FINANCE: Caribbean Banks Feel Heat From USA Patriot Act

By IPS Correspondents Reprint | | Print |

Bert Wilkinson

GEORGETOWN, Guyana, Nov 29 2007 (IPS) - Speaking to a hushed room of Caribbean executives, a Florida-based banker recently detailed how tough U.S. banking laws have become since the Sep. 11, 2001 attacks and how easy it is now for U.S. authorities to penalise regional banks if they knowingly or unknowingly help to launder money for narco-trafficking and terrorism financing.

Wilbert Bascom, whose Miami-based consulting company conducts due diligence for major banking clients in the United States, says some banks have pulled out of the U.S. market after being hit with huge fines for imprudent banking practices that led to millions ending up in the hands of traffickers and terrorists.

The measures are contained in the “USA Patriot Act” passed by the U.S. Congress in the wake of the attacks on New York and Washington. Section 312 of the Act addresses collaborations between U.S. financial institutions and foreign banks.

So-called correspondent banking occurs when one bank provides services to another to move funds, exchange currencies, or carry out other financial transactions. New rules established this year by the U.S. Treasury Department’s Financial Crimes Enforcement Network require even great due diligence in correspondent banking transactions.

Bascom and counterpart Rudy Zepeda of the Federal Reserve Bank of Atlanta’s Miami branch told the recent conference of the 50-member Caribbean Association of Indigenous Banks (CAIB) that they should pool their resources and buy the expensive software that allows banks to tap into international databases to identify major players in laundering for the drug trafficking industry and for terrorism financing.

“These measures can have serious implications for banks and it will be difficult to reestablish relations with American correspondent banks if your institution is considered for special measures under the act. They treat you like the plague after that,” said Bascom.

He said several large banks operating in the United States have already paid hefty fines for deliberately or inadvertently laundering money. The Bank of China, U.S. Trust, Banco Popular, Riggs Bank, AmSouth, Arab Bank, ABN/AMRO Bank, Bank Atlantic, Israel Discount Bank, American Express Bank and Union Bank of California had total fines of 350 million dollars levied against them.

ABN Amro paid 80 million dollars in 2005, and might face a second penalty of nearly 500 million dollars.

But even as bankers scrutinised the changing U.S. landscape for their very survival, some are already balking at the cost of keeping abreast with the regulations. Most of the CAIB members have correspondent banks in the U.S. that terminate transactions started in the region and can ill-afford not to buy and install software and implement other security measures.

One suggestion that emerged from the annual consultation is the pooling of resources to buy software costing up to 600,000 dollars, plus fees for annual licensing and other charges.

Bankers say this is the only way entities are going to survive and prosper even as big North American banks that abandoned the region for so-called greener pastures in the 1980s and 1990s are reentering the market in a big way.

The 50 members and three honorary members of the CAIB have a combined asset base of 17.5 million, making it difficult to compete in the daily changing face of an industry that includes mergers and acquisitions and billions of dollars available through investment financing on the stock market.

“These regulations present for us an added cost that small banks will have to bear,” said CAIB Chairman Mike Archibald.

The Caribbean bankers’ frustrations were aired – with no holds barred – by the keynote speaker at the conference opening – Guyana’s President Bharrat Jagdeo.

Singling out the United States, Britain and other Western countries, Jagdeo tore into policy-makers for imposing tough rules on other players – rules which they themselves ignore or can’t reasonably comply with.

He called the U.S. the biggest conduit for money laundering and other dirty money, dubbing it a home of double standards of the worst kind.

And London is the global capital for tax evaders and underground mafia money from Russia, among other places, said a visibly angry Jagdeo.

“When we talk about money laundering, most of the drugs go into the U.S. and a financial transaction takes place there. It flows through the system so if it is one billion dollars in our country it is 100-fold in the U.S. – and you don’t see the U.S. on any blacklist.”

Jagdeo also recalled the 1990s campaign against the Caribbean offshore banking industry by members of the Organisation for Economic Cooperation and Development (OECD).

He argued that while the OECD sought to close a lifeline industry down, banking havens of its own, such as Luxembourg, went untouched. “They never have felt the wrath of a blacklist. Others in Europe are still involved in imprudent lending,” he told a riveted audience.

Three major challenges face regional banks are they head into the next year – surviving a changing global financial environment, unifying national laws to allow banks in any of the 12-member Caribbean single market to tap into each other’s credit databases, and coping with an influx of multinational banks – which can set up anywhere and everywhere in the trade bloc in an initiative that formally got started early last year.

Still, Jagdeo has a word of warning for bankers and governments.

“Do not impose undue burdens just to satisfy some notion of probity that even countries that recommend the probity don’t practice themselves,” he said.