Caribbean Financial Inclusion Initiative

Caribbean Financial Inclusion Initiative

Promoting Financial Access to Caribbean Communities

In line with recent U.S. governmental initiatives, Stern Bank seeks to promote financial access to Caribbean communities by providing secure, compliant and cost-effective USD correspondent services to local banks, credit unions and similar financial institutions.  To further this initiative, Stern Bank has developed a relationship with the Caribbean Association of Banks – which represents over 80 member institutions in the Caribbean and Latin America – to foster a better understanding of U.S. AML and BSA requirements amongst its members, vet prospective community banks and ultimately provide services.  Stern intends to dedicate additional resource to further its relationship with CAB Member Banks in the coming years.

Derisking Explained

Providing correspondent banking services to the region has been a controversial, yet pressing, matter as of late.  Since 2015, Latin America and the Caribbean – as well as parts of Africa, Eastern Europe, the Middle East, and the South Pacific – have lost access to a significant number of their correspondent relationships and with it the ability to process U.S. dollar-denominated transactions  – a phenomena referred to as “de-risking.”[1]  The Financial Stability Board’s Correspondent Banking Report found that although all continents “have seen a decline in the number of active correspondents, as measured by the flow of messages sent through SWIFT,” that the “Americas (excluding Northern America) and Oceania experienced the largest decreases in the number of active correspondents in 2017.”[2]  As compliance costs rose over this period,[3] major global banks exited correspondent banking relationships with their Caribbean counterparts en masse judging that the risks associated with potential AML and CFT concerns did not outweigh any potential earnings gained in processing relatively small payment flows.[4]  Caribbean countries are particularly vulnerable to disruptions in U.S. dollar-denominated flows because they depend disproportionally on foreign trade, most of which is conducted in U.S. dollars, to survive.[5]  Belize’s currency, for instance, is pegged to the U.S. dollar, and the United States is one of its most important trading partners.  Banks in the Caribbean and Latin America region have resorted to unorthodox mechanisms to process USD flows, often relying on nested accounts through money services business (“MSB”) and electronic money institutions (“EMIs”).  Such payments rarely receive the same level of compliance scrutiny, take longer to process and are far costlier to execute.

Regulatory authorities continue to emphasize that de-risking is not in line with international guidelines, and in fact is a misapplication of the risk-based approach. According to the Financial Action Task Force (“FATF”):

In recent years, financial institutions have increasingly decided to avoid, rather than to manage, possible money laundering or terrorist financing risks, by terminating business relationships with entire regions or classes of customers. This so-called 'de-risking' practice has negatively impacted correspondent banking.  De-risking is not in line with the FATF Recommendations, and is a serious concern to the international community, including the FATF and the FATF-Style Regional Bodies. De-risking can result in financial exclusion, less transparency and greater exposure to money laundering and terrorist financing risks.[1]

As the FATF alludes, the alternative to de-risking is proper risk mitigation.  The primary risk mitigation tool is having physical proximity and in-depth knowledge of the target customer market.  Physical proximity to a bank’s customer base is important because it gives the bank a point of reference for the customers’ experience and the people working in the bank will be able to relate to and understand the behavior of their customers.[2]  As Stern Bank sits in Puerto Rico, it has the closest physical proximity of almost any U.S. bank to the Caribbean and Latin America.  It seeks to develop in-depth knowledge of customer markets through relationships with organizations such as the Caribbean Association of Banks, in-person meetings with its respondent’s Management Teams and visits with local Caribbean regulators and Central Banks.

If your bank or organization, whether it be governmental, regulatory, not-for-profit or a banker’s association, is interested in discussing how it can get involved in Stern Bank’s Caribbean Financial Inclusion Initiative, please contact us at