Fi­nan­cial crime crack­down curbs emerg­ing mar­kets

IFC says cut in bank ties has de­pressed le­git­i­mate growth

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY BEN MCLANNAHAN, FT COR­RE­SPON­DENT IN NEW YORK

Global reg­u­la­tors’ as­sault on ter­ror­ists, tax dodgers and money laun­der­ers is sap­ping vi­tal­ity from a host of emerg­ing mar­ket economies, ac­cord­ing to the pri­vate-sec­tor arm of the World Bank, as big banks cut ties that could ex­pose them to sanc­tions. Over the past few years banks such as HSBC, BNP Paribas and JP­Mor­gan Chase have paid bil­lions of dol­lars of fines for fail­ing to keep tabs on crim­i­nal ac­tiv­ity, while spend­ing heav­ily to in­crease their rou­tine flag­ging of sus­pi­cious trans­ac­tions.

Global reg­u­la­tors’ as­sault on ter­ror­ists, tax dodgers and money laun­der­ers is sap­ping vi­tal­ity from a host of emerg­ing mar­ket economies, ac­cord­ing to the pri­vate-sec­tor arm of the World Bank, as big banks cut ties that could ex­pose them to sanc­tions.

Over the past few years banks such as HSBC, BNP Paribas and JP­Mor­gan Chase have paid bil­lions of dol­lars of fines for fail­ing to keep tabs on crim­i­nal ac­tiv­ity, while spend­ing heav­ily to in­crease their rou­tine flag­ging of sus­pi­cious trans­ac­tions. As a re­sult, many of them have trimmed their net­works of re­la­tion­ships with banks in other coun­tries, fear­ing that such con­nec­tions may be more trou­ble than they are worth.

But ac­cord­ing to the In­ter­na­tional Fi­nance Cor­po­ra­tion, these cuts to so-called cor­re­spon­dent bank­ing re­la­tion­ships — bi­lat­eral agree­ments to han­dle ba­sic ser­vices such as re­mit­tances or let­ters of credit — are hav­ing the ef­fect of shut­ting out house­holds and small busi­nesses from the global fi­nan­cial sys­tem.

In a new sur­vey of more than 300 of its bank­ing clients around the world, the IFC found that more than one in four re­ported a de­cline in their CBRs. In seven coun­tries — in­clud­ing Kenya, Le­banon, Pak­istan, Paraguay and Viet­nam — the banks said that a lack of CBRs, or tight­ened terms on the ties that re­main, were their sole ob­sta­cle to growth.

Mar­cos Bru­jis, Wash­ing­ton-based global in­dus­try di­rec­tor of the fi­nan­cial in­sti­tu­tions group at the IFC, noted that the cut­ting had spread well be­yond re­gions such as the Pa­cific Is­lands and some Caribbean coun­tries, where de­clines in CBRs have been widely re­ported. In sub-Sa­ha­ran Africa, in par­tic­u­lar, he said, the de­clines have been par­tic­u­larly acute, forc­ing some lenders into un­reg­u­lated net­works.

“As a re­sult of all these ad­di­tional costs, emerg­ing-mar­ket banks have less ca­pac­ity to serve their coun­tries, which af­fects jobs, eco­nomic growth, de­ci­sions to mi­grate and so on,” he said. “The ef­fects of ‘de-risk­ing’ are very sub­tle, com­plex and per­va­sive.”

The sur­vey adds to a grow­ing body of work on the un­in­tended con­se­quences of ef­forts to en­list banks in the global fight against crime. The In­ter­na­tional Mon­e­tary Fund flagged con­cerns ear­lier this year, warn­ing that a steady de­cline in CBRs has ex­ac­er­bated fragili­ties in the fi­nan­cial sys­tem by con­cen­trat­ing flows of money across borders. The Fi­nan­cial Sta­bil­ity Board took a sim­i­lar line in July, ar­gu­ing that falls in CBRs had slowed global trade by length­en­ing chains of pay­ments, while in­creas­ing de­pen­dence on smaller groups of lenders.

Lob­by­ists for the big banks, mean­while, have long com­plained of un­rea­son­able ex­pec­ta­tions heaped upon them. A re­port is­sued in Fe­bru­ary by The Clear­ing House, a pow­er­ful Wash­ing­ton-based lobby group, claimed that big fi­nan­cial firms were spend­ing at least $8bn on anti-money laun­der­ing com­pli­ance each year — not much less than the $9.5bn bud­get of the FBI.

The Clear­ing House is at the fore­front of a loose col­lec­tion of bod­ies try­ing to cre­ate some kind of shared global de­pos­i­tory of knowyour-cus­tomer in­for­ma­tion, which could lower com­pli­ance costs for banks all over the world.

Reg­u­la­tors in­clud­ing the Fed­eral Re­serve and the Of­fice of the Comp­trol­ler of the Cur­rency, and FinCEN, the US Trea­sury’s Fi­nan­cial Crimes En­force­ment Net­work, have shown an in­ter­est in sup­port­ing such an ini­tia­tive, ac­cord­ing to peo­ple fa­mil­iar with the sit­u­a­tion.

The IFC is push­ing in that di­rec­tion too, says Su­san Starnes, head of trade and com­mod­ity fi­nance strat­egy. “None of us feels we can do this on our own. We’re try­ing to find a way where there is pro­tec­tion in num­bers.”

Rod­gin Co­hen, se­nior chair­man at Sul­li­van & Cromwell, the law firm, said the project “could be the ul­ti­mate win/win. Costs are cut but more im­por­tantly, the po­ten­tial for catch­ing bad ac­tors is sharply in­creased.”

The Fed­eral Re­serve’s plans to shrink iits bal­ance sheet are likely to im­pact upon emerg­ing mar­kets © FT mon­tage; Bloomberg

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