SLIDE 1
"Correspondent Bank Relations in Curaçao:
no quick fixes available"
Keynote speech delivered by
Richard Doornbosch
President of the Centrale Bank van Curaçao en Sint Maarten
At the IBA-CBA-CIFA information session on
June 16, 2022
Renaissance Hotel
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0. OPENING
Excellencies, distinguished guests, ladies and gentlemen, good afternoon.
It is an honor to be here among the finest of Curaçao's local and international
banking sector, as well as the international financial services sector.
It's a pleasure to see IBA, CBA and CIFA work together in the interest of
Curaçao as an International Financial Center. In particular, I would like to thank
the International Bankers' association, and its chairman Lionel Anthony, for the
conversations about today's topic and the invitation to elaborate on our
position on correspondent banking and the de-risking trend in our region.
There is growing recognition in policy and banking circles that the regulatory
treatment of correspondent banking is out-of-balance. A year ago, the
Economist stated on the cover of its weekly 'The war against money-
laundering is being lost'. 'The global system for financial crime is hugely
expensive and largely ineffective' they continued.
I am surprised you haven't yet started cheering. As I suspect this statement can
count on some support among bankers dealing on a daily basis with the
intricacies of detailed rules and regulations and hefty fines if not enough
efforts are made.
Unfortunately, for those that would have liked to cheer, my message will be
the opposite. The emphasis on measures protecting the integrity of the
financial system is here to stay and - if any - will only increase in intensity and
importance.
But I do hope we will get better - that is more effective and efficient - at it.
And although I would be happy to discuss with you the merits of the
international fight against money laundering and financing of terrorism - as a
small jurisdiction we cannot really hope to change the international standards.
The only way to reduce our correspondent banking risk is to increase our
AML/CFT effectiveness. There are no quick fixes available.
With the existence of a large online gaming and trust sector, sectors that are
considered either high risk or more vulnerable to AML/CFT offenses, as a
jurisdiction we must ensure that these perceived risks be properly managed
by our AML/CFT framework.
Against this background, I would first like to speak to you about the recent past
and scope of the wave of de-risking that intensified around 2015 and my
understanding of the current situation.
Secondly, I will discuss our approach and the actions to avert de-risking that
we are working on. I will highlight both the role and responsibilities of the
banking sector and that of the CBCS.
And ultimately, I will touch on the role of technological innovations and offer
a few concluding remarks.
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1. Scope and range of the CBR-problem
1.1. Globally
Let's start with some numbers. Cross-border payments are crucial for global
trade and the correspondent banking network is a vital component of this
eco-system.
Correspondent banks provide access to international markets by providing
wire transfers, check clearance, trade finance and securities settlements.
The Bank of England estimated that the total value of global cross-border
payments will continue to rise to over $250 trillion in 2027, from approximately
$150 trillion in 2017. This is an impressive growth over a period of 10 years,
even though current events and the resulting global market segmentation
might suppress these numbers somewhat.
Despite the importance of cross-border payments, this global "plumbing"
system has been plagued by structural challenges. The system is often
qualified as expensive, slow, opaque, and not available to many that need them
most.
That is to a large extent seen to be true whether we talk about correspondent
banking, credit card networks or money transfers. And new technologies and
platforms do not provide an alternative. Yet.
World-wide we have seen the number of active banking relationships
declining over the past decade. We refer to "de-risking" when the
correspondent bank terminates its services to the respondent bank.
The Bank of International Settlements continuously monitors the banking
network on a global scale and reported that active relationships have
decreased by approximately 20% since 2011.
However, the decline is not evenly distributed across the regions, with some
regions being more affected than others. Regional and global surveys and data
analysis in past years point out that the Caribbean region was one of the two
most affected regions (Financial Stability Board1).
To illustrate this, for the Caribbean region, CBRs declined by 6.4% in 2016,
7.8% in 2017 and 8% in 2018. The overall decline was 32% between 2011 and
2018.
Correspondent banks report that the combination of reputational damage,
compliance costs, lack of clarity or ambiguity on the regulatory requirements,
and penalties for non-compliance put such pressure on their profitability, that
remaining in correspondent relationships and lines of business with low
margins, is no longer justified.
So, while the demand for cross-border transactions is increasing, the
correspondent service is declining and becoming more expensive.
SLIDE 4
The challenges regarding the cross-border payment infrastructure have not
gone unnoticed. The concerns have been raised to the level of the G20.
Indonesia made the improvement of cross border payments in 2020 a focal
point of its G20 presidency. In response the Financial Stability Board
developed a roadmap to address the challenges to cross-border payments
aiming to be finalized in 20272.
At the Centrale Bank van Curaçao en Sint Maarten we applaud these
developments. But at the same time, we know that the threat of de-risking is
too urgent to just wait for others to solve this matter for us.
1.2. Monetary union/Curaçao
So, turning closer to home. Curaçao and Sint Maarten are small, internationally
oriented economies that are - for now - almost fully depended on
correspondent banks for cross-border USD (FX) transactions.
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In 2020, the total number of active correspondent service providers was forty-
four. According to our most recent survey, in 2021 the number of active
service providers improved slightly to 46.
Though the number of active relationships is increased, we see a skewed
distribution on the institution level. Some banks have experienced more de-
risking than others.
We have seen mostly large global US banks de-risk their correspondent
relationships, and a shift has been observed to more regional banks or
payment platforms that have stepped into the market to try to fill the gap.
Aside from losing cross border transfer service, local and international banks
in our jurisdiction experienced reductions in service, higher transaction costs,
higher maintenance costs and/or longer payment chains by their
correspondent banks. Some banks were required to stop entire categories of
industry-accountholders.
We have seen differences in de-risking experiences between banks that are
part of an international group and banks that are not part of a group. Within
an international group the main bank is able to provide the backing of a larger
network. And often, the parent can negotiate more effectively because of
pooling of cross-border payment transactions.
The so-called indigenous banks, local banks not part of international groups,
have been affected more severely in the past years.
Correspondent banks not only expect the respondent banks to comply with
the local regulatory and compliance requirements but also with the home
country demands.
On top of that, most correspondent banks also require a minimum annual
volume in cross-border transactions. Imagine a small bank that, to be prudent,
wants to maintain several correspondent relationships to ensure the continuity
of its operations. Complying with the volume requirement alone can be a
challenge.
SLIDE 6
According to our most recent survey, the average yearly transaction volume
for local banks in 2021 stood at NAf. 500 million for inflows and NAf. 600
million for outflows. The aggregate volume for the local banking sector in
2021 reached the 10 billion mark.
The international banking sector (excluding two very large outliers in terms of
volume) recorded significantly lower average yearly transaction volume for
both inflows and outflows compared to the local banking sector.
The average yearly transaction volume for international banks in 2021 stood
at NAf. 140 million for inflows and NAf. 110 million for outflows. However,
these volumes do not compare to the volumes of for example service
providing banks in Europe, which reached an average of approximately 50
billion dollars a day or 33 trillion a year in 20193 .
SLIDE 7, 8, 9, 10
The increasing load of regulation requirements is felt on all levels. Where
correspondent banks add pressure to respondent banks, international
standard setting organizations do so on the jurisdictional level.
.
Curaçao and Sint Maarten are members of the Caribbean Financial Action Task
Force (CFATF)4, and both have completed the CFATF third round Mutual
Evaluation Process.
Curaçao has never been on the list of countries identified as having strategic
AML deficiencies. Curaçao addressed the deficiencies noted in its third round
CFATF Evaluation report in 2016 and since then was deemed largely
compliant.
In 2024, the fourth-round mutual evaluation by CFATF is due. The focus in this
fourth round is shifting from technical compliance to effectiveness of the legal
framework.
Curaçao, the CBCS, and stakeholders in Curaçao are continuously drafting
and amending legislation to keep abreast of international developments and
updated international standards in particularly related to fiscal legislation and
the (AML/CFT) framework.
As many other Islands in the region adequate resources in both public and
private sector remain a challenge. The cooperation of all stakeholders is
essential to work together to achieve the desired results.
Whichever way I look at it though, and even while several authorities and
stakeholders work tirelessly at improving the conditions for CBRs and
ALM/CFT, the de-risking trend is a problem that will stick around and not
"disappear" for the time being. In the words of Toussaint Boyce of the
Caribbean Development Bank, de-risking may have become "the new normal"
in the Caribbean5.
2. The strategy of the CBCS
The CBCS' strategy for de-risking by CBRs builds both on previous efforts and
looks forward at new technologies and how they can help us deal with this
de-risking wave.
The main risk for correspondents stems from AML/CFT. That's why the core
of our three-pronged approach is focused on reducing AML/CFT risks:
Starting with you, the financial institutions and service providers and the efforts
you are making to upgrade your AML/CFT framework.
Secondly, we as a central bank will intensify our supervision, strengthen our
AML/CFT risk-based approach and invest in technologies that allow a more
efficient and effective supervision.
Finally, we will continue our dialogue with international partners and the US
authorities.
In parallel, and you could say our fourth prong, we are keeping a close eye on
Fintech options that might provide alternative and more efficient solutions for
cross-border payments.
Let's discuss them in turn.
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2.1. What can the financial sector do
The first prong is also the most important one. Before all, the primary
responsibility for safeguarding the financial system from abuse is with you, the
financial institutions and service providers. You will have to ensure your
AML/CFT compliance is commensurate with your risk and your risk is
commensurate with the risk appetite of your correspondent banks.
You will have to ensure:
1. That your customer due diligence and transaction monitoring is
adequate and up to date, that AML/CFT procedures are enforced, and
their execution is being monitored, and measured for effectiveness.
2. We expect that institutions have an independent compliance unit or
compliance officer in place and embedded within the governance
framework.
3. Institutions' staff should be well trained in AML/CFT procedures and
policies, and the banks should have the Know-Your-Employee (KYE) in
place and up to date.
There is the continuous need for financial institutions to work at and improve
the culture and acceptance surrounding AML/CFT. For this more intangible
but equally important facet, CBCS expects the institutions to:
 Create a culture of compliance throughout their organization through
training and change management tracks, provide ongoing client
education programs
 The members of the board of directors must be able to show that are
fully involved with the Risk Management Framework.
 And demonstrate that deficiencies in the AML/CFT and governance
framework are addressed with appropriate urgency and diligence.
This is not optional. According to compliance software company Fenergo,
global banks were penalized 10.4 billion dollars for money laundering offenses
in 2020. We all know the examples.
It was noted that US banks have complained that regional banks in the
Caribbean are not timely or deficient in providing AML/CFT regulatory
information.
Immediate response time is key. Institutions need to have all relevant
transaction details on file. It is best to avoid approaching the client for
additional information only after the correspondent bank requests the
additional information, to not cause unnecessary delays.
Fortunately, there is an increasing number of tools, instruments, and expertise
available in the AML/CFT-related market. Institutional improvements in
AML/CFT frameworks and governance often simultaneously contribute to
improved timeliness, accuracy, and transparency of information, thus
operational efficiency.
The task at hand for financial institutions is a tough one. There are no quick
fixes.
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2.2. What is CBCS doing: measures and activities to combat de-
risking
Secondly, the CBCS has and is taking several steps to strengthen our AML/CFT
supervision.
We are taking a risk-based supervisory approach with the intensity of
supervision proportional to the risk level of the institution.
The CFATF mutual evaluation remains the gold standard. The CBCS has
dedicated additional resources to ensure the CBCS is ready in time for the
CFATF evaluation.
In addition, and in this context, strengthening of the regulatory framework for
AML/CFT is underway, as revisions to legislation and taking steps to ensure
that our AML/CFT framework is evidently effective.
As for CBRs, the CBCS is taking a close monitoring approach. Banks are to
report on a more frequent basis the number of CBRs, how many CBRs lost,
their cross-border volumes, current onboarding processes and risk-mitigating
measures taken by the bank.
It is our experience that onboarding processes for correspondent services are
lengthy. Certain institutions may take 2 to 3 years to open an account, which
is very different compared to 15 years ago.
Through surveys and follow-up, we register and gauge CBR situations. We get
a better view of changes in numbers of relationships and volumes over time,
which helps to better identify risks in our banking sector.
We do understand the need to not overburden you with our surveys and are
therefore looking into possibilities to integrate the CBR and de-risking
questionnaire into the Chart of Accounts (COA).
Lastly, the CBCS aims to facilitate courses and seminars for the banking sector
on correspondent banking and compliance, together with the sector and
international stakeholders.
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2.3. Dialogue with international partners and US authorities
The last-but-not-least part of our strategy is to continue to invest in the
dialogue with international institutions, partners, and the US authorities.
With assistance from the Dutch Kingdom embassy, we have on and off been
in dialogue with US treasury senior officials. Last year we had a first meeting
under the Biden administration with the Office of Terrorist Financing and
Financial Crimes. We have agreed with them to engage in a structural dialogue
on a roadmap towards an improved country risk profile. During November
2021, exploratory virtual meetings were held with technical experts from the
US Treasury. More recently in April the minister of finance and myself have
visited the US treasury in Washington to take stock of the technical
discussions. The conclusion remains the same though: there are no quick
fixes.
In large part Curaçao's success in averting the negative consequences of de-
risking depends on our AML/CFT compliance on all levels. It was
recommended to communicate more often and more transparent about our
individual and collective AML/CFT efforts.
Transparency is key in creating comfort and trust among international
stakeholders. The National Risk Assessment and the implementation of the
recommendations is a very important element in this respect.
For the past two years, CBCS has joined forces with the relevant stakeholders
on the NRA. The results of the NRA and the related plan of action will be
presented to the Minister of Finance in June 2022. Publication is expected to
follow shortly.
Lastly, I would like to mention that we recently spoke to the Atlantic Council
and agreed to join their annual banking forum, where large global banks will
join in a Caribbean initiative looking into better servicing of Caribbean
countries.
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2.4. Regional strategies: matchmaking and pooling
The reason we spoke to them is that in March 2022, the Atlantic Council,
spearheaded by the Adrienne Arsht Latin America Center in Washington DC,
published a report on financial de-risking in the Caribbean and its implications
for the US.
In this report, the authors explain their views on de-risking of financial
institutions in the Caribbean region, and its consequences for US-based
interests.
The report argues that de-risking by correspondent banks in the Caribbean is
or can become a problem for US interests as well, through economic,
financial, leisure and security channels. Therefore, the US government and
private sector should take steps to avert the consequences of de-risking.
Their recommendations include regional pooling of transactions and
"Matchmaking" between banks in the region with US banks.
We find this an interesting option and would like to explore mapping of the
volumes of transaction requirements of banks to see if there are possibilities
for joint matchmaking to minimize the profitability constraint.
We hope to engage in discussions with several CBRs, traditional global banks
as well as newer players and smaller US banks offering CBR services, to re-
onboard our banks.
2.5. Technical innovations and options for the future
Ladies and gentlemen, we know that the technology is there to make cross-
border payments instantaneous and direct. We also know that the
interoperability of the different digital platforms is not there yet. Making the
correspondent bank still indispensable.
For this reason, the importance of interoperability, I believe the governance of
new technology payment systems will not be fully decentralized. Global
regulators will want to ensure the integrity of the payment systems and avoid
abuse. Central banks digital currency platforms will be part of the future
payment landscape.
But I guess we will have to come back to discuss this a separate time. Because
it opens up a whole new set of issues.
Within the correspondent banking infrastructure our experts are also looking
at available and viable fintech options. The CBCS endorsed for example the
SWIFT KYC Registry and recommends the local commercial banks and
international banks operating from Curaçao and Sint Maarten to participate in
this Registry.
The registry is meant to promote transparency in the institution's business and
facilitate the required level of KYC compliance by maintaining a set of data and
documents used by correspondent banks. The initiative helps financial
institutions to address challenges faced in conducting timely, efficient, and
low-cost counterparty due diligence.
Next week the Bank will organize in corporation with SWIFT a webinar for the
SWIFT community in Curaçao and Sint Maarten to address initiatives aimed at
strengthening the local industry's payments fraud & cyber security defense.
Other promising developments surrounding digital corporate identitys also
have the potential to simplify the verification and identification of companies
and reduce the risks of doing business. The BIS recently published an
interesting paper on this topic6.
New onboarding processes have increasingly involved alternative regional
banks, fintech, and payment platforms. The fintech and payment platforms we
have encountered are online companies providing cross-border payment
services using their own correspondent bank (in the US), and other (credit
card) payment platforms offering cross border payment services.
An advantage of the fintech route is that the fintech company takes care of
screening and pre-approval in relation to regulatory requirements. On the
other hand, it also adds an intermediary in the cross-border payment chain.
CBCS is aiming to chart and analyze more in detail, the risks of fintech
companies to our financial system.
We are aware, however, that international payments are still largely cleared
and settled through correspondent banks, even as more and more alternatives
arise in the cross-border payment market.
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3. Opportunities and vision of the CBCS looking forward
At the beginning of the year, we presented our Strategic Plan CBCS 2025. The
transformation of the financial sector and our supervision remains our number
one priority. Curaçao can only be an attractive international financial center if
we are a high compliant jurisdiction meeting all international standards.
This not only relates to supervision on financial institutions and service
providers but also for supervision on other sectors in particular those to be
considered high risk.
Institutions that have correspondent banks with no risk appetite for these
high-risk sectors need to make absolutely sure their accounts and services
cannot be used by such companies.
However, as much as compliance is a cost to one, it is a business opportunity
to the other. Compliance is and has always been an essential element of
financial intermediation determining market power.
4. Wrap-up
In conclusion, the CBCS has the importance of correspondent banking
services and the threat of de-risking firmly on its radar screen. However, there
is no quick fix.
A speech on correspondent banking is a speech on the importance of anti-
money laundering measures and supervision. The CFATF mutual evaluation in
2024 is and should be top of mind.
Secondly, we are at the same time actively engaging with international
institutions and the US treasury and seeking to re-engage global
correspondent banks.
Finally, we are exploring technological options to complement and substitute
correspondent networks.
Let me leave you with this final thought. As the Centrale Bank van Curaçao en
Sint Maarten, our mission is to safeguard the integrity and stability of the
financial system.
And we work hard to update our regulatory framework, we work hard to assess
risks, we work hard to see which institutions have shortcomings and, we work
hard to formulate appropriate measures to mitigate risk and maintain
compliance.
But in the end, you have to work harder. To make the necessary investments,
train your employees, ensure you know your clients, guarantee your
transaction monitoring is state of the art while your service delivery to the
client remains excellent.
SLIDE 16
We all have to do our part to keep Curaçao on the map as a compliant
international financial center.
I thank you for your attention.