The international payment system oils the wheels of trade with the dollar still predominantly the currency used for transferring funds from buyers to sellers of goods and services. Any grit that gets caught in the delicate trade cogs creates significant risk for international trade.
Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border services to their customers, supporting international trade and financial inclusion. The likelihood of Bank of Valletta losing its last correspondent bank prepared to clear its US dollars payments is indeed worrying.
The sensitivity of some jurisdictions to the risks of money laundering is high. US banks and international ones operating in the US face huge penalties if they are found to process payments that could be connected with money-laundering activities, including tax evasion. For the past decade, commercial banks have taken note of this development in international correspondent banking. Most banks now refuse to service companies that could be used for money laundering including payment gateways, gambling companies and businesses dealing in cryptocurrencies.
When Standard & Poor’s downgraded BOV in August 2018, the rating agency expressed the view that the perception of poor transparency at some banks had increased the reputational and operational risks for the Maltese banking sector. The risk that BOV is now facing is linked to the poor perception of Malta as a reputable financial centre because of various highly-publicised allegations of money laundering by Malta-based foreign entities.
BOV, like all other locally-based banks, took note of this and started an intensive de-risking exercise by closing several accounts of foreign individuals and organisations that had no business activity here. It also terminated its trust services. There is no doubt about the determination of the bank to get its house in order in the shortest possible time.
The threat of correspondent banks terminating the relationship with smaller banks has existed for the last few years. A report by the Bank of International Settlements in 2016 highlighted the problem of small banks being frozen out of the international payment system. The report confirmed that US-based banks had cut back services to banks located in jurisdictions perceived to be too risky or that offer services to customers that pose a higher risk for anti-money laundering.
Malta’s economic strategy includes economic activities that are shunned in some jurisdictions like the US. These activities include e-gaming, certain financial services like companies that offer payment facilities for businesses that prefer not to use the major credit card agencies and companies that locate their businesses in counties that are considered as tax havens. One could argue that it is wrong to ostracise such businesses because of perceptions of money laundering. However, it is the more significant players that define the rules of the international money transfer system.
BOV will, no doubt, continue to review its anti-money laundering processes and, hopefully, find a practical solution to keep serving its clients who need to transfer US dollars. Its role is crucially important for the Maltese economy.
The government and its economic strategists must start listening to what international institutions have been telling it for the past several years. Certain economic activities may generate short-term gain but are unsustainable because they rely too much on low tax advantages rather than solid competences that modern economies demand.
This is a Times of Malta print editorial