World Bank Group and Pacific Islands Forum Secretariat
Correspondent Banking Relationships Roadmap Implementation Coordination Event
Pacific Island Countries Perspectives – Keynote Address
27 March 2024
Protocols:
WB Country Director Stephen Ndegwa
PIFS Secretary General Henry Puna
Mr. Andrew Cumston, Assistant Secretary, DFAT
Mr. Robert Kaproth, United States Deputy Assistant Secretary for Asia and the Pacific
Hon. Teuea Toatu, Vice President and Minister for Finance of Kiribati
Hon. Panepasi Nelesone, DPM and Minister for Finance Tuvalu
Hon. John Salong, Minister for Finance Vanuatu
Lord Sevele, Chairman, National Reserve Bank of Tonga
Director for Financial Sector, ADB Emma Fan
Colleagues and Distinguished Guests,
Pleased to offer the perspective of Pacific Island Countries (PICs), representing the Governors of the South Pacific Central Banks, on this crucial matter of Correspondent Banking Relationships (CBRs) de-risking.
2. CBRs are declining globally, but the decline in PICs is higher, or to be more clear, the lowest access globally, A 2021 IMF report states that the number of CBRs in the Pacific has fallen by nearly 50% since 2011 with US dollar CBRs falling by more than 60%, almost twice as severe as that seen globally, with the lowest access to channels of counterpart banking globally. This has led to a concentration of remaining CBRs in just a few banks, and some PICs at risk to a complete loss of CBRs.
3. The negative impacts of the decline in CBRs add to several global financial matters that worsen the total impacts on the pacific islands, but the cause did not originate from our region. Initially, the challenges stemmed from pressure to comply with global Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) standards, and now in Tonga we are amending our Money Laundering and Proceeds of Crime Act to include Countering Proliferation Financing. More recently, profitability concerns are stated, which makes so much sense, yet difficult to understand from a World Bank Development poverty reduction perspective. Changing the goal posts from time to time is business as usual, but they do expose small island's isolation, our small market size, relative weak institutions and elevated high unit costs of operations, reducing profit margins, further highlighting the region's challenges in conducting business with the rest of the world.
4. Constant changing of the international regulatory goal posts, with accompanying increased in regulatory expectations have caused certain global banks to halt the provision of CBRs to financial institutions in jurisdictions that they deem to have limited AML/CFT/CPF capacities, and lower profitability due to higher due diligence costs.
5. The unique geographical and economic characteristics of our island countries, are particularly attractive for tourism and fisheries but, highly vulnerable to the adverse effects of financial crime and instability. Ensuring robust CBRs and AML/CFT/CPF frameworks are essential for safeguarding the integrity of our financial system. However, achieving and maintaining compliance can be challenging for PICs due to limited resources, capacity constraints, and structural vulnerabilities. Tonga for instance, its 2021 APG Mutual Evaluation Report is publicly accessible, revealing findings regarding our national capacity, highlighting numerous vulnerabilities in our institutional due diligence capabilities.
5. Those countries that are no longer able to access any USD CBRs, are disproportionately affected. This presents significant challenges for local banks and customers in our jurisdictions. Multiple currency transfers and conversions to facilitate the transactions in currencies where CBRs are not available (e.g. USD and JPY), do incur losses and the ultimate beneficiaries may not always be accommodated, or the transactions are just declined without explanation. Two of the four banks in Tonga had lost their USD CBRs of which one still has not recovered and is forced, to deal in NZD with most of its customers and the Reserve Bank.
6. In several island countries, four plus one more recently, the imminent risk of losing banking relationships poses severe consequences.
• countries experiencing partial loss of CBRs, foreign correspondent banks may impose higher costs on local respondent banks to maintain accounts.
• countries that are highly-dependent on remittance receipts, are also at risks. Tonga’s annual remittances up to 39 percent of its GDP, highest in the world according to the World Bank, least 80 percent received through MTOs, are subject to restrictions. The restrictions felt across the country more so post disaster events, Mother's Sunday, Father's Sunday, and festivities like Christmas and the Holy Week this week, where millions of Pa’anga flow into the country.
7. Constant efforts to reduce relative remittance costs to PICs have faced significant challenges, affected by the decline in CBRs. Despite a decline in the average cost of remittances for the Pacific since 2009, the costs remains relatively high. In 2022, the average remittance cost in the Pacific stood at 9.1%, higher than the global average of 6.25%, and three times higher than the UN global target of 3%. The G20 cross border payments roadmap requires any remittance corridor to be no more than 5% cost, will not be complied with in the Pacific. Fees for overseas workers sending remittances to PICs are among the highest in the world. De-risking has reduced competition in the market as MTOs are forced to exit or the level playing field.
8. I have taken you through our struggles in addressing de-risking, the progress has been too slow and ineffective, with constant goal posts changing.
9. Alternative solutions to CBRs have not effectively resolved the challenges. Currency platforms like Currency Cloud and Convera, are available but come with high costs. The initial onboarding costs, maintenance fees, and annual subscriptions linked with these platforms are excessively expensive compared to traditional CBRs. Similarly, there is some interest from the Crowns Agent Bank to provide CBR also involve high costs.
10. Reports by regional partners such as AUSTRAC have assessed that the level of ML/TF/PF risk associated with remittances from Australia to Pacific Island countries sent through remittance providers, is low. However, even when proven to be low, this finding has not been quite helpful, in deterring de-risking as profitability considerations took over as the main driver of de-risking, and to a lesser extent the perceived AML/CFT/CPF risks.
11. When analyzing the 2023 Basel AML Index for the Pacific, and the percentage deviation from the average, Tonga and the Solomon Islands show a higher presence on the NC and PC (less positive), while Australia, New Zealand, Fiji, and Samoa not too far behind in terms of better rating. The range of deviation indicates a strong correlation between AML measures and CBRs. Similarly, there appears to be a strong correlation between GDP and robust CBRs, or as they say in banking, international banks are loosing interests, in the small markets and low profitability of the Pacific.
12. PICs efforts have mainly focused on strengthening the AML/CFT/CPF compliance of banks and MTOs to address the primary / initial cause of de-risking. In Tonga’s case;
a) More stringent requirements have been imposed on MTOs, mandating that their overseas agents be licensed by relevant authorities. MTOs utilizing third parties for local disbursements, pose further ML/TF/PF risks, therefore are now required to report on such arrangements for close monitoring.
14. Addressing these challenges requires concrete solutions and a concerted effort involving domestic authorities, regional organizations, international partners, and the global banks themselves. This Event could play a crucial role in advocating for the unique needs and circumstances of Pacific Island countries within international forums and financial networks.
15. Development partners can help Pacific Island countries strengthen their regulatory frameworks, enhance institutional capacity, and implement best practices in CBR and AML/CFT/CPF compliance. In this regard, we welcome the support from the World Bank, the Government of Australia, the United States, the IMF, and other partners in response to the bid from Forum Finance Economic Ministers and the Leaders of the Pacific.
16. Raising the appetite for offering CBRs for our local banks and MTOs is an important first step rather than the outright blanket closure of accounts. It is therefore important to foster a better understanding of the Pacific island countries' compliance status, and better utilization of national and sectoral ML/TF/PF risk assessments to advocate for proportionate and risk-based approaches to compliance, tailored to the realities of small island economies. Transparency on how this could be harnessed and openness to consider such arrangements would be very helpful.
17. Equally important, is the responsibility of our respective jurisdictions and national institutions like our Ministry of Finance and Central banks, to comply with AML/CFT/CPF, and build on the following:
a. The Pacific Islands Forum (PIF) and the World Bank Group have jointly developed a CBR Roadmap following discussions among Finance & Economic Ministers (FEMM) and endorsed by our Pacific Leaders in 2023. This Roadmap closely aligns with the objectives outlined in the Pacific Island Regional Initiative (PIRI) de-risking action plan.
b. Under the Alliance for Financial Inclusion (AFI) Pacific Island Regional Initiative (PIRI), Pacific central banks formulated a regional de-risking action plan in 2019. This plan involves engaging with stakeholders in the United States, Australia, and New Zealand, establishing a de-risking baseline to monitor progress over time, enhancing AML/CFT/CPF assessment capabilities, and implementing technology-based solutions.
• to highlight, the need to consider how to ensure transparent data is made available for monitoring of progress with our efforts to combat de-risking, particularly given that SWIFT has decided to no longer make its CBR data publicly available.
• Utilizing technology to address the challenges faced by PICs, should aim at providing affordable remittance products, ensuring accessibility for smaller/local banks and MTOs, and compliance with AML/CFT/PFT requirements, is another viable option.
• Banks to explore opportunities to diversify revenue streams beyond traditional banking services which may include providing financial products tailored to needs of customers in small markets, such as microfinance solutions.
c. Closer engagements with relevant international banks and regulators from the US, Australia, and New Zealand, are essential to ensure that developed solutions meet the specific needs of Pacific Island countries. In this context, we call for commitment from international banks and developed country regulators to work with the Pacific on workable solutions.
18. As the provision of CBR services is a commercial matter for international banks and global networks, sponsoring a third-party agent with correspondent banking capabilities presents a practical solution. This approach could involve forming partnerships, providing capacity-building support, and ensuring regulatory compliance and oversight.
19. We are deeply moved and encouraged by the rapid response by the World Bank, the Governments of Australia, the United States and our partners, to understanding our requirements, the commercial interests of international banks and cost implications of these solutions are essential to getting support for successful implementation.
20. On behalf of the Governors of the South Pacific Governors Meeting, by extension our Pacific colleagues, we emphasize the urgency and importance of these collaborative efforts to roll out timely and highly relevant responses to the Pacific islands.
