Bahamas
IFD/ICS
PROJECT COORDINATOR - Strengthening Financial Transparency: Rebuilding Trust in Correspondent Banking in the Caribbean – Temporary Term Contractual (TTC)
TERMS OF REFERENCE
Background
Established in 1959, the Inter-American Development Bank (“IDB” or “Bank”) is the main source of financing for economic, social and institutional development in Latin America and the Caribbean. It provides loans, grants, guarantees, policy advice and technical assistance to the public and private sectors of its borrowing countries.
Correspondent banking relations (CBRs) facilitate access to financial services across jurisdictions, including cross border payments connected to remittances, trade financing and other economic activities. Well-functioning CBRs also facilitate financial inclusion. In recent years, there has been a growing trend towards reduction in CBRs in many countries, creating a problem known as “de-risking”. This phenomenon has been described and analyzed in a series of recent reports and surveys, from the Bank for International Settlements (BIS), the World Bank, the international Monetary Fund (IMF), as well as think tanks and independent researchers.
According to the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS), de-risking refers to the withdrawal of correspondent banking relations (CBRs) by international banks from small countries and markets, which pose (or are perceived to pose) a high money laundering risk. One of the main reasons behind “de-risking” is the fact that there are tougher AML/CFT regulations in place, globally through the Financial Action Task Force (FATF) , which all countries must adhere to. The effect on international banks are rising operating costs particularly in small markets and in terms of AML/CFT, uncertainty for example about how far customer due diligence should go to ensure regulatory compliance (i.e. the extent to which banks need to know their customers’ customers – the so-called KYCC). As a result, in order to avoid penalties and related reputational damage, international banks are now increasingly sensitive to the risks associated with correspondent banking. They have therefore withdrawn services from local respondent banks that (i) do not generate sufficient volume to overcome compliance costs; (ii) are located in jurisdictions perceived as too risky; (iii) provide payment services to customers about whom the necessary information for an adequate risk assessment is not available, or not collected; or (iv) offer products or services or have customers that pose a higher risk for anti-money laundering/combating the financing of terrorism (AML/”CFT) and are therefore more difficult to manage in terms of this risk. International banks therefore withdraw from countries that present excessive money laundering risks, particularly if their local counterparts do not offer in their view, sufficient evidence or guarantees of compliance with basic Anti-Money Laundering (AML) requirements.
Several of the factors identified by the BIS report for withdrawal of CBRs apply to Caribbean countries. In fact, as of May 2016, the “de-risking” phenomenon had resulted in at least 16 banks in the Caribbean losing their CBRs, with additional withdrawals expected to continue through 2017. While a number of these banks have secured new CBRs, these new relationships involve more complicated relationships and higher costs for CBR transactions. De-risking has severely affected a diverse set of countries in the region including the Bahamas, Belize, Jamaica, and the OECS. Some Caribbean countries present an increased reputational risk due to the presence of a significant offshore banking sector.
Credit Unions have been affected as well, as KYC and source of funds collected “over the counter” have come under increasing scrutiny, particularly those credit unions providing remittances services. In addition, to the extent that customers cannot open accounts at commercial banks, and move to credit unions, these institutions are under increased scrutiny for money laundering.
CBRs are crucial for Caribbean countries to enable the flow of remittances, provide access to credit or other financing, and to facilitate business operations for multinational corporations, including Foreign Direct Investment. The loss of CBRs has a negative, potentially devastating developmental impact, as this may increase financial exclusion in the region, reduce trade flows, hamper the ability to obtain payments for services provided to foreigners (e.g. tourists), and overall compromise the current and future global competitiveness of Caribbean businesses . The resulting termination of CBRs has contributed to growth of the shadow banking sector which also operates illicit or illegal activities, as well as a return to cash transactions, further fueling the perception of the region as high-risk for financial crimes.
In two public statements on de-risking in (October 2014 and June 2015), the FATF has recommended that international banks adopt a Risk-Based approach. In other words, each bank must assess their money laundering and terrorist financing risk and implement measures consistent with the risks identified. This will result in a need to strengthen supervision based on the perceived risk of respondent bank clients,
The local financial institutions in the region find it difficult to keep track of the latest developments vis a vis global rules governing international financial transactions, including AML/CFT standards, which are updated by FATF on an ongoing basis. It is also a serious challenge to fund on an individual basis the necessary training, staffing and operational upgrades needed in accordance with the standards, or to advocate and communicate the changes being undertaken to be fully compliant.
Some of the root causes of de-risking lie outside of the control of the countries that are affected by it. For example, conflicting messages coming from regulators in the US and Europe have been flagged as one of the triggers for de-risking, and so has the termination of CBRs based on a consideration of risk versus return i.e. the level of business (income from correspondent banking).
However, there are steps that can be taken to improve the perception of the risks in a given jurisdiction. These actions have been mostly focused on the public sector, improving AML/CFT regulations, working only with regulators and supervisors. The private sector has not been a central part of compliance efforts at a country level. But as the experience demonstrates, IMF, the BIS and others such as the World Bank have highlighted, coordinated efforts by the public and private sectors are needed to mitigate the risk of financial exclusion and the potentially negative impact on financial stability. This includes a more precise understanding of the specific risks in each jurisdiction, a more effective implementation of AML/CFT policies and improved internal and external communication of the overall performance of the financial and non-financial sectors in relation to FATF requirements.
Specifically, such an approach should seek to: i) strengthen a country’s level of compliance with international AML/CF standards, by improving the way in which financial institutions, namely banks, implement those standards; and ii) improve private – public collaboration in developing and implementing AML/CFT solutions. In addition, because de-risking depends not only on actual risk but also on perceived risk, governments and financial institutions in affected countries should more effectively communicate their ongoing efforts to reduce risk. Interviews conducted by the IDB suggest that such a communication gap exists and that there is significant room for improvement. Finally, IT solutions may play a critical role in achieving better AML/CFT compliance and supervision, while reducing costs both for the public and private sector.
In recognition of these challenges and their potential negative impact in the Caribbean, the Inter-American Development Bank (IADB), is providing funding to assist the public and private sectors in the Caribbean mitigate the effects of de-risking. The project consists of 3 components: Component I – Strengthening the Implementation of Financial Integrity Standards, focusing on improving compliance with the recommendations of the Financial Action Task Force in areas such as beneficial ownership and Know Your Customer’s Customer (KYCC); Component II – Strengthening the capacity of financial institutions to comply with financial integrity best practices, focusing on targeted training activities for compliance officers and relevant staff; and Component III – Improve Coordination between the Public and Private Sector, establishing a mechanism for dialogue with external regulators and banks, based on a common understanding and a unified interpretation of AML/CFT regulations.
The IDB is seeking a consultant to serve as manager for this operation.
Consultancy objective(s)
The overall objective of the project is to increase the level economic activity by micro, small and medium-sized enterprises and individuals by increasing financial transparency in Caribbean countries. The specific objective is to help prevent and mitigate the risk of loss of Correspondent Banking Relations in the Caribbean region. Accordingly, the objective of the consultancy is to realize these project goals by facilitating the successful completion of project activities.
Main activities
The project manager will engage in the following activities and any additional ones considered relevant to achieve the objectives of the assignment or the MIF in the Bahamas:
- Raise awareness about the project in the Caribbean and de-risking in general;
- Develop a workplan for the project with input from ASBA and the IDB, including an execution plan, and milestones table, refining the project’s Operating Plan;
- Organize and act as secretary for quarterly meetings of the Project Steering Committee, and prepare the agenda as well as a project status report for each meeting;
- Assist the IDB and ASBA in their role as facilitator for the public-private dialogue mechanism to be established under project Component III.
- Supervise the development and ongoing updating of the project website;
- In cooperation with the Bank, manage local contracting of consultants as well as project disbursements and other administrative tasks;
- Provide weekly briefings to the Bank on the progress of project activities;
- Have weekly meetings with ASBA on the execution of Components II and III of the project;
- Remain in constant contact with the key project partners who will assist ASBA to successfully execute project activities: the Caribbean Association of Banks, the Caribbean Confederation of Credit Unions and the Caribbean Financial Action Task Force.
- Gather all necessary information from IDB and ASBA to prepare and present a Project Status Report within thirty (30) days after the end of each semester. The PSR will contain information on the progress of project execution, achievement of milestones, and completion of project objectives as stated in the results matrix. The PSR will also describe issues encountered during execution and outline possible solutions. Within ninety (90) days after the end of the execution term, the Executing Agency will submit to the MIF a Final Project Status Report (FSR) which will highlight results achieved, project sustainability, evaluation findings, and lessons.
In all these activities, the consultant needs to work closely with both the Bank team here in Washington, ASBA in Mexico, and the Country Office in the Bahamas, which has disbursement responsibility for this project.
Reports
The consultant coordinator should deliver the following:
- A draft 12-month work plan for the project – Within 3 weeks after signature of the contract. This will be circulated to project Steering Committee for clearance. and the report should be finalized within one week after receiving comments.
- Monthly updates - 3 to 4 pages – describing activities, achievements and challenges for the period, submitted to the Bank and the project Steering Committee, as well as Country Office Bahamas.
- A semi-annual Project Status Report (PSR), which will include a discussion of challenges encountered, issues to be solved at the level of the Steering Committee, activities projected for the following period and lessons learned.
- A Final Report highlighting project successes, lessons learned and recommendations
