Page 20 - Islands Business March 2023

Banking

CORRESPONDENT BANK DANGER PERSISTS

By Samantha Magick economic and social impacts of a decreasingly regulated
financial system that’s open to exploitation by local and
The loss of correspondent banking services, limited financial transnational organised crime groups. There’s a genuine
inclusion, a potential increase in non-performing loans and possibility that some Pacific nations could become global
difficulty accessing credit are amongst the challenges the money-laundering hotspots if further de-banking of individuals
financial sector in the Pacific continue to face. and nations occurs.”
Despite years of financial inclusion initiatives, ADB Financial The lack of correspondent banking services has been “quite
Sector Specialist, Shiu Raj Singh notes that financial inclusion pervasive across the Pacific,” says Shiu Singh, with Tonga,
in Papua New Guinea remain a massive challenge, as a Samoa, Vanuatu, Solomon Islands, PNG, and Federated States
result of its topography, spread out communities and limited of Micronesia affected, following the derisking undertaken
infrastructure. by larger international banks as Pacific banks respond
“The banks’ branches are focused in urban areas, there are inconsistently to anti money laundering (AML) requirements.
also security concerns, and the presence in the rural areas The Pacific Islands Forum Secretariat has told finance
is not there, so there is a higher dependence on the cash ministers that the worst-case impacts of this loss could:
economy, and that has basically led to substantial number of limit a nation’s access to the international finance system;
people out of the formal system.” limit their ability to perform payment services and currency
To address this, a digital access tool is being pilot-tested in exchange thereby limiting remittances and trade; worsen
PNG with two microfinance banks, which enables bank agents financial exclusion and risk jeopardizing poverty alleviation
to go into the community with a tablet and cards, record efforts.
information and issue cards “there and then to open bank The situation has become so difficult for Pacific money
accounts and start taking deposits,” Shiu says. remittance companies that they sough a judicial review of
“The biometric information would be collected from the the NZ Reserve Bank’s action around money laundering laws,
individuals, including a picture and fingerprints, and that will which has seen the companies deprived of bank accounts
form the basic form of identity, and then with the help of a under AML regulations.
village elder like a church person or village leader, they vouch The legal action was unsuccessful.
that the person is who he or she says they are, and based on The problem arises in part due to a “lack of investment in
that vouching, the person is able to open a bank account with the soft infrastructure required for the banking sector, the
a microfinance institution.” smaller volume in the Pacific, and the smaller values,” Singh
says.
Correspondent banking Increased requirements around AML policies has prompted
The requirements around anti money laundering (AML) the ADB to work on ‘Know Your Customer’ (KYC) support. A
efforts, driven predominantly from the U.S., and the pilot in Samoa is assisting financial institutions to undertake
subsequent impact on correspondent banking in the Pacific verification, sanction checks and enhance due diligence
have been of concern for some years. through online platforms to save costs and improve customer
This month, the Assistant Secretary for Terrorist Financing experience.
and Financial Crimes, Elizabeth Rosenberg told Australian South Pacific Central Bank Governors have pledged to look
bankers, “the financial threat landscape certainly features at the potential to develop a regional electronic ‘Know Your
immense and daunting challenges.” Customer’ (eKYC) facility.
She continued: “The explosion and pace of developments in “Governors decided to prioritise countries developing
the virtual asset space are, frankly, astounding. This can often strategies for delivering their own eKYC capability. This work
mean that industry treats regulations and financial crimes is part of their respective national digitalisation, digital
compliance as an afterthought. While governments should identity, and AML/CFT compliance work programs. The
be weary of stifling innovative spirit, we cannot forsake the development of a regional eKYC facility may be considered as
obligation to promote financial integrity and protect people a possible extension of the national eKYC capabilities in the
and financial systems from fraudsters and criminals.” future,” they said in a statement after meeting last June.
Writing for the Australian Strategic Policy Institute (ASPI) On the matter of access to credit, Singh says a lot of work
late last year, John Coyne observed that the exit of major has been done on the Moveable Assets Security Framework
banks from the region has led to a growing reliance “on new to address the difficulties many micro and small enterprises
financial institutions that have a far less rigorous commitment face in accessing credit in markets where land is communally
to regulatory compliance, especially with respect to anti- owned, and therefore difficult to use as collateral.
money laundering and foreign bribery.” Following its support for the the Centre for Excellence in
He continues: “This situation is creating all-new financial inclusion in Papua New Guinea, the ADB is working on
vulnerabilities, including opening avenues for foreign a follow up project which will support access to finance and
interference and heightening the risk of serious organised microentreprenurship.
crime in the Pacific. Increased reliance on foreign financial
institutions, especially state-owned ones, could provide editor@islandsbusiness.com
opportunities to use passive and active economic influence
across the Pacific. Of more immediate concern are the For country briefs, see page 26

20 Islands Business, March 2023