Finance
CARIB | Oct 15, 2020

Fresh evidence shows how financial blacklisting is hurting CARICOM states

/ Our Today

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Trade financing, remittances and development grants most affected

The Caribbean Community Secretariat headquarters in Georgetown, Guyana. (Photo: CARICOM.org)

By Durrant Pate

Fresh evidence has shown that the continued practice of the European Union (EU) blacklisting CARICOM states is severely hurting them, particularly in the area of trade financing, remittances and developmental grants.

Perhaps the most damaging of all the consequences of blacklisting is the fact that banks in Europe and North America are in effect compelled to de-risk banks from these blacklisted jurisdictions by withdrawing or reducing correspondent banking services, and, in many cases, even physically exiting these jurisdictions.

This fresh evidence comes amid the reignited debate last week on the blacklisting of CARICOM states when it was announced that the European Union’s Economic and Financial Affairs Council (ECOFIN) has added Anguilla and Barbados to its blacklist of non-cooperative jurisdictions for tax purposes. The Cayman Islands and Oman were removed from the list, after having passed the necessary reforms to improve their tax policy framework.

CARICOM states blacklisting

Anguilla and Barbados were blacklisted following peer review reports published by the Global Forum on Transparency and Exchange of Information for Tax Purposes, which downgraded the ratings of Anguilla and Barbados to “non-compliant” and “partially compliant” respectively.

A political map of the Caribbean showing member CARICOM states highlighted in yellow. (Photo: CARICOM Energy)

On May 7, 2020, the EU announced the addition of Jamaica and Barbados among 12 countries on its blacklist.

Back in February, Jamaica was among seven countries that were placed on a grey list by the Financial Action Task Force (FATF) for gaps or failures in stemming the financing of terrorist groups or money laundering.

Blacklisting not only creates reputational damage in addition to severely affecting the economic prospects of CARICOM states, in general, at a time when all of them are already faced with the disproportionate impact of the COVID-19 pandemic.

As such, being blacklisted causes significant reputational risk, erodes their competitive advantage, and discourages the investment that CARICOM states desperately need to drive inclusive growth and build economic resilience.

The fallout from being blacklisted can be quite significant, such as companies pulling out of a blacklisted state as well as the cost to conduct common, everyday transactions going up. The exodus of companies which offer financial services, including banking services, money transfer services, and insurances services, would be problematic for many CARICOM states given the limited number of such service providers.

Being blacklisted can also have a negative impact on foreign direct investment (FDI) as potential investors may find it difficult to explain to their compliance and due diligence committees why they should put money in a country that is blacklisted.

This is a result of the aforementioned fact that being blacklisted drives up the cost to business and high operation costs are a disincentive to foreign investors.

T&T study of de-risking effects

A recent study conducted by two Central Bank researchers indicates that the de-risking in the Caribbean has had a tangible impact on remittance flows and trade financing. In their Central Bank working paper, Reshma Mahabir and Ashley Bobb articulated that in the Caribbean, the increased global scrutiny of activities of financial firms resulted in correspondent banks withdrawing their services from several of the islands.

This has resulted in increasing costs of conducting international transactions and the de-risking by domestic banks of segments, where risks of money laundering were deemed to be high. The researchers from Trinidad note that while the noise surrounding de-risking has diminished in the last year, its effects are still being felt.

Simultaneously, Mahabir and Bobb indicate that new and unforeseen financial regulations by international bodies are being put forward and applied. However, those supervising the Caribbean financial sector constantly have to expedite or fast track their processes in order to catch up to, avoid or exit a ‘black’ or ‘grey’ list.

In their research paper, the authors found an increase in the demand for Berne Union financing in the midst of de-risking. This means that foreign exporters were worried about receiving payments from their Caribbean partners.

The entrance to the Central Bank of Trinidad and Tobago in the capital Port of Spain. (Photo: Behance)

Berne Union is an international insurance organisation that provides parties with short-term export credits when they are concerned about being paid. According to the authors, trade financing facilitates international trade by providing a measure of security of payments between the importer and exporter.

For the Caribbean countries this form of financing is very important, which Mahabir and Bobb declare that, “these economies have historically been described as highly open and are highly dependent on imported goods either for final consumption or as inputs into the production process”.

According to the researchers, “the reduced availability of trade financing could mean that the ability of the CARICOM countries to import goods would be restricted”. They point out that policy-makers should ensure that domestic import-export institutions are meeting the needs of the local businesses.

Impact on remittance

The research confirms that, for several of the Caribbean countries, remittances are a significant source of inflows of financing, which comes at a time where the World Bank indicates that COVID-19 has threatened remittances to Latin America and the Caribbean by 19.3 per cent.

Citing 2018, Mahabir and Bobb show that remittances as a per cent of gross domestic product was over 33 per cent for Haiti, 15 per cent for Jamaica and nine per cent for Dominica. They indicates that remittances both into and out of the Caribbean have continued to trend upwards over the last three decades.

Jamaican customers conducting remittance transactions at Grace Kennedy Financial Services (GKFS). According to their website, GKMS is the umbrella brand for the products and services offered by FX Trader, Bill Express and Western Union. Combined, the GKMS network has over 300 locations across Jamaica. (Photo: GraceKennedy.com)

According to the research paper, Jamaica and Haiti receive over 80 per cent of the remittances into the Caribbean, as these two countries possess the largest number of outward migrants – where both countries are estimated to have over one million of their citizens living in another country.

The findings of the study highlighted that the relationship between de-risking and outward remittances was positive, where the authors suggest that persons took the opportunity to deposit funds in foreign financial institutions, via relatives abroad, to avoid the effects of de-risking.

Development assistance affected

CARICOM Secretary-General, Ambassador Irwin LaRocque has pointed to the challenges faced by his member states in getting development assistance because of being blacklisted. He charged that ECOFIN is bent on destroying CARICOM states “attempts at ensuring economic viability” and “efforts at building resistance” through blacklisting.

Ambassador Irwin LaRocque, CARICOM Secretary-General. (Photo: CARICOM.org)

LaRoque explained how critical access to disaster funding is for Small Island Developing States (SIDS) in times of crises, noting out that blacklisting of countries restricts this access. He pointed to the difficulty for CARICOM member states, which is among the most vulnerable of groups to access developmental funding with the blacklisting designation.

CARICOM issues stinging broadside

In the meantime, CARICOM has issued a stinging broadside against the EU and its blacklisting of member states. In a statement this week, CARICOM says it, “deplores the ongoing unilateral, arbitrary and non-transparent blacklisting strategy employed by the European Union (EU) against CARICOM member states”.

In its statement, CARICOM cited the most recent inclusion of member states to the blacklist of alleged non-cooperative tax jurisdictions and jurisdictions.

Pointing to the EU’s identification of blacklisted states as being deficient in the area of Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT), CARICOM argues that such action underscores the EU’s unwillingness to take into account the substantial progress made by CARICOM member states at compliance with global standards.

Prime Minister of Barbados Mia Mottley wrote to German Chancellor Angela Merkel and the European Union (EU), on the issue of plans to blacklist the country, stating that “it is wrong and disproportionate.” Barbados was blacklisted on Tuesday, October 6. (Photo: Twitter @MiaAmorMottely)

Along with the unprecedented task of staging a post-COVID-19 economic recovery, CARICOM states that are blacklisted now have the added burden of being subject to the EU’s discriminatory tactics disguised as tax policy and governance.

CARICOM is calling on the EU to desist from this harmful practice of blacklisting small states, and instead pursue a mutually collaborative engagement towards the shared goals of effective tax governance and combating money laundering and terrorism financing.

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