Experts suggest ‘de-risking’ alternatives

By Alexis Milan

The Prime Minister, along with his team of financial advisors, returned to Belize this week, following meetings with banking regulators in the United States regarding the current ‘de-risking’ problem and indicated that one solution on the table is partnering with smaller banks.

During the visit, Prime Minister Dean Barrow, and his team, which included Financial Secretary Joseph Waight, Central Bank Governor Glenford Ysaguirre and Economic Ambassador Mark Espat, met with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), two of the largest regulators in the US, among other departments.

Basically, the regulators both assured Barrow and his team that Belize’s legislation is not the problem as it relates to the ‘de-risking’ issue and essentially gave a vote of confidence in Belize as a jurisdiction in relation to anti-money laundering and counter terrorism financing (AML/CTF) legislation.

The regulators further advised, that rather than seeking to establish corresponding banking relations with a top 10 (tier one) bank, that Belize try to establish corresponding ties with smaller banks that can provide the same service. According to Barrow, GOB has already identified one bank in particular with which it intends to approach to establish such a corresponding relationship. Barrow chose not to name the bank, as discussions are ongoing, but confirmed that the bank is a tier two bank.

Furthermore, the FDIC, which is the regulator for the bank GOB has its sights on, indicated it would be willing to express to the bank that Belize is a perfectly competent jurisdiction and if the circumstances are right to do business with the country and a profit is there to be made, it should feel comfortable doing so.

Barrow declared the visit as a success, however, some experts in the banking industry aren’t convinced the solution is that simple.

Another Solution: KYC Registries

Andrew Enriquez, a former vice president and director of investment banks, including Bear Stearns and J.P. Morgan in the US, in a conversation with the Reporter this week said there is no “magic bullet” solution to the ‘de-risking’ problem but there are other options to consider.

According to Enriquez, the increasing cost of regulatory compliance as it relates to anti-money laundering regulation and “know-your-customer” (KYC) requirements is the main driver in correspondent banks dropping less profitable customers or jurisdictions.

He added that jurisdictions like Belize and the wider Caribbean and Latin America should be looking for ways to reduce the cost associated with satisfying KYC requirements as a part of AML laws. KYC is simply the process of a business verifying the identity of its clients and in banking, it is becoming much more important globally to prevent identity theft, financial fraud, money laundering and terrorism financing.

Enriquez explained that US regulators expect banks in that country to know their customers’ customer (KYCC), which can become costly for banks. For this reason, Enriquez suggested that Belize and the Caribbean should be trying to create a depository of customer information.

This would serve as a platform to clear or deny transfers and should be designed in a way so as to abide by local privacy laws, yet still providing assurances about a transaction’s legitimacy.

The concept is not new. In fact, KYC registries, as they have been referred to, were discussed by top-ranking banking executives at the Society for Worldwide Interbank Financial Telecommunications (SWIFT) business forum in London last April.

At that event, Thomas Piontek, head of regulatory services at Commerzbank AG, explained that by 2020, the industry will step away from customer and identity verification and while the technology develops, banks will look deeper into customer transactions.

At that same event, Peter Drake, AML head of Europe, the Middle East and Africa for treasury and trade at Citi, which works in more than 100 countries, said: “What we try to do is enforce a common standard, a gold standard or global policy on KYC.”

When looking at the correspondent banking partners they work with, Citi looks at a section of the year or a number of months of activity to see what the flows are between that bank and others. Then the bank asks itself: “Does it make sense that money is moving between these locations or companies?” said Drake. For instance, if a partner says it’s not banking money-services businesses or money transmitters, yet its transaction history says otherwise, that’s a problem, he said.

While banks have this data at their disposal today, most have a hard time analyzing it after the fact. To help banks deal with customer identification, several organizations are launching KYC registries, centralized indexes to store, authenticate and share corporate client information. The industry-owned SWIFT started such a registry in December, and during the forum announced that it had already gained users from 109 different countries.

Piontek added that the one thing a bank doesn’t want to do is store too much information that it isn’t using because regulators might be concerned about a breach risk.

For that reason, Russell Saunders, managing director of global payments at Lloyd’s Banking Group, said the growth of utility services for this type of data management could be beneficial. “You can’t un-know what you know,” he said, which is why he sees a future where banks set parameters on what type of information they want back from a centralized registry organization.

A KYC registry service could also cut time and expense. “It can take about $30,000 to aggregate a file on a correspondent bank… a file with tons of pages of information that are out of date by the time it’s signed off on,” Saunders said. But if there was a business that could focus on managing and updating customer data, the process could be much smoother.

But even in a future where banks use technology to decipher vast amounts of data, a bank can’t stray far from the tried and true. A bank must continually retrain its compliance staff, knowing that 20 percent of their time will be spent “KYC-ing” customers, Saunders said.

Enriquez, meanwhile, said the Committee on Payments and Market Infrastructures (CPMI), made up of 60 central bank governors have proposed a similar system. “Without these kinds of innovations, we will continue to find ourselves trapped between the proverbial rock and a hard place in this ping-pong match between the international banks and the financial regulators,” he said.

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