The Central Bank of Seychelles’ rescue of BMI Offshore Bank in November is one of the clearest examples of the impact global banks are having on smaller financial institutions as they cut back in correspondent banking. Where there is one victim, there are sure to be many others across the world.
Global banks are being ruthless, and blundering, in their worldwide purge of correspondent banking relationships. Thousands of relationships have already gone, and thousands more are sure to go as big banks ‘de-risk’ themselves.
The danger however, is that the small guys, the BMIOs of this world, get shut out of the global financial system, and more profoundly, that certain countries and regions become unbanked or at least, less-banked.
Intense anti-money laundering and terrorist financing regulation, and the associated compliance costs, are big reasons banks cite for paring back correspondent banking networks. Privately most would say they are doing so simply because the escalated costs and hassle of checking on their correspondent accounts far outweigh the measly profits they can generate from them.
Indeed, the Financial Action Task Force, an inter-governmental body that since 2001 has overseen international rules on money laundering and terrorist finance, has been scathing of banks for using such rules as an excuse to purge.
Yet ambiguity over the rules and their application does not help. Senior bankers say the parameters keep getting moved, if they are discernible at all. Dealings with Cuba, for instance, seem less troublesome than those with Iran.
The ferocity with which US regulators have pursued banks for sanctions breaches and shambolic lapses in money laundering controls, has been evident for all to see. BNP Paribas’s staggering $9 billion fine shows the seriousness of their intent.
Most needed, however, is for regulators to weigh not just the benefits, but the costs of their rules. Left unchecked, de-risking may leave some banks, their customers and countries, with no or little access to the global finance system.
That, in turn, is likely to exacerbate the poverty and exclusion that fuel the terrorism and crime these rules were designed to prevent.