Until the Bank of New York scandal erupted in 1999 international correspondent banking had not been fully acknowledged as a high risk area, specifically prone to money laundering.
This event provided the early catalyst for change and the recognition that some countries were more responsible in dealing with their obligations regarding the proper licensing of financial institution, regulation, supervision and international co-operation, while others were more susceptible to the short-term economic benefits of letting these controls slide.
It is still acknowledged today that the game changer were the hearing that culminated in the report dated 5 February 2001 by the U.S. Senate Committee on Government Affairs of the Permanent Subcommittee on Investigations.
Correspondent banking is a vital aspect of financial services as it enables banks that do not have a physical presence in another country or location to conduct business.
However, the bank providing the correspondent service is entirely exposed to the level of due diligence performed by its associate. When associates are in jurisdictions unable or unwilling to meet these obligations the issue is magnified and facilitates the movement of proceeds of crime, tax evasion and money laundering.
The investigation entitled the Role of U. S. Correspondent Banking in International Money Laundering was a damming expose of this world of "dirty money" and a revelation of the threat posed by correspondent banking. (https://www.gpo.gov/fdsys/pkg/CHRG-107shrg71166/pdf/CHRG-107shrg71166.pdf)
A large number of high risk banks were examined across the Caribbean and in Latin America.
Several of these entities were or had been based in Antigua & Barbuda. These included American International Bank, Caribbean American Bank, Hanover Bank, Overseas Development Bank & Trust, Swiss American Bank and Swiss American National Bank.
The report highlighted three principal types of high risk banks: shell banks, offshore banks and banks in non-co-operating jurisdictions. In June 2000 the Financial Action Task Force identified and named its first 15 jurisdictions with serious systemic problems. More were to follow.
Also in 2000, the Subcommittee distributed a survey to 20 banks undertaking correspondent business in the US. These included Barclays Bank Plc, HSBC, The Royal Bank of Canada and Scotiabank.
Amongst the US based correspondent banks listed such as Bank of New York, Citibank, Chase Manhattan, Union Bank of Switzerland (New York) and Bank of America was a US subsidiary of Toronto Dominion, which would subsequently feature prominently in the Stanford Ponzi fraud. Canadian banks have enjoyed longstanding relationships in the Caribbean, despite the perceived high risks.
Key factors plaguing correspondent banking quickly emerged.
One aspect was "nested" banking. This was a manoeuvre by which a bank did not open a direct U.S. correspondent account, but instead opened an account at another foreign bank which already had an established correspondent banking relationship with a U.S. bank. As a result, the U.S. bank was unaware that it acted in a correspondent capacity for an unidentified foreign bank, ''nested'' in the correspondent account the U.S. bank had opened for another vetted foreign bank.
American International Bank, Hanover Bank and Swiss American Bank, based in Antigua were identified as participating in this practise.
Another feature was the now well-known so-called 419 Nigerian Advanced Fee Fraud, which was operated on a massive scale and was identified as existing largely through correspondent banking and remittance channels. Indeed, Canadian banks had long been targeted by fraudsters perpetrating such frauds because of volume of money, remittance services, and weak anti-money laundering supervision, something which has been considerably addressed in recent years.
It is felt that Canada avoided much of the crisis in 2008 because of its separation of retail and investment institutions and the amount of independent remittance & money transmission service providers.
Furthermore, the Canadian banks in the Caribbean continued to enjoy good business and high profits despite the very risky market until a few years later when tourists stopped visiting expensive regional destinations, thus exposing their reckless lending in a high risk sector.
Other frauds revealed by the Subcommittee included the Guardian Bank and Trust (Cayman) Ltd, William H Koop, Benjamin Franklin Cook III and the Gold Chance frauds.
Meanwhile, during the investigation, a largely unexpected new area of concern emerged, the largely unregulated rapid growth of Internet gambling,
And so the process known today as "de-risking" or as sometimes called "de-banking" started.
In recent years this process has gained pace The severe penalties and sanctions handed out to banks such as HSBC & BNP Paribas have brought home to the banking community the more serious and fuller jurisdictional risks to their reputations, economic well-being and, possibly, even survival inherent in dealing with these concerns.
No doubt the latest moves contain an element of the fear of loss of reputation, the cost of rising regulation and compliance, changes in global trade / growth patterns, individual bank cost / benefit analysis of their offerings and the growth of risk aversion.
However, it is bewildering that correspondent banking relationships have taken so long to be withdrawn from the regions, nations and institutions that have ticked all the high risk boxes themselves, without any help from anyone else.
Antigua & Barbuda, for instance, was named in the Subcommittee's report as being guilty of much abuse, and not learning the lessons, has continued on its well-trodden path that reinforces its status as a high risk jurisdiction in its own right.
One example of its malgovernance is the expropriation Half Moon Bay Resort a foreign-owned private property and, though ordered to pay fair and prompt compensation by the Privy Council, it has consistently and deliberately refused to do so.
Another illustration is provided by R Allen Stanford, former Knight of the Antigua realm, being allowed, even encouraged, to foster one of the world's greatest Ponzi schemes, through his Bank of Antigua and his Antigua Overseas Bank, both which was licensed, regulated and supervised by the Antiguan Authorities. His fraud would not have been possible without correspondent banking relationships with the likes of HSBC, Toronto Dominion and National Republic.
Antigua has steadfastly refused to give up Leroy King, its former Financial Services Regulator, wanted for questioning by the US Authorities, who has been indicted for alleged complicity in the fraud.
Rather than admit the truth, successive governments have tried to muzzle the free press and have viciously persecuted journalists.
The country permits e-gaming despite the well-documented risks and has been operating a controversial Citizenship by Investment Programme (CIP) offering second passports to individuals from around the globe.
Following the Subcommittee's report in 2000, Barclays Bank, having been actively involved in the Caribbean since 1836, was the first proper institution to consider its brand risk-reward.
Barclays did not withdraw immediately from the region, but in 2002 established a joint venture with Canadian bankers CIBC to create First Caribbean International Bank. However, it continued to decrease its interest in the Bank and by 2006, CIBC acquire full ownership of the CIBC-FCIB.
Fast-forwarding to the second week of May 2014 will find the Canadian Imperial Bank of Commerce warning that it would take a $420 million USD charge to goodwill related to its subsidiary CIBC FirstCaribbean, which it blamed for "persistently challenging economic conditions and our current expectations for conditions going forward."
It is believed that no U.S. banks have ever operated directly in Antigua and that the Royal Bank of Canada and Scotiabank are the only non-national banks currently remaining in Antigua.
As correspondent banking in the Caribbean breathes its last gasps, following consistent moves in the last two years by banks in the US, Canada and Europe to terminate facilities, often summarily, the region is now asking remitters to use the SWIFT system instead.
The Belgium-based Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a financial communication and clearing system used by most of the world's major banks.
Until recently the SWIFT system was held in awe and was dominated by the top 25 world banks. Its shortcomings had been restricted to a few small banks failing to conduct adequate due diligence.
Now, however, the SWIFT system has been exposed by corporate client terminal weaknesses that have largely been ignored and cyber-attacks that have shocked the complacent Board. With the expected growth due to smaller clients wishing to join the system and the flight from the closure of correspondent banking services., the risks will continue to grow.
The loss of correspondent banking however has opened up another major corridor of abuse, which as yet has not been acknowledged, let alone stemmed, especially as this manoeuvre is based upon the "nesting" system, which was well developed under correspondent banking – the use of another party's SWIFT account without it being declared to the official opening Institution.
There is also talk of moves to more lenient institutions, new national institutions, pooling of transactions, overarching due diligence agencies, secret "nesting" with remaining correspondent bankers and even tax transparency.
Moreover, investors are being urged by Calvin Ayre founder of Bodog and one of the Department of Homeland Security's 10 Most Wanted fugitives, to follow his lead and use Antigua as a hub for business process outsourcing of so-called crypto currencies, such as Bitcoin and Blockchain. Other crypto currencies include, Dogecoin, Litecoin, Ether, DAO tokens and Ripple. Most are favoured by the online gaming sector and those seeking to avoid traditional, regulated banking services.
Another more recent move is towards the creation of national, central and / or state-owned banks, sometimes to act as a clearing-house or handle import/export payments.
One such instance is in Antigua, where Brian Stuart-Young, the country's current Ambassador to China and ex-Manager and now Chairman of the Board of Caribbean Union Bank, in which the Government of Antigua & Barbuda now holds a substantial controlling stake.
CUB used to be Global Bank and before that had a noteworthy history as the Swiss American Bank, where both Stuart-Young and Antigua's current Prime Minister, Gaston Browne began their careers by accommodating the banking style of its founder, Bruce Rappaport.
Browne's prophesy that "notwithstanding the bank's record of failure, it will turn a profit of about $3 million next year based on a very expansive expansion programme and government borrowing" could be worth watching. Observers may recall that that strategy did not work out too well for ABIB.
It may be hard to distinguish between cause and effect in the countries dealing with these banking changes. Certainly, the ethos, culture and behavioural norms for each participant play a crucial role in the ever increasing loss of control over the banking process.
Therefore, it comes as no surprise that Antigua has recently announced its preliminary negotiations to establish correspondent banking relationships with the People's Republic of China.
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