Page 34 - Islands Business October 2023 edition

Banking

countries have suffered significant Changes in correspondent banking relationships in SPGM
reductions in CBRs, ranging from a (South Pacific Central Bank Governors Meeting) member countries.
decline of 40% in Kiribati to 70% in Cook Percentage change over 2011-2022
Islands.
For example, the International
Monetary Fund (IMF) notes that Samoa’s
domestic banks are experiencing CBR
pressure as a result of low profitability,
weaknesses around AML supervision
and reputational risks around Samoa’s
offshore sector.
Two small banks in Tonga recently
lost their USD accounts, and given
Tonga’s heavy reliance on remittances,
this could have a big impact on the
Kingdom’s economy. Tonga has set up WHAT IS CORRESPONDENT BANKING?
a Financial Analysis and Supervision
Coordinating Unit to strengthen Correspondent banking involves a financial institution (the ‘correspondent’)
AML/CFT supervision and improve providing a deposit account and related payment services to another financial
coordination between agencies. institution (the ‘respondent’) for the purposes of currency exchange, the
Vanuatu’s domestic banks have also execution of third-party payments, trade finance and cross border money
been affected by pressure on CBRs, transfers. The correspondent bank executes payments on behalf of the
which in part stems from concerns respondent bank and its customers.
around Vanuatu’s economic citizenship For countries that rely on foreign currency inflows (such as remittances,
program, offshore financial centre official development assistance and tourism receipts), correspondent banking is
dealings and tax transparency. critical.
By contrast, CBR pressure has been
more muted in Fiji, Papua New Guinea
and Solomon Islands, although work continues to strengthen What we’ve seen in the Pacific with Westpac is a response
AML regimes in all these jurisdictions. to actually stuff that happened in Australia. The biggest fine
The World Bank study found some evidence that a decline in so far has been on Westpac for what it did in Australia. So, for
CBRs has seen a corresponding decline in export performance. anyone to say that they’re not a risk, actually, it happened in
However, the impact on remittances has been cushioned by Australia.”
changes in the channels used for remittance transfers such as In October 2020, the Federal Court of Australia ordered
the proliferation of online and mobile money services. Westpac to pay A$1.3 billion for breaches of the Anti-Money
Laundering and Counter-Terrorism Financing Act. A statement
Mitigation measures from AUSTRAC (the Australian Transaction Reports and Analysis
In a paper recently published by the Reserve Bank of Centre), noted that Westpac had conceded it contravened the
Australia, Michael Davies writes that: “While the available Act on 23 million occasions by failing to properly report over
evidence suggests that South Pacific countries have been able A$11 billion worth of transactions; pass on information about
to manage this decline thus far, the remaining correspondent the source of funds to other banks in the transfer chain (which
banking services are becoming increasingly stretched and they needed to manage their own risks); keep records of the
further withdrawal may cause financial sector disruption.” origin of some of these transfers; and carry out appropriate
Australia and New Zealand have agreed to provide ‘urgent due diligence. AUSTRAC is one of the agencies now assisting
support’ to “assist Pacific Islands Forum Countries in Pacific Island countries to reach compliance.
re-establishing correspondent banking relationships.” “We’ve got to lift standards,” Jones said. “We’ve got to
Assistant Treasurer and Minister for Financial Services, ensure and work with member states to lift standards. We
Stephen Jones represented Australia at the FEMM and told want to ensure that we don’t go backwards while we’re doing
Islands Business there were important discussions around CBR. that stuff.
“The AML laws are real. We didn’t set the international “We don’t own the banks. We don’t direct the banks,
standards, but we support them. Because we don’t think but we’re working with them to ensure that things don’t go
our banking system should be facilitating criminals or backwards.”
terrorists. And they will find a weak link in the banking system
somewhere and use it from the various purposes. It’s in editor@islandsbusiness.com
everyone’s interest that jurisdictions don’t do that.

34 Islands Business, October 2023