All eyes are on the changing political landscape in the United States as government and the financial services industry in Cayman worry about continued bank de-risking, the process of banks reducing the risk of money laundering and terrorism financing.
In the weeks since the U.S. election, headlines like Politico’s “Bankers celebrate dawn of Trump era” have proliferated in industry publications and popular websites. President-elect Donald Trump’s transition team posted a statement in mid-November promising to dismantle the Dodd-Frank Act, a suite of financial regulatory reforms passed after the last decade’s financial crisis.
It’s unclear so far whether the president-elect’s plans include de-risking, and as of press time Mr. Trump had not announced his nominee for Treasury secretary. But the conservative ideology of the Republican Party could lead to fewer regulations for big banks, a possibility that has gotten the attention of Cayman’s financial services industry and the government.
In a recent statement, Financial Services Minister Wayne Panton said, “Our issues with local money services businesses, which Cayman’s Government and the private sector worked together last year to resolve, were linked to de-risking.
“This issue didn’t just affect persons who send remittances from Cayman to their families and friends in their home countries. It affected banking services across the board, for all of us.”
Acting Under Secretary for the U.S. Treasury Adam Szubin, addressing a conference the week after the U.S. election, said de-risking “remains a key priority for the U.S. Department of the Treasury.”
He told the American Bankers Association and American Bar Association annual Money Laundering Enforcement Conference, “Last year the World Bank undertook a survey that found that small jurisdictions with significant offshore banking activities were disproportionately affected. Given what we have come to understand about some of the reasons why some global banks are reassessing their business relationships, this is not entirely surprising.”
According to a copy of his speech published on the Treasury website, he said, “These reasons include that correspondent banking is a low-margin business in a global banking environment that has seen many multinational banks reassess their global strategic footprint, cut costs, and reallocate capital.”
Cayman, as one of those offshore jurisdictions, has felt the impact, most publicly when Western Union closed without warning in July 2015. A month later, Cayman National Bank closed the bank account for MoneyGram and JN Money Services, almost shutting down all cash-transfer counters in the islands. Many expat workers rely on cash transfer services to send remittances overseas to support their family.
A Nov. 16 press release from the Financial Services Ministry said a delegation from the ministry visited Washington, D.C., in September to meet with representatives from the Treasury, the State Department, the World Bank and several Democrat congressmen.
“We appreciated their strong interest in hearing how Cayman, as a well-regulated international financial centre, was affected,” Minister Panton said in the statement. “We are planning further visits in the coming months to continue these discussions, and we look forward to working with US leaders to strengthen our collaboration.
“As we told our experiences, we were particularly heartened to learn that the lawmakers we met – some of whom have constituents from the Caribbean who use MSBs [Money Services Business] – agree that de-risking is affecting a significant group of persons whom it was never intended to affect.”
Explaining de-risking, Minister Panton said, “Rather than working to reduce the risk, some banks have moved to eliminate the risk completely by terminating certain types of banking business altogether.
“However, by trying to eliminate risk rather than assessing and mitigating it, they are also cutting off lines of business that were not intended to be captured by the regulation, such as the MSBs, whose business by its nature does not appeal to money launderers and terrorist financiers because the monetary value of the transactions are so small.”
The de-risking actions, he said, have created their own risks by moving people outside of the traditional financial system. “The international banks are hindering law-abiding individuals from conducting daily, necessary financial transactions, such as wiring money home to families. Persons then may turn to alternative means of money transfer, which have greater associated risks,” he said.
Fidelity Bank ran Cayman’s Western Union cash transfer franchise until the windows closed overnight in July 2015. At the time, Fidelity Bank (Cayman) CEO Brett Hill told the Cayman Compass that the costs of compliance with new regulations are increasing while income from the cash transfer business is declining. “It’s been an increasingly marginal business for us,” he said.
In the month after Western Union closed, Cayman National Bank closed the bank accounts for JN Money Services, which runs the MoneyGram franchise on the islands. Without a local bank account, JN had to close or find another way to reach the international banking system. The company opted to accept only U.S. cash, so that it would not have to convert Cayman dollars and the cash could be flown to another country and deposited in a bank.
Cayman experienced a shortage of U.S. cash, with banks running out of the notes and some charging fees to convert local currency to U.S. dollars.
Months of closed-door negotiations between the ministry, banks, the Cayman Islands Monetary Authority and the cash-transfer companies dragged on, while people became more upset with the difficulty in sending cash back home to family members.
Western Union reopened in late November 2015 under Jamaica-based GraceKennedy Remittance Services and with banking through Scotiabank, effectively ending the crisis.
Minister Panton, announcing the deal last year, thanks JN for keeping its windows open for remittances, but JN was left out of the deal and still does not have a local bank account.