaller producers or retailers who do not have the means to navigate complex bureaucracies," the ERC added.

It also urged an exemption of CBD products - hemp and hemp derivative products with minimal or no THC levels - "from the regulatory ambit, and permit their trade with minimal restriction".

Mr Brathwaite admitted he was "kind of surprised" that the correspondent banking fears were not addressed given that these have been known since last year.