The bank de-risking trap |17 March 2017

 • The Seychelles response to global de-risking to date and the need to revise it

In a press conference aired on SBC last Friday evening we heard the Central Bank of Seychelles explain that Seychelles banks continue to come under pressure from overseas correspondent banks (i.e. for USD, EUR and GBP transactions) due to “de-risking”.  We were told as we have been over the previous years that the primary culprit to the de-risking threats of Seychelles is the often maligned “offshore” industry.  In response to de-risking by the correspondent banks, Seychelles banks have responded by doing their own de-risking.  Yet according to the press conference from the Central Bank, we still seem to be under imminent threat of losing more correspondent banking relationships due to de-risking! Logic should dictate at this stage that we need to revisit our approach to global bank de-risking in a way that is going to result in the best possible outcome for the Seychelles economy. 

What is bank “de-risking”? It is simply the ending of (foreign currency) correspondent banking relationships with the bank clients (e.g. Seychelles banks) of these correspondent banks where the bank client does not present enough value as a client to the correspondent bank in terms of perceived risk (i.e. costs in the form of ongoing direct compliance costs relating to oversight and potential costs for causing the corresponding bank to be fined) vs. reward (revenues generated from these bank clients).  De-risking started when several large global correspondent banks in the US, UK and Europe started receiving heavy fines and having to pay large settlements due to perceived lapses in terms of their anti-money laundering and terrorist financing oversight of their banking clients.  It is important to note that de-risking is a problem for many developing countries like Seychelles across the world including those that have no “offshore” industry.  The World Bank and financial regulators in the major correspondent banking jurisdictions (i.e. USA, UK and Europe) have been reviewing the issues caused by de-risking which they now see is causing adverse consequences to ongoing efforts to increase financial inclusion globally.

The Seychelles banking sector and Central Bank have so far focused primarily, if not exclusively, on the risk mitigation side of de-risking.  Seychelles banks have been engaging in their own de-risking by closing accounts and taking it to the extreme by simply no longer providing services to “offshore entities” (i.e. the banks seem to view IBCs, trusts, foundations as “offshore” and some even seem to think that any company that is licensed and regulated under the FSA umbrella is “offshore”) at all.   However, if our banks are not generating enough income for their respective correspondent banks, then we are at further risk to losing correspondent banking relationships.  Not to mention that we are losing business as a jurisdiction and that a non-banking financial services sector is simply not sustainable without support from the banking sector.    

We are likely now caught in a “de-risking trap” where we are increasing our risks both at the individual bank level and as a jurisdiction in terms of losing correspondent banking (i.e. de-risking) because of our own “de-risking” activities.  In reaction to the ongoing threats posed, Central Bank is apparently now suggesting that our existing banks obtain additional correspondent banking relationships.  This is an understandable reaction, but would seemingly fragment the already tiny business even further and put us further into the de-risking trap.

So what is the solution? Some initial thoughts:

1. 1.        Decrease perceived risk/costs

• Remain engaged and compliant with international bodies such as FATF and OECD.
• End the “offshore” and “onshore” delineation.  There is no “offshore” and “onshore”.  We simply have a financial services industry (i.e. banking, insurance, capital markets, wealth management, corporate services, legal, accounting) that provides products and services which are consumed by residents and non-residents.  The portion that relates to non-residents is an export service in terms of our trade balance.  This is no different from tourism. 
• Implement a well-resourced PR campaign to ensure our major trading partners, relevant international bodies and key markets of interest are aware of our compliant status.  “Financial inclusion” should also be peppered heavily in those campaigns.
• All but 2 or 3 suitable banks perhaps to completely de-risk by stopping to provide services to for entities that are deemed to be high risk (i.e. IBCs) and notify their correspondent banks of same.  This has already occurred in fact which makes it perplexing that the “offshore” industry is still being blamed for de-risking woes of these banks.
• Collaboration among industry stakeholders and regulators on a common AML and compliance framework to reduce jurisdiction risk and mitigate regulatory arbitrage within the jurisdiction.   There was a meeting late last year between the industry stakeholders including the respective regulators and an MOU was supposed to follow.      

1. 2.        Increase FX banking deposits and volumes

• Focus banking services provided to the non-banking financial services industry and their customers to 2 or 3 suitable banks or bring in additional banks that will service this sector.
• Financial services industry stakeholders working together to develop high value products and services (including supporting the capital markets!) with those banks.
• Consolidation of banks (Hint: we have a securities exchange that is well suited for facilitated merger and acquisition activities.) Fewer, larger banks each with multiple correspondent banking relationships would present a lower risk to the country and would probably improve services.

1. 3.        Focus on mid-tier correspondent banks – these will likely have more of an appetite for our Seychelles banks than their larger counterparts.
2. 4.        Attract a new large global bank – now that Barclays has stopped providing services to the non-banking financial services sector, we need a comprehensive campaign to identify one large global bank with its own correspondent banking facilities in the major currencies that provides high value banking products and services (i.e. geared toward capital markets, funds, private banking, etc.) needed to support the non-banking financial services industry and to attract that bank to come set up operations in Seychelles.

When it comes to solving ‘’de-risking’’, there is no single panacea in a system as complex as the global banking network. The above are some initial thoughts, but the entire financial services industry (i.e. everyone licensed under FSA, Central Bank, lawyers and accountants) needs to respond with a proactive solution to the current crises it faces. We must ask where we can strike a healthy balance between reducing our perceived risks, growing our financial sector and ultimately ensure the health of the financial service industry in Seychelles.

Contributed by Trop-X (Seychelles Securities Exchange)