The International Monetary Fund (IMF) Managing Director Christine Lagarde
The International Monetary Fund (IMF) Managing Director Christine Lagarde

The October meetings this year of the World Bank (WB) and the International Monetary Fund (IMF) in Washington DC present a rare opportunity for Caribbean government representatives to be heard by crucial decision-makers.

Ironically, what provides this opportunity is a matter most Caribbean governments would wish did not exist. It is the withdrawal by US and European banks of correspondent banking relations (CBR's) from Caribbean financial institutions.

The withdrawal of CBR's has already badly affected several Caribbean countries. Many Caribbean banks have lost their traditional CBR's with US banks such as Bank of America, Wells Fargo and Citibank, and also with British banks like Barclays and Royal Bank of Scotland. The loss of these CBRs has come at a high price, including (i) newly imposed minimum activity thresholds below which the account is closed, (ii) higher costs (often associated with due diligence) passed on to the consumer when establishing a new CBR, and (iii) pressure on the respondent banks to limit their exposure to certain categories of customers in order to maintain a CBR.

Some Caribbean banks have had to go further afield to find banks that would settle their transactions. Consequently, costs have risen, and ultimately they will be passed-on to every customer. The cost of doing business is set to rise.

The problem will get greater. For instance, the IMF has stated that loss of CBR's "could disrupt financial services, including trade finance and remittances, and lead to financial exclusion for certain categories of customers, particularly Money or Value Transfer Services and Non-Profit Organizations, which serve vulnerable segments of the population". In fact, money transfer operations in some Caribbean countries have already been forced to close down. This has had an effect on remittances from the Caribbean diaspora in the US particularly to their dependents in the region.

If the transfer of remittances is severely affected, the social welfare cushion that it provides to the vulnerable in the Caribbean societies will be eroded, putting great pressure on the resources of governments that are already cash-strapped and debt-ridden. This will be very difficult for all governments, and impossible for some.

Beyond remittances, if Caribbean countries – governments and the private sector – cannot do international business through CBRs, the countries will be cut-off from the global trading system. This is not imminent but it is by no means impossible unless action is taken at the international level to remedy the very difficult problem that the loss of CBRs presents.

The reason that the global banks in the US and Britain are withdrawing CBRs from the Caribbean and other small countries in the Pacific and Africa, is manifold. But, at its centre are the several requirements of organisations such as the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development's Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum), including the 'black list' of countries that they have produced in the past. Beyond these two powerful organisations, other countries, such as the US, and regions like the European Union, have created their own lists. The combination of these measures, supposedly directed at anti-money laundering and terrorism financing activities, weighs heavily on the decision of Banks in the US and about whether or not to provide CBRs.

The fact that Caribbean countries have been branded as 'tax havens' and the region has been dubbed 'high risk' for financial services, effectively spoiled their chances of keeping CBRs that they enjoyed for years. The global banks in the US and Europe simply do not want to take the risk of having to pay heavy financial and other penalties for the slightest incident that allows money laundering or tax evasion, however remote it may be. And, it does not seem to matter that the majority of Caribbean jurisdictions are compliant with FATF and OECD rules or that they have signed agreements to automatically provide tax information to the US and more than 12 EU countries.

So, why do the IMF and WB meetings in October provide an opportunity? The first reason is that both the IMF and the WB are now engaged on this issue. Both institutions recognise the immediate and possible long term damage to Caribbean countries if remedial action is not taken swiftly. They have both established small states machinery and are ready to work for, and with, Caribbean governments to address the problem. Significantly, the Managing Director of the IMF, Christine Lagarde has spoken on the issue personally.

In July, at a meeting of the US Federal Reserve, she said: "I am concerned that all is not well in this world of small countries with small financial systems. In fact, there is a risk that they become more marginalized. All actors have a part to play: countries need to upgrade their regulatory frameworks, regulators in key financial centers need to clarify regulatory expectations and ensure consistent application over time; and global banks need to avoid knee jerk reactions and find sensible ways to reduce their costs. There is a lot at stake. For both the big and the small. For all of us".

That is an important intervention, and one which Caribbean representatives can seize as they engage in a high-level dialogue with Ms Lagarde herself and with senior officials of the WB. The engagement is not a guarantee of change, but it is chance to begin the process of formulating solutions to a problem whose gravity should not be underestimated.

It is not a problem that will be contained in the Caribbean. If economic circumstances become dire, waves of migrants and refugees will wash-up on the shores of the US, Canada and Europe; so too will the narcotics whose trade will benefit from increased poverty and unemployment. Even money laundering would increase as, inevitably, the cross-border flow of money and other means go underground – far away from the reach of regulations, controls and law-enforcement.

(Sir Ronald Sanders is Antigua and Barbuda's Ambassador to the United States and the OAS. He is also Senior Fellow at the Institute of Commonwealth Studies, University of London and Massey College in the University of Toronto. The views expressed are his own).

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