By Richard Bernal Senior Associate (Non-resident), Americas Program From Center for Strategic and International Studies

The United States is the main economic partner of the countries in the Caribbean. These small developing countries are long-standing friends and consistent allies. In spite of transnational crime and narcotics transiting the air and sea space, they have maintained an enviable record of democracy. They have achieved the status of middle-income developing economies, although they were the economies most adversely affected by the global economic crisis that emerged in late 2008. Their economic growth and sustainability are strongly influenced by the state of the U.S. economy and the impact of U.S. policies both domestic and foreign. What happens in the United States affects the Caribbean through trade, investment, and tourism. International financial intermediation is essential to the regional financial flows, facilitating trade, foreign investment, development aid, and remittances. U.S. policy toward the Caribbean can have a major impact, but just as important are U.S. policies not directly aimed at the Caribbean but whose spillover effects also have serious implications. Recent policy actions mandated by actual and proposed legislation in the U.S. Congress threaten to inhibit vital international financial flows and financial intermediation.

The U.S. Department of State in its March 2017 International Narcotics Control Strategy Report named 14 of the 15 Caribbean Community (CARICOM) states as major money laundering countries. The announcement has prompted an outcry from governments in the region regarding the possible consequences of such a designation. The concerns of the region center on the distinct possibility that it will cause increasing unwillingness of international banks to conduct correspondent banking services for countries in the region.

This report could compound the real damage of the ongoing crisis of correspondent banking and the potential harm of legislation proposed in the Congress, which seeks to impose a 2 percent tax on all remittances from the United States to Latin America and the Caribbean.

Anti-Money Laundering Legislation

Banks have been reducing and/or eliminating correspondent banking services to financial institutions in CARICOM countries. This has had an adverse impact on the region that could become increasingly detrimental if it continues.

Impact

The Inter-American Development Bank has shown that the Caribbean is the region most adversely affected by the global financial crisis of 2008. The Caribbean Association of Banks estimates that 60 percent of its members have suffered a loss of correspondent banking services (CBS). The International Monetary Fund (IMF) estimates that 16 banks in five countries have lost CBS. Only 2 of Belize’s 9 banks have not lost CBS, and the Central Bank of Belize has lost 2 of its correspondent banks. Royal Bank of Canada closed its wealth management division in the Caribbean in 2014. The World Bank in 2015 identified the Caribbean as the region most severely impacted by the crisis of correspondent banking. This is so because of the highly open nature of their economies and their dependence on international financial intermediation by foreign commercial banks. The Foreign Account Tax Compliance Act (FATCA) adversely affects international financing provided by correspondent banks, and this in turn has an adverse impact on investment flows, trade financing, transfers of remittances, debt servicing, settlement of credit cards, transfers of profits, and royalties.

Legislation

The U.S. government passed the Foreign Account Tax Compliance Act in 2010. FATCA requires: (a) U.S. persons, including those living outside the United States, to file yearly reports on their financial accounts outside the United States with the Financial Crimes Enforcement Network (FINCEN); and (b) all foreign financial institutions to provide information on assets and transactions of U.S. persons to the U.S. Department of the Treasury. The motivation for FATCA is two-fold: (1) improve tax compliance and increase tax revenue collection; and (2) reduce money laundering and block funds intended to finance terrorist organizations.

Financial institutions that do not comply can suffer financial penalties and reputational damage. Consequently, in a logical and practical response, U.S. banks began to reduce the risk of penalties by pruning their portfolios of the most risky clients, personal and institutional. This process of risk reduction is known as “de-risking.” De-risking has had a disproportionate impact in CARICOM. Because all breaches of FATCA incur penalties, the correspondent banks have reduced their risks by eliminating services to the smaller clients, smaller transactions, and smaller financial institutions. These correspondent banks view small-scale business from these relatively small Caribbean banks as not worth the risk of incurring penalties. Smaller institutions have been hit the hardest, but the larger banks in Jamaica and Trinidad and Tobago appear to have managed to cope. Some countries such as Belize, have been more affected than others. There could be implications for the off-shore banking sector in the Bahamas and Barbados, as well.

Compliance

Compliance across the region has been uneven, and there is a case for additional technical assistance from the U.S. Treasury Department and the IMF. The cost of compliance by Caribbean financial institutions can be very onerous for both institutions in the national financial system as well as the operations of off-shore financial centers in the Caribbean, particularly the Bahamas. In the case of off-shore financial centers, FATCA noncompliance can result in the “black listing” of these jurisdictions by the Organization for Economic Cooperation and Development (OECD) Global Forum.

Foreign financial institutions have to: (1) undertake certain identification measures and due diligence requirements with respect to their account holders, (2) report annually to the Internal Revenue Service (IRS) account holders who are U.S. persons or foreign entities with substantial U.S ownership; and (3) withhold and pay to the IRS a certain percentage of certain transactions. Accomplishing this can be expensive, time consuming, and complex for small financial institutions. The cost of compliance has escalated because penalties are related to the number of transactions rather than the size of transactions.

FATCA also has implications for the U.S. banks that provide correspondent banking services to non-U.S. financial institutions. Penalties can be incurred for omissions in reporting especially if there is repetition. The United States has not always met the standards that it requires of other countries, as is the case of the recommendations of the Financial Action Task Force on Money Laundering.

Caribbean Supports Anti-Money Laundering

Combatting money laundering and blocking terrorist financing are goals that CARICOM governments share with the United States. Suitable arrangements have to be put in place to ensure that these objectives can be attained while allowing normalcy in international financing. The CARICOM countries have mounted a collective campaign to modify the application of FATCA. CARICOM has persistently used every opportunity to explain its case for change in U.S. policy. There has been a series of meetings between the ministers of finance of the Caribbean countries and the U.S. Treasury Department and with the IMF to find a solution; however, a more empathetic approach by the United States has not been forthcoming.

Remittance Taxation Legislation

Representative Mike Rogers (R-AL) introduced H.R. 1813, the Border Wall Funding Act of 2017, on March 30, 2017. The bill was cosponsored by Representatives Lou Barletta (R-PA), Matt Gaetz (R-FL), Mo Brooks (R-AL), Austin Scott (R-GA), Trent Franks (R-AZ), John Culberson (R-TX), Trent Kelly (R-MS), and Rick Crawford (R-AR).

If enacted by the U.S. Congress and signed by President Donald Trump, the legislation would mandate a remittance transfer provider to collect from “the sender of such remittance transfer a remittance fee equal to 2 percent of the United States dollar amount to be transferred (excluding any fees or other charges imposed by the remittance transfer provider)” and that “such remittance fees shall be submitted to the Treasury to be expended for the purpose of improving border security.”

Providers failing to comply with the provisions of the bill will be “subject to a penalty of not more than $500,000 or twice the value of the funds involved in the remittance transfer, whichever is greater, or imprisonment for not more than 20 years, or both.” There are also penalties for foreign governments, which in the joint determination of the secretary of homeland security, the secretary of the treasury, and the secretary of state have engaged in aiding or harboring an individual or conspiring to avoid the fee collected in accordance with the subsection. This could ultimately render the country “ineligible to receive foreign assistance and to participate in the visa waiver program or any other programs.”

The bill proposes to apply for five years to 52 countries (all in the Western Hemisphere except Canada) of which 25 are in the Caribbean, including Antigua and Barbuda, Aruba, the Bahamas, Barbados, the British Virgin Islands, Belize, the Cayman Islands, Costa Rica, Cuba, Curacao, Dominica, the Dominican Republic, El Salvador, French Guyana, Guadeloupe, Guatemala, Grenada, Guyana, Haiti, Honduras, Jamaica, Martinique, Montserrat, Nicaragua, Panama, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago.

If enacted, it would be tapping into a very large pool of funds. It is estimated that in 2015, according to the World Bank, the flow of remittances to Latin America and the Caribbean surpassed US$69 billion, of which Mexico received US$26.2 billion. The impact could be very significant in countries like Haiti, where remittances amount to US$2.2 billion, the equivalent of 25 percent of gross domestic product (GDP), and in Jamaica, where the numbers are US$2.3 billion and 16.6 percent of GDP.

Hundreds of thousands of members of the Caribbean diaspora who send remittances are tax-paying U.S. permanent residents and citizens, both by birth and naturalization. These are, for the most part, working class people sending small sums of money to families, churches, hospitals, and schools. There are many thousands of non-Caribbean Americans who make humanitarian donations to the Caribbean and Central America. The proposed legislation is discriminatory because it puts a greater burden for U.S. security (and the building of the wall on the U.S. southern border) on citizens and residents who remit funds within the Western Hemisphere than on any other U.S. citizens or residents.

U.S. Policy in the Caribbean

The United States needs to pursue a policy in the Caribbean that supports sustainable economic growth. In this regard, the Trump administration should support the congressional foresight in passing HR 4939 (The United States–Caribbean Strategic Engagement Act of 2016) late last year. It would be prudent and timely to respond to the mandate of the bill for the administration to submit to Congress a “multi-year strategy for United States engagement to support the efforts of interested nations in the Caribbean region.” In the absence of a coherent integrated strategy, a series of uncoordinated initiatives could cause serious unintended consequences. The report to Congress is due in mid-June and is an opportunity for the United States to forge a foreign policy that is strongly supportive of long-standing allies in the Caribbean.

Ambassador Richard L. Bernal is a nonresident senior associate of the Americas Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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SOURCE: https://www.csis.org/analysis/caribbean-collateral-damage-us-national-security-policy