The Cayman Islands finds itself caught in a global public policy debate over how to deal with cash transfers that flow around the world through companies like Western Union and MoneyGram. The result has been a shortage in U.S. cash, steeply increased fees to send remittances, and restrictions on how much money workers can send home to support their families.
“This is not just a problem of the Cayman Islands,” said International Monetary Fund senior economist Jacques Bouhga-Hagbe.
“These are unintended consequences of tough regulatory requirements from advanced countries,” Bouhga-Hagbe said, impacting the entire Caribbean region and other less-developed countries around the world.
The IMF economist warned that what is happening with the ability to send remittances is “clearly a risk to the economic stability of the region.” Countries have been addressing the problem with cash transfer businesses one by one, with central banks and regulators stepping in when local banks can no longer handle the remittances for fear of losing their own correspondent banks in the U.S.
Bouhga-Hagbe said at least 10 financial institutions in five countries have stopped offering remittance services, but he said he had not heard of a situation like the one in Cayman where the money services companies do not have a single bank willing to do business with them.
Remittance service is a widespread problem, he said, and the Caribbean needs a regional solution. He said a task force at CARICOM, the Caribbean Community Secretariat, is working on a proposal that he hopes will be released soon.
Cayman Financial Services Minister Wayne Panton, in a recent interview with the Cayman Compass, said, “Even though Cayman may be in a better position than others in the region, we’re a small drop in the bucket for them to make an exception for.” He said his ministry is not directly involved in the CARICOM task force.
The problem boils down to the notion that the Caribbean region is a high-risk area for banking. Local banks across the region, from Cayman to the Bahamas, rely on correspondent banks in the U.S. to access the global financial system. The United States and Europe have increased regulations on cash transfers over concerns about money laundering and terrorism financing, and those new rules and the financial risks to banks for breaking the rules mean banks are getting out of the cash transfer business altogether. Cash transfers, by their nature, are not a big source of income for banks, so it is easy to pull out of the business.
The drop in remittances could impact gross domestic product for Caribbean countries, Bouhga-Hagbe said. Families who rely on remittances could face financial difficulties, and the workers who send cash have to spend significantly more to support their families at home.
Another problem with what is called “de-risking” by the banks, according to Duke University economist Connel Fullenkamp, is that the increased costs to send money can move the cash transfers into the black market. With the underground transfers “security goes down and costs go up.”
Additionally, withdrawal of banks from the remittance business “connects with a bigger, somewhat disturbing trend of moving backwards from global banking integration.” The decreased competition, Fullenkamp said, “can be significant in a country with a few banks and a big market.” The problems, he said, are the full range of issues any economist would point to with decreased competition, such as higher prices and less innovation.
In the Caribbean, Cayman is on the opposite side of the equation from countries like Jamaica and Haiti, which rely on receiving remittances. Workers in Cayman last year sent out almost $180 million through cash transfer agencies. About $110 million of last year’s total went to Jamaica and another $23 million went to the Philippines.
Lacking a correspondent bank in the Cayman Islands, the remittance companies have resorted to shipping U.S. dollars to Florida to get the funds into the banking system. The companies here will now only accept U.S. cash, leading to a shortage of U.S. dollars and sharply increasing the price for workers to send money home.
With all the U.S. cash literally flying off the island, the Cayman Islands now faces a shortage of U.S. currency, and banks have to fly in cash from the U.S. Many banks on the island will not exchange Cayman dollars for U.S. dollars for people who do not have bank accounts. There are several banks charging fees for non-account holders to convert cash to U.S. dollars so they can be sent through money transfers. CIBC FirstCaribbean, for example, is charging CI$50 to convert up to a maximum of US$500.
The bank fee for exchanging cash more than doubles the typical fee for sending remittances, leaving people paying upward of 20 percent between the exchange fee and the standard charge to send money through MoneyGram or JN Money Services.
Minister Panton told the Compass he expects that the U.S. cash shortage will be temporary as government regulators work with the remittance companies and banks to come up with a new solution. He said there are several options on the table, including turning the Cayman Islands Development Bank into a more traditional bank to take deposits from the money transfer companies. But, the minister noted, that could be a risky proposition as a government bank could face the same challenges as private banks that can’t find a correspondent bank in the U.S. that will handle the cash transfer transactions. Additionally, Panton said, government would have to capitalize the bank and make significant changes to its structure, which he estimated could cost upward of $20 million.
Another possible solution, he said, rests with a money transfer company with enough global market clout to make a deal with a bank. He said government is working with one such company and he hopes to have a deal in place soon. He refused to say which transfer company that might be, but he has said previously that government has been working with Western Union to reopen its branches in Cayman.
Western Union was the first money transfer company to close over the summer when Fidelity Bank decided to stop offering the service in the Bahamas, Turks and Caicos and the Cayman Islands in July.
Minister Panton said the sudden shortage in U.S. cash surprised him and his staff.
He said the remittance companies initially had told Cayman regulators that they were receiving cash in about half Cayman Islands dollars and half U.S. dollars. It turns out, the minister said, that the companies were receiving more like 95 percent Cayman dollars.
In August, when the money transfer companies started accepting only U.S. currency and then shipping it off island, remittances went from almost all Cayman currency to completely U.S. dollars. Panton said there was a shortage on U.S. currency within a week.
He said he expected there would be a shortage in U.S. cash, but based on the initial numbers from the money transfer companies, government regulators expected it would take two months to run through the U.S. cash supply on the islands.