Faced with tightening regulations from around the world, some international banks are likely to limit their Caribbean operations or pull out of the region altogether, government officials said this week during the Caribbean Community’s 37th Regular Meeting of the Conference of Heads of Government.

This practice has been dubbed “de-risking” by organisations such as the World Bank and the Caribbean Development Bank, which say that many international banks are taking such actions over fears of “high risk” customers who might be engaging in money laundering and other criminal activity.

Rather than trying to conduct due diligence and manage such risks, many international banks are attempting to play it safe and avoid risk altogether, the CDB noted in a report published in May.

This play-it-safe strategy is reportedly spreading throughout the world — especially in the Caribbean — and documents recently obtained by the Beacon suggest that it could be taking place in the Virgin Islands, endangering financial institutions’ ability to do business here.

If it continues, de-risking threatens to choke off international trade and capital flows, causing global financial instability, according to Caricom, the CDB, the World Bank and others.

Closing accounts

On May 23, a Virgin Islands trust firm with headquarters in Panama received a letter from CIBC FirstCaribbean International Bank stating that the firm’s accounts would be closed on June 30.

According to the documents obtained by the Beacon, CIBC gave the same notification to at least 10 other trust companies. The names of the firms are being withheld at the request of the person who provided the documents, who said their business could be affected if they are identified in this report.

However, all of the affected firms listed in the documents have something in common: They either are headquartered or have branches in Panama — the jurisdiction that gained sudden infamy in early April in the wake of the Panama Papers, a trove of more than 11.5 million documents leaked from the Panama-based law firm Mossack Fonseca that allegedly include evidence that VI-based companies were used for money laundering, tax evasion and other nefarious activities.

Other banks

After receiving the notification from CIBC, some of the trust firms then tried to open accounts with Banco Popular and Scotiabank, according to a letter they sent to the Financial Services Commission on June 10.

Some of the firms were able to open accounts with Banco Popular, but were told the accounts couldn’t be used for paying company licensing fees because the bank can’t ascertain the beneficial owners of those companies, according to the letter.

“The bank informed the licensees that compared to other banks, it has limited staff and therefore is unable to service offshore-related business,” the firms stated in their letter to the FSC.

Scotiabank gave the firms a similar response, saying that the bank can’t accept payments from or on behalf of third parties, according to the letter.

“This is due to the reason that they cannot identify the beneficiaries for which those payments are made,” the letter states.

The affected trust firms told the FSC that the banks’ policies could make it more difficult for them to do business here.

The firms use local bank accounts to conduct business such as paying rent; salaries; National Health Insurance and Social Security taxes; annual licensing fees to the Registry of Corporate of Affairs; and regular payments for the registration of new companies, their letter states.

CIBC’s response

CIBC FirstCaribbean International Bank declined to answer specific questions about its recent decision to cease business with at least 11 Virgin Islands financial services firms that have ties to Panama. The bank did, however, release a statement on the matter, which follows in full:

“In the wake of the stricter ‘know your clients’ (KYC) requirement imposed by the US Patriot Act on correspondent banks, there is an obligation on banks to identify the owners of accounts and the source of transaction funds. This is true of our operations across the region and is not unique to CIBC FirstCaribbean in the Virgin Islands; neither is it unique to firms originating in Panama. All accounts are held to the same standard.

Following an internal audit of accounts held in the Virgin Islands, CIBC FirstCaribbean identified a handful of accounts where the information provided did not satisfactorily meet these regulatory requirements and a decision was made to close them. These accounts were originally set up before the new KYC requirements came in to full effect and met the criteria in place at the time that they were set up.

It is important to note that, generally, accounts held with CIBC FirstCaribbean are not under threat of closure provided account holders are able to meet the regulatory requirements and provide the relevant documentation where requested.”

“The licensees would like to be able to continue to operate from and within the BVI,” states the letter. But operating here “requires them to have unrestricted banking services for the type of services carried out by them.”

The affected firms also expressed concerns that the banks’ decisions could tarnish the territory’s reputation.

“Both the licensees and the jurisdiction are at risk to be perceived as non-compliant,” the letter states. “This is not the time to permit anyone to consider that the business that is carried from and within the BVI jurisdiction is other than legal and properly regulated business.”

Asking for help

After noting their concerns, the trust companies requested the FSC’s assistance in securing local banking services, and also requested that the regulator ask CIBC to allow them to maintain their accounts through the end of the year.

“The reason for this request is based on the fact that the second billing cycle is approaching and the licensees need to be in a position to inform their clients when and where to send payments of their annual licence fees,” the letter states. “Failing this, there is a real risk that a number of companies might be liable to be struck off for non-payment or failure to make the payment on time to the Registry of Corporate Affairs.”

FSC officials did not comment or grant interview requests about the affected firms’ requests.

BVI Finance, the government-sponsored organisation that promotes VI financial services, did not grant interview requests, but did issue a statement on the matter.

“Premier [Dr. Orlando Smith] is well aware of this issue and has been personally leading the dialogue with senior management at CIBC,” the organisation stated in an e-mail to the Beacon. “Both the government and the bank are looking to identify ways to resolve the situation.”

Bank’s response

CIBC Country Manager Malcolm Whetnall said the closures are the result of an internal audit, and are not targeted at firms with Panama ties (see sidebar for full response).

The internal audit found that some of the bank’s accounts were not complying with know-your-client requirements that were imposed by the United States Patriot Act after the terrorist attacks of Sept. 11, 2001, he said.

“There is an obligation on banks to identify the owners of accounts and the source of transaction funds,” he stated in an e-mail to the Beacon. “This is true of our operations across the region and is not unique to CIBC FirstCaribbean in the Virgin Islands; neither is it unique to firms originating in Panama. All accounts are held to the same standard.”

However, an employee of one of the affected firms — who spoke on condition of anonymity — painted the closures as both arbitrary and discriminatory against businesses with a presence in Panama.

“So their excuse is, ‘We can’t do due diligence on the underlying clients of the trust companies, and consequently we need to close the accounts,’” he said. “But it doesn’t make sense that they say that for these 11 companies when that’s how all trust companies work. There’s no way they can say that’s an excuse without closing all their trust company accounts.”

Knee-jerk reaction?

The employee said he thinks the de-risking policy of CIBC and other banks could be a knee-jerk reaction from top banking executives to the Panama Papers.

“They’ve been told, ‘Listen, this has been a scandal. People are expecting some kind of a reaction from us. We need to see accounts closing,’” the employee said. “And they just decided to round up these accounts because they look like they’re connected to something that has been in the news recently.”

Mr. Whetnall declined to comment on when CIBC conducted its internal audit; who made the decision to close the accounts; how many accounts were closed; or whether any accounts that did not have ties to Panama were closed. He said such information is confidential.

The CIBC manager did say that extensions have been granted to some of the firms so that they can find alternative banking solutions, but he declined to disclose the length of those extensions.

The June 10 letter from the trust firms to the FSC stated that they were granted extensions until the end of August, but that they were seeking longer extensions.

The Beacon sent multiple e-mails to all the trust companies listed in the letter. Nine of the firms didn’t respond; the managing director of one firm responded but declined to comment; and the one associate who responded is quoted above.

Banco Popular and Scotiabank executives did not immediately respond to requests for comment.