Stricter Anti-Money Laundering Regime for Caribbean Banking Industry

Latin American Advisor, Financial Services asks: Are Stricter Bank Regulations a Major Hinderance in the Caribbean?

Q: Royal Bank of Canada in the Caribbean in recent months has closed wealth-management offices across the Caribbean. The closures come amid growing pressure on the Caribbean banking industry by regulators who are fighting money laundering in the region. Are stepped-up regulatory pressures making Caribbean markets less attractive for banks? Are increased regulations well-placed, or are they proving to be too much of a hinderance for businesses? What do the changes mean for consumers in the Caribbean?

A: Benjamin Rosenberg, associate attorney at Diaz, Reus & Targ, LLP

Pressure has been mounting against banks and financial institutions in the Caribbean as a result of recent efforts by regulators to combat money laundering in the region. In response, banks are faced with two choices: they can submit to the regulatory pressures and ‘ramp up’ compliance at significant cost; or, they can withdraw from the region. A timely example of a multi-national bank selecting the latter option is Royal Bank of Canada.

In recent months, RBC has closed its wealth-management offices across the Caribbean largely in reaction to the pressure placed on banks by regulators who are fighting money laundering in the region. As the potential for profits is outweighed by the cost of compliance and increased risk associated with enhanced money laundering oversight, large-scale cutbacks are a real possibility.

The enhanced regulatory environment in the Caribbean banking industry has unquestionably created a more difficult and more costly environment for banks and could further diminish international banking in the region. Two other large Canadian banks, Scotiabank and CIBC, recently posted $123 million and $109 million loan losses, respectively. This is potentially significant given that these three banks account for nearly 60 percent of bank assets in the Caribbean. Scotia bank has already reduced its operations in Latin America, and it is possible that it too will join RBC in exiting the region altogether.

It is unknown whether regulatory pressures will lessen the attractiveness of the Caribbean for international banking purposes. However, if the regulators continue these efforts, business growth and foreign investment within the Caribbean banking industry could be significantly impaired.

This Q&A was first published in Inter-American Latin American Advisor | Financial Services, April 23-May 6, 2015 Edition. Access the full edition PDF here.