The De-Risking Damnation

Be very aware of the new fancy jargon now trending the lexicon of international financial systems. Innocuous as it seems, de-risking is a serious threat that could utterly destroy Caribbean economies
already crippled with bankruptcies and vulnerabilities.

De-risking means big foreign banks like JP Morgan Chase and Bank of America are ending their correspondent banking relationships with banks in countries they consider “high risk jurisdictions”. Not risk management or risk mitigation, de-risking is risk avoidance taken to extremes, a zero tolerance policy striking “sudden death” on perceived offenders often without warning.

All international business is conducted in the currency of individual countries and the correspondent bank is the intermediary that supplies the different foreign currencies. You cannot buy imports or sell exports, send or receive international payments legitimately without using the correspondent bank facility.

Grenada is an import-intensive country so this is a question of survival. Imagine a situation with access to foreign exchange cut off and we cannot import anything. With businesses closed down, supermarket shelves empty and cooking gas and vehicle petrol dried up, St George’s becomes a “ghost town” as the economy stops working.

This worst case scenario imposes “joint and several liabilities” on economic, social, and political fronts. De-risking is market failure in the allocation of a scarce resource (foreign exchange) and creates parallel underground economies, black markets, and racketeering to supply the “missing market” for the product.
Scarcity breeds discontent and crime, erodes the social fabric, and ferments upheavals and in political economies politicians lose viability as angry constituents demand solution.

With the new terrorism insurgency, U.S. regulators like the Financial Action Task Force (FATF) and the Financial Stability Board (FSB) are pressuring banking institutions for tough compliance. High risk jurisdictions are accused of lacking the standard “firewalls” for anti-money laundering and countering terrorism financing (AML/CFT).

Accordingly, without evaluating country profiles with due diligence, Caribbean countries are black-listed and condemned. De-risking is a negative fallout from the 2008 global financial meltdown when extremely risk-averse banking institutions became nervous about risk exposure, real or imagined. In a preemptive strike, global financial powerbrokers launched the unconscionable, draconian de-risking scheme fully conscious of its devastating potential for developing countries.

Bank of America cancelled its correspondent banking relationship with Belize and put other Caribbean countries on notice, other banks colluding in contagion across the region. The Antigua/Barbuda Prime Minister, Gaston Browne, said it was “tantamount to an economic blockade”.

Institutions targeted for the biggest hits are offshore banks, indigenous banks, money transfer organisations like Western Union and MoneyGram, and even central banks. Areas impacted include foreign direct investments (FDI) and remittances and the whole gamut of financial products including stocks, bonds, and money market instruments. Foreign exchange earnings from these sources will be decimated by de-risking. Diaspora money remittance is lifeblood for many economies and cutting it off spells disaster. A 2005 World Economic Outlook ranked the Caribbean top beneficiary of global remittances averaging 13% GDP with 75% global receipts from United States.

The 2013 IDB Multilateral Investment Fund reported U$8.5 billion Caribbean remittances, Jamaica the highest with U$2.7 billion (14.5% GDP) and, in Africa, Somalia remittances peaked at 45% GDP.
Trials and tribulations, man-made and Acts of God, have plagued the Caribbean for half a century but we always “rise from the ashes” to fight again, examples, the scrapping of trade preferences, crippling debt crises, devastating hurricanes, revolution, and war. But this unprecedented paradigm shift to de-risking could be “the last straw”, the game changer, and the prognosis going forward looks formidable.

In “Good Karma, Bad Karma” (September 2015), yours truly raised the specter of global karma hanging over nations like the Sword of Damocles waiting to strike anyplace, anytime. Karma is the economic sanction on Russia and the Cuban trade embargo and de-risking is the criminal financial “sanction” now imposed on our people.

No nation on earth survives an autarky cut off from the international system. Modern countries are all interconnected in networks of symbiotic relationships, financial and economic, that cannot be broken without serious consequences.

The Soviet Union tried autarky behind an Iron Curtain and imploded, and de-risking is autarky under duress.

The 2008 crisis had CARICOM governments scrambling to implement all the rule requirements demanded by U.S. financial regulators, no matter how capricious. The 9/11 terrorist attacks required efforts above and beyond for robust infrastructure with limited country resources.

Our financial system had to be compatible with U.S. Foreign Account Tax Compliance (FATCA), the Harmful Tax Competition Initiative (HTCI), and AML/CFT regulations. In addition, U.S. regulators have been granted unlimited monitoring access and disclosure to financial information.

CARICOM Member States cooperated fully to be compliant with the regulations and the little incidentals that occur couldn’t possibly threaten the colossal U.S. financial system.

The Caribbean accomplished “mission impossible” to conform with U.S. financial regulations and deserved high accolades for a job well done.

Instead, we are punished with de-risking hell and damnation.

Jay Bruno

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