by Aesia B. Worme
Compliance, Compliance, Compliance. Talk to any banker, anywhere in the Caribbean, and this topic is certain to come up. Within the last five years, compliance with financial regulations has emerged as one of the major concerns affecting Caribbean banking operations, and it is constantly evolving with new legislature being created governing Anti Money Laundering and Counter Terrorism financing (AML/CFT) laws and regulations, as well as Foreign Account Tax Compliance Act (FATCA) reporting.
The ever-increasing threats of money laundering, terrorist financing, and tax evasion are global and have indeed pushed many governments, financial services industry regulators, and financial institutions to strengthen their vigilance and detection systems as the best means to deter criminals from using respective institutions and jurisdictions for illicit activities.
These crimes represent significant threats to our ways of life and carry serious repercussions for the country and institutions found engaging in them.
There is no shortage of news stories surrounding many international banks that have been found guilty of systemic failures in customer reporting. Over the course of the last decade, several eminent financial institutions such as Barclays, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS have all had hefty fines and administrative sanctions worth billions of dollars levied on them.
However, despite the substantial restrictions and punishments, compliance continues to be a problem for many financial institutions. A KPMG Global Anti-Money Laundering Survey, conducted in 2014, points to the differences in national legislation and data privacy, coupled with the fast pace of regulatory change, as the main challenges faced by banks when implementing internal AML/CFT procedures.
While the amount of money spent on fines and sanctions by Caribbean banks is uncertain, the challenges of implementing an effective compliance framework are certainly well known and make up an unwelcome Caribbean reality.
To protect their institutions from unwittingly being conduits in the money laundering and terrorist financing processes, as well as, to avoid the related fines/sanctions if found to be lax in their policies and practices, banks are faced with the mounting costs to establish compliance departments, develop processes, procedures, and programmes geared towards continually training all its stakeholders; from tellers to board directors.
Some of the measures implemented by banks are the more stringent Know Your Customer (KYC) policies, the adoption of a risk-based approach to conducting business, and the transference of some of the costs of non-compliance to customers through higher fees and reduced services.
However, these are not without discouraging side effects. For example, one of the biggest impacts of the risk based approach is de-risking, where customers whose accounts are assigned a high risk profile are subjected to enhanced due diligence and, where applicable, the severing of business relationships between institutions and customers.
Banks in the United Kingdom, Australia, and the United States of America are frequently engaged in the de-risking of certain sectors; including money service businesses, foreign embassies, non-profit organisations and correspondent banks. In their de-risking, these banks have categorised the Caribbean region as high risk, which has already resulted in some regional banks losing their correspondent banking relationship, while others currently face the threat of losing their relationship with correspondent banks.
According to an OXFAM November 2015 report entitled Understanding Bank De-risking and its effect on Financial Inclusion, de-risking practices are argued to have significant “humanitarian, economic, political, and security implications, effectively cutting off access to finances, further isolating communities from the global financial system, exacerbating political tensions, and potentially facilitating the development of parallel underground “shadow markets.”
The report further concludes that, “De-risking represents a market failure. All invested stakeholders (banks, regulators, and bank customers and clients) appear to be acting rationally and in their own best interest, but in so doing, have created unintended consequences for financial inclusion goals. “
The pressures to better safeguard the Caribbean banking sector and customers from money laundering and terrorist financing activities has led to more rigid account opening requirements, existing customers being asked to provide additional verification information; customers are being required to pay higher fees, undergo longer transaction times, which can inevitably lead to a marked deterioration of the bank-customer relationship.
It is not uncommon to hear customers say that when they first opened an account, they simply visited the Bank with a form of ID and the necessary cash to open the account. Now, they are being asked to present proof of income, proof of residential address, to update their IDs, and to complete a variety of sometimes complex and lengthy formal paperwork.
Caribbean banking customers often say that they feel like their banks no longer know them; that they are no longer important to banks. Caribbean banking customers are in danger of becoming unbanked.
Instead, these customers are now turning to the non-bank financial institutions as they explore creative alternatives to saving and investing. While this practice is not widely prevalent in the Caribbean, it is already an area of notable concern.
Some banks within the Eastern Caribbean Currency Union that are faced with excess liquidity and the cost to pay interest on deposits, actually welcome the loss of deposits. However, should the practice of customers leaving continue, over time, the banking sector will be significantly affected as the mounting loss of customers could lead to even greater financial loss and possibly closure of some banks altogether.
It is of critical importance that banks do what they can to retain their customers in light of the demands that come with regulations, compliance and customers’ growing discomfort with the changes to rules and procedures. In the long run, doing this works out to the benefit of both banks and their customers.
Considering that it costs five times as much to attract a new customer than to keep an existing one, retaining customers and preserving a loyal relationship with them makes greater business sense than incurring customer acquisition costs.
According to Ferhan Patel in his article entitled “Why compliance and customer service go hand in hand, “It is important to recognise and understand that compliance requirements should not upstage the customer experience, but rather be effectively integrated into that experience.”
Caribbean Banks, therefore, must find a more balanced approach to integrating compliance measures and regulations into the service delivery processes and channels since the customer is the reason banks exist. In the sweeping thrust towards enhancing internal compliance, there is great danger in pushing the customer out of the bank and into saving their money “below the mattress” or into the arms of the competition.
One possible measure would be, prior to introducing a new requirement, for the Compliance drivers to actively engage Customer Service and Operations experts to determine the most seamless and convenient method of obtaining customer information all the while still providing the customer with that high level of service to which they expect from their banks. This cross functional approach can lead to a simplified banking experience for the customer as well as help maintain existing customer relationships.
Another possible approach would be to pilot the new compliance processes with internal customers to obtain their feedback so that necessary adjustments can be made and customer disruption is minimised when the procedures are rolled out.
Additionally, banks can incorporate intuitive technology into the customer compliance process with a view towards significantly reducing the level of disruption experienced by customers.
According to James Larriva in his article, Combining Objectives for compliance and customer experience, “With the right partners and technology, servicers can gain a new perspective this year and realise that their goals for creating a better consumer experience do not have to run in contrast with compliance, but instead, can be in tandem.”
The Caribbean Banking landscape remains dynamic and highly competitive. However, one thing is certain, compliance requirements will continue to play a major role in shaping decision-making and customer relations.
The banks that quickly learn how to balance meeting compliance requirements with serving their customers will be the ones to stay viable and reap the reward of having loyal customers.
(Aesia B. Worme, BSc. Soc Sci (Hons), MBA (Dist) is a Management Associate with Republic Bank (Grenada) Limited, the largest commercial bank in Grenada, and the lead Bank for Compliance and Customer Service)