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The Guardian - UK
The Guardian - UK
World
Kenneth Mohammed

Banks are leaving the Caribbean. It’s unfair and will backfire on the west

A bitcoin sign in Hastings, Barbados.
Bitcoin trading in Barbados. Alternatives to banking become more attractive when access is cut by de-risking. Photograph: David Kilpatrick/Alamy

Mia Mottley, once again, this time at Cop27, chastised the west for being the main culprits in the climate crisis. The Barbados prime minister said that the Caribbean and Pacific islands, being the most vulnerable and least responsible, face certain doom if wealthier nations are not held accountable.

The Caribbean has some of the most resilient and talented people in the world. People who have risen above slavery, indentureship and colonialism. Over the past five decades they have faced corrupt politicians draining their economies, perennial climate disasters and economic discrimination by the west. Now, these small island developing states, still reeling from the Covid pandemic, face further economic challenges inflicted by banks from the US, the UK and EU and Australia.

Academics and journalists have been writing about financial “de-risking” in the Caribbean region for at least a decade, and how it has been getting worse over that time. Simply put, de-risking is where foreign banks perceive that the risks of doing business in a region outweigh the rewards.

Mottley has been highlighting the issue this year, telling the US Congress that de-risking is the “most nonsensical thing” the region has “seen in public policy” and that it will lead to the very money laundering and financing of terrorism that the US and Caribbean governments want to avoid.

But little has improved: banks continue to leave the Caribbean. That makes international trade increasingly difficult, not just for local companies but for foreign corporations and individuals wanting to do business in the region or simply to extend financial support to their families. Sustaining trade has been increasingly difficult for small and medium-sized businesses.

The fallout from de-risking is significant – stagnated economic growth in nations already reeling from Covid and the hurricanes and flooding worsened by the climate crisis. It has discouraged foreign direct investment. International financial centres and development finance institutions, the conduits for investment and aid, are faced with increasing challenges in attracting investors.

De-risking has made it more difficult for the diaspora to support their families with remittances, it has affected tourism – the lifeblood of many island economies – and contributed to some airlines and cruise ships no longer visiting the region. The islands of the Caribbean are now becoming uncompetitive and losing the impetus in their developmental goals. The impoverishing of developing countries by the west is nothing new.

The probable root cause of the banking exodus is the blacklisting of these small island developing states by the Financial Action Task Force, the Organisation for Economic Co-operation and Development (OECD) and more recently the EU Commission.

Blacklisting comes from the global reform movement to clamp down on money laundering and financing of terrorism. Over the past two decades these US and European bodies have held the Caribbean and countries in Africa and the Pacific to stringent standards not mirrored in their own institutions. This results in the perception that the developing countries engage in rampant corruption and are not applying anti-money laundering regulations or countering the financing of terrorism, while enabling tax evasion and other economic crimes. This is reinforced by Transparency International’s corruption perception index but sometimes it can simply mean countries at the top of rankings are better at corruption than those at the bottom.

However, the reality is different. The continued inclusion of countries such as Jamaica, Trinidad and Tobago, Barbados, and even Haiti and Vanuatu, on these lists is largely due to the changing of the assessment criteria and the definition of the money supply. The standard explanation is that these countries did not make commitments to transparency and exchange of information. Moving the goalposts for vulnerable nations once again – while the real money launderers in London, New York, Luxembourg and Switzerland have been exposed as facilitating Russian oligarchs with parking spaces for their illicit gains.

Closer examination of compliance challenges in the islands show a proactive commitment, even with limited resources, to engage with the rules of “know your customer” processes such as enhanced due diligence, verification of the sources of funds and the beneficial ownership of companies. Implementing these policies takes time and costs money, making setting up a bank account – whether for a business or an individual – protracted and difficult.

Such perceptions are leading an increasing number of banks to de-risk in the region. They have decided that the risk versus the reward is too great, that these countries’ economies are too small and compliance is too costly. More than a third have left the region. This has reduced the Caribbean’s access to the global financial system that depends on correspondent banking relationships.

Ironically the system sometimes exposes the very institutions that wield the big regulatory stick and whose methodology is rarely questioned. The World Bank’s Ease of doing business index was once the go-to guideline for the investment community, even though it often had a negative impact on developing countries. The index was discontinued in September 2021 after an independent report found “data irregularities” and “ethical concerns” with a number of officials, including the current IMF managing director, accused of inflating data to boost China’s ranking. The IMF board later found there was no conclusive demonstration of wrongdoing.

While the black and grey-listed countries are subject to such double standards, bias and suspect data, they face the additional blow of being increasingly excluded from financial systems.

The same regulations designed to mitigate money laundering and terrorism financing will result in individuals and businesses seeking alternatives outside the conventional banking system, creating underground networks. Alternatives to the Swift system are becoming available, although not yet in the Caribbean. The Russian SPFS and China’s Cips are two examples, as well as cryptocurrencies such as bitcoin. This should be a warning to those concerned about countries such as Guyana and Trinidad and Tobago, which supply oil and gas to Europe and the US, and will now be evaluating the one-sided relationship and the inequity of trading with their western allies.

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