[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
WHEN BANKS LEAVE: THE IMPACTS
OF DE-RISKING ON THE CARIBBEAN
AND STRATEGIES FOR ENSURING
FINANCIAL ACCESS
=======================================================================
HYBRID HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 14, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-97
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
48-837 WASHINGTON : 2022
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts LANCE GOODEN, Texas
ALMA ADAMS, North Carolina WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York RALPH NORMAN, South Carolina
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
September 14, 2022........................................... 1
Appendix:
September 14, 2022........................................... 55
WITNESSES
Wednesday, September 14, 2022
Delmar, Wendy, CEO, Caribbean Association of Banks (CAB)......... 14
Mottley, Hon. Mia Amor K.C., M.P., Prime Minister of Barbados;
Minister of Finance, Economic Affairs and Investment; and
Minister of National Security and Civil Service [with
responsibility for culture and CARICOM matters]................ 4
Mowla, Wazim, Assistant Director, Caribbean Initiative, Adrienne
Arsht Latin America Center, Atlantic Council................... 12
Shah, Wayne, Senior Vice President, Wells Fargo & Company; and
Vice Chair, Financial and International Business Association
(FIBA)......................................................... 16
Sharma, Amit, CEO & Founder, FinClusive.......................... 18
Shetret, Liat, Director, Global Policy and Regulation, Elliptic.. 19
APPENDIX
Prepared statements:
Delmar, Wendy................................................ 56
Mottley, Hon. Mia Amor....................................... 61
Mowla, Wazim................................................. 75
Shah, Wayne.................................................. 81
Sharma, Amit................................................. 86
Shetret, Liat................................................ 100
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of BAFT (Bankers Association for Finance
and Trade)................................................. 105
Written statement of the Caribbean Community (CARICOM)
Secretariat................................................ 108
Written statement of the Embassy of Antigua and Barbuda,
``Ten Practical Ideas for International Co-operation to
Maintain the Caribbean's Inclusion in the Global Financial
and Trading System,'' by the Honorable Gaston Browne, Prime
Minister of Antigua and Barbuda............................ 114
Written statement of the Embassy of Saint Vincent and the
Grenadines................................................. 138
Memo from the Director of the Financial Intelligence Unit of
Saint Vincent and the Grenadines........................... 139
Response from the Financial Services Authority of Saint
Vincent and the Grenadines................................. 141
Written statement of MoneyGram International, Inc............ 144
Garcia, Hon. Sylvia:
Report of the Texas Association of Business, the Texas State
Chamber, ``Anti-Money Laundering Regulation, Correspondent
Banking, and the Adverse Economic Effects for the U.S.-
Mexico Bilateral Relationship,'' dated April 2022.......... 147
Delmar, Wendy:
Written responses to questions for the record from Chairwoman
Waters..................................................... 201
Written responses to questions for the record from
Representative Sylvia Garcia............................... 199
Written responses to questions for the record from
Representative Nikema Williams............................. 210
Shah, Wayne:
Written statement of the Financial and International Business
Association (FIBA)......................................... 213
Position Paper on De-Risking Correspondent Banking and Trade
Finance, the Cost of Doing Business, and Basel III......... 218
Written responses to questions for the record from Chairwoman
Waters..................................................... 224
WHEN BANKS LEAVE: THE IMPACTS
OF DE-RISKING ON THE CARIBBEAN
AND STRATEGIES FOR ENSURING
FINANCIAL ACCESS
----------
Wednesday, September 14, 2022
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:17 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Velazquez,
Sherman, Meeks, Cleaver, Perlmutter, Himes, Beatty, Vargas,
Gottheimer, Lawson, San Nicolas, Axne, Casten, Pressley, Lynch,
Adams, Dean, Garcia of Illinois, Garcia of Texas, Williams of
Georgia, Auchincloss; McHenry, Posey, Luetkemeyer, Huizenga,
Wagner, Williams of Texas, Hill, Zeldin, Mooney, Davidson,
Gonzalez of Ohio, Timmons, and Sessions.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today's hearing is entitled, ``When Banks Leave: The
Impacts of De-Risking on the Caribbean and Strategies for
Ensuring Financial Access.''
I now recognize myself for 5 minutes to give an opening
statement.
I would like to welcome the Prime Minister of Barbados, the
Honorable Mia Amor Mottley, to the Financial Services
Committee, and thank her for being here to discuss an issue
that I have long dedicated my time to solving: the crisis of
bank de-risking in the Caribbean. By appearing here today,
Prime Minister Mottley is giving voice to a topic that matters
to every person in the Caribbean and, as we will discuss,
everyone in the United States too. Today's testimony by Prime
Minister Mottley isn't just timely. It is historic. It marks
the first time in nearly 40 years that a Prime Minister will
testify before Congress. Her presence today underscores the
gravity of this issue and the urgent need to take serious steps
to end the deterioration of global financial access for her
nation and the whole of the region. Prime Minister Mottley, I
am so pleased to welcome you to the United States, and I look
forward to hearing your testimony and listening to the ways we
can all work together to reverse de-risking.
I am also pleased to acknowledge Dr. Keith Rowley, the
Prime Minister of Trinidad and Tobago. Thank you, Mr. Prime
Minister, for joining us to lend your support. For too long,
the lack of financial access faced by Caribbean nations and
their majority Black populations has been blatantly ignored. As
chairwoman of the committee, and even long before I became the
Chair, I have worked with stakeholders to combat the de-risking
we have seen harm businesses and families across the Caribbean
and the United States for more than 10 years.
Financial access is key to a nation's stability, but for
our neighbor island nations whose economies rely on cross-
border transactions, they are being denied this path to
prosperity and resiliency. The Caribbean is very close to the
United States, not only in geography, but also in its shared
economy, culture, and security. This is reflected in the mutual
trade and tourism, which fuels jobs and economic growth here
and in the region, as well as in the 8.5 million members of the
Caribbean diaspora community who have chosen the United States
as their home. We must acknowledge that our nation's security
and well-being is directly linked to that of the Caribbean
nations, and that dwindling financial access endangers these
mutual benefits.
That is why back in April, Prime Minister Mottley and I led
the Caribbean Financial Access Roundtable with nearly a dozen
heads of state, Members of Congress, and other stakeholders to
discuss concrete solutions. In addition, my committee worked to
secure key anti-money laundering provisions in the 2021
National Defense Authorization Act, including a mandate for a
United States Government-wide strategy to address financial de-
risking. Without action on this issue, we risk ceding our
leadership in this region to countries like China and Russia,
which have been working hard in recent years to become more
active in the Caribbean. It is clear that combating the loss of
United States correspondent banking relationships in the
Caribbean should be a mutual priority for both the Caribbean
and the United States.
Solving this crisis requires us to work together, from
government examiners, to correspondent banks, to civil society
organizations, to international financial institutions and
standard-setting organizations. Congress has a role, too. Under
my leadership, the committee continues to press for action on
the collaborative solutions needed, solutions like removing any
unsubstantiated stigma of the region, and government reports
and helping to streamline bank examinations to name a few. Now
is the time to move on these measures. Thank you.
And I now recognize the ranking member of the committee,
the gentleman from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman, and Prime
Minister, thank you for being here. It is an honor to have you
before our committee, and Madam Chairwoman, thank you for
having this hearing.
De-risking is a critical issue, and the last time we talked
about de-risking in a committee hearing was back in 2008. But
that was domestic de-risking, and that was led by the
subcommittee ranking member, then-Chair of the Financial
Institutions Subcommittee, and it was analyzing the impact of
Operation Choke Point in the then-Obama Administration and the
impact that Operation Choke Point had on consumers, small
businesses, and communities. But that was a domestic walk.
Today, we are looking at the global landscape and the
implications of de-risking at a macro level, and that is
important, but those issues are similar, whether they are
domestic or international. The underlying factors of de-risking
remain the same between both domestic and international
functions, and overly-punitive supervisory examination tactics
employed by Federal financial regulators can have serious
implications.
Take, for example, the availability of banking services in
jurisdictions deemed high risk, like the Caribbean, as well as
towns along the southern U.S. border. It is one thing if de-
risking is an evidence-based response to illicit finance, and
let me be clear, we support that, and I think that we have
bipartisan support to do that. But when innocent people and
legitimate businesses are being shut off from financial
services, we need to take a step back. We should re-examine our
approach to ensure that we are not lumping the good in with the
bad.
And the problem is this. The penalty for failing to comply
with any money laundering regulation can be so devastating for
financial institutions, especially small and medium-sized
banks, that they turn to defensive approaches to ensure
compliance. Republicans have raised this issue numerous times
in the context of suspicious activity reports (SARs). Many
banks carry out defensive SAR'ing to ensure that they don't get
penalized. In 2021 alone, this resulted in over 3 million
reports being generated, and I expect that we will see a new
record set every year moving forward.
It is through this lens that we approach Caribbean de-
risking. U.S. banks were faced with a difficult decision.
Regulatory compliance costs and the penalties for noncompliance
are so steep that financial institutions would rather end
customer relationships than run afoul of regulators. The result
is large-scale de-risking and de-banking for entire geographic
areas that can sweep up ordinary people and small businesses,
and have severe economic consequences and severe consequences
for friends, allies, and neighbors. And the question of the day
is this: Where do those de-banked customers go? I will tell
you--China--and these are our neighbors. These are our friends.
These are our traditional allies. These should be some of the
closest relationships the United States has in the world.
According to the report entitled, ``Financial De-Risking in
the Caribbean,'' which was authored by one of today's witnesses
on the second panel, from 2009 to 2016, Chinese correspondent
banking relationships grew from 65 to 2,246. To put it in
another way, over an 8-year span, China gained 2,181 new ways
to engage with partners in developing regions like the
Caribbean. As a matter of American policy, why are we driving
people away from our friendship as a nation and towards seeking
a country that does not adhere to our rules of law, our concept
of human rights, and our struggle to improve human rights?
Think about this. Our current regime that compels banks to
over-file reports to not get penalized is actually driving
customers to regions that regulators deemed high risk,
underperforming, or worse, in the financial arms of the Chinese
Communist Party (CCP). I would argue it is in the best interest
of our financial system communities of law enforcement and the
Federal Government to be able to monitor and maintain these
global banking relationships and friendships.
I look forward to hearing from the Prime Minister today, as
well as the witnesses on the second panel. Thank you, Madam
Chairwoman.
Chairwoman Waters. Thank you, Mr. McHenry. As a reminder,
we will have two separate witness panels today. After the first
panel concludes, we will take a very brief recess before
proceeding with the second panel.
The sole witness on our first panel is the Honorable Mia
Amor Mottley, the Prime Minister of Barbados. Prime Minister
Mottley is an attorney, a member of parliament, her nation's
minister of finance, economic affairs, and investment, as well
as minister of national security and civil service. She is a
leader in the Caribbean Community (CARICOM) Secretariat, and
one of Time magazine's 100 Most Influential People for 2022.
Prime Minister Mottley, you will have 5 minutes to present
your oral testimony. You should be able to see a timer that
will indicate how much time you have left.
And without objection, your written statement will be made
a part of the record.
You are now recognized for 5 minutes to present your oral
testimony.
STATEMENT OF THE HONORABLE MIA AMOR MOTTLEY, K.C., M.P., PRIME
MINISTER OF BARBADOS; MINISTER OF FINANCE, ECONOMIC AFFAIRS AND
INVESTMENT; MINISTER OF NATIONAL SECURITY AND CIVIL SERVICE
[WITH RESPONSIBILITY FOR CULTURE AND CARICOM MATTERS]
Ms. Mottley. Thank you very much, Chairwoman Waters, and
Ranking Member McHenry, and thank you for having me here. I
want to acknowledge my colleague and brother, the Prime
Minister of Trinidad, the Honorable Keith Rowley, who is also
here this morning, and appropriately so, because even though
they don't have an offshore banking sector, they are the owners
of 2 of the 5 banks in Barbados, and, therefore, have a vested
interest in this issue. I want to say especially to the ranking
member that you can be assured that while Barbados sent the
first seven governors to the Carolinas, I am not here for that
purpose at all today, and therefore, you need not worry. But I
am here to tell you who we are and what faces us when banks
leave.
Our reality is that we in the Caribbean community are a
community of sovereign nations of 15 countries, and we have a
collective GDP of $82 billion. There are 41 States in the
United States of America that have a larger GDP than all 15
member states of CARICOM. It is important that we appreciate
that context first. The irony is that the State that is closest
to us in terms of GDP, at $80 billion, is the State of
Delaware. But that speaks to other opportunities, I suspect, as
to why Delaware and Wyoming, which is also smaller than us,
have also pursued this area of financial services with the
keenness that they have in recent years.
We are here because we are fighting for the global public
good, and we are fighting for the human rights of our citizens.
This committee has already expressed its concern about
financial exclusion of the American population, persons who
have been excluded here. Our people are no different. When we
were growing up, opening a bank account was a part of our rites
of passage in becoming an adult. Today, it is now a gargantuan
obstacle for us to have our people do so given that businesses
come into our region and it sometimes weeks or months just to
open a bank account as individuals to live and as companies to
trade and do business.
Our economies cannot function on their own. We do not make
enough clothes, we do not produce our own food, we do not
produce our own equipment, and, therefore, unless we are able
to trade with the rest of the world, we are at risk of becoming
financial pariahs. We are here because the listing process that
has taken place, whether through the Financial Action Task
Force (FATF), or the Organisation for Economic Co-operation and
Development (OECD), or, further, as a result of actions taken
for enhanced due diligence by those who take the listings from
the FATF and the OECD, it means that those correspondent banks
over the course of the last 10 to 12 years have made a judgment
that we are simply too small, as I have just told you, in order
to get involved because the enhanced due diligence means
increased costs of regulation, and increased costs of
compliance. And rather than do business with us, they say,
thank you, but no thank you.
What it has meant is that almost every country in our
region over the course of the last decade, with the exception
of two or three, have had a loss of more than 30 percent of
their correspondent banking relationships. The truth is that we
have also seen others use alternative mechanisms, as the
ranking member just appropriately referred to in his opening
statement. And, therefore, what we face is a situation where
the very thing that you set out to achieve, which is the
avoidance of terrorism financing, the avoidance of money
laundering on which we are all agreed, is likely to happen
because you are driving people underground. There is no benefit
in driving our citizens underground or making our countries
uncompetitive, such that our economies are at risk of becoming
underdeveloped or failed states. And we now have to determine
whether this is capable of being a continued acceptable course
of action.
We have been making noise for nearly a decade, and we want
to thank this committee for hearing us today, because that
noise cannot continue. And ironically, with the technological
developments that have taken place, and as recent as the
issuance of the digital yuan on which the Economist magazine
wrote a column last week, there are options becoming available
to countries to opt out of the SWIFT (Society for Worldwide
Interbank Financial Telecommunications)system, and to find
other ways of being able to transmit money to their citizens.
For us in this region, it is not yet here, but given long
enough, nature abhors a vacuum, and we will find a way. And why
should this matter to you? This is a country of immigrants. We
have as many immigrants here as from Africa, Asia, Europe, all
over. And you need to recognize that part of the pattern of
being an immigrant is that when you are able to do better, you
want to send money back home to those who have not been able to
make the journey. When correspondent banking relationships are
removed from our people, there is no longer the luxury of being
able to do so, but the love doesn't stop. You don't stop loving
your family. You don't want to stop sending back the money.
And, therefore, you will find whatever mechanism you can to be
able to do so.
Similarly, our economies require not just investment from
local savings, but the attraction of foreign direct investment
to survive. If we cannot keep our country safe, you already
know in this country the spectacle of immigration from
Caribbean countries. And you already have vigorous debates
about what is acceptable and what is not acceptable, sometimes
in ways that cause a little difficulty, too. If we want to be
true to the declaration that we signed in Los Angeles, in the
City of Angels, 3 months ago with respect to migration, then it
is important that we create conditions where our countries can
benefit and where our countries can have a level playing field
in order to be able to achieve prosperity for our citizens who
expect education, healthcare, and opportunities for trading.
We, the majority of our countries, also depend on tourism.
What happens when your tourists come? What happens when your
investors want to build hotels? This is the most nonsensical
thing that we have seen in public policy. And why do we say
that we are at risk of offending a human right and a global
public good? Every citizen of the world ought to have the right
to be able to have a bank account if they are to walk the
streets without fear of crime, if they are to have the
opportunity to save, if they are to have the opportunity to do
as the capitalist system tells us we should do: to leverage our
savings to be able to invest in order to grow our economy and
to increase our wealth.
And every country in the world ought to be able to have
access to affordable banking services to fuel trade and to
foster and enable remittances. And in this entirely-globalized
world that has come out of the bottle and can't go back in,
there is no chance of putting the genie back in the bottle.
What we do is force countries to find alternative means to
trade.
Now, the SWIFT system sounds familiar. Why? In this
committee, I am sure you have had a lot of discussion about who
should be excluded from the SWIFT banking system in this year.
And we know that the attempts to keep Russia out through
sanctions, as you have done with other countries, simply has
treated them as pariahs, but they have found ways to trade
outside of the SWIFT banking system, too.
The reality also is that if you don't use this example to
show you why this is an appropriate time to take different
action, we will continue the injustice. And what do I mean by
that? Russia didn't choose the Caribbean to hide its money.
Russians didn't choose the Caribbean to hide its money. They
chose the metropoles. They chose London, and New York, and
Switzerland, and Luxembourg. And you only have to, as Tom
Cruise told us in that famous movie, ``Follow the money.''
Where has the money gone? It hasn't come to the Caribbean. And
what we have is listings from the Financial Action Task Force
that are perhaps well-intentioned, but are focused on process
and form and are not focused on substantive prosecution of
money laundering. That is the equivalent of saying that I am
more interested in whether you adhere to rules than in finding
where the money launderers are.
When you wanted to find the money launderers with respect
to Russia, you didn't come to the Caribbean. You went to
London. You went to New York. You went to Zurich. You went to
Luxembourg. And I say this because there has to be a
fundamental injustice in the system that puts on a list not
Luxembourg, not the United States of America, not the United
Kingdom, but perhaps Jamaica, Trinidad, Ghana, Barbados, all of
which were put on a list, not even because we were having
substantive money laundering there, but because in 2020, there
was a determination to change the criteria by which we assess
countries, looking at the definition of money supply from M2 to
M3.
Now, for most of my constituents, that sounds as though we
are playing a game, but that reality of changing the definition
of money supply led to the listing of our countries. And what
did it mean? An investor wanting to come to Barbados from
Europe goes into a bank and says, ``I want to transfer X
million dollars for an investment.'' The bank says, ``Oh,
Barbados, no, we have to do enhanced due diligence because they
are on a list, or Belize, we have to do enhanced due
diligence.'' When that happens, they say, ``But guess what? The
enhanced due diligence is too costly for us. You need to go and
find another bank.''
It doesn't only happen with de-risking of institutions. It
also happens with categories of business. So, you have bankers
saying to people who trade gold, oh, you can't bank with us
anymore. Come for your millions of dollars. Where are they
going to carry it? How does that enhance the opportunities for
crime? How does that enhance human insecurity? People who trade
in casinos, do you believe that the owners of casinos in Las
Vegas keep their money in a safe or do they keep it in a bank?
In the Caribbean and Trinidad where the casinos and then
the rest of us, they tell the people who have casinos and slot
machines, you can't bank in a bank anymore, in spite of the
fact that we still have correspondent banking relationships.
Why? Because to keep the remaining relationships that we have,
they go overboard with the level of compliance and regulatory
compliance that make us now as countries uncompetitive and make
the conduct of certain businesses prohibitive. This can't be
fair, and if it is not fair for your people to be excluded
financially, then we say equally it is not fair for their
family in the islands and in the other countries from which
they come to be excluded financially. This is a global public
good that we must protect, and this is a human right that we
must protect. And I want to thank this committee for seeing us
today, for hearing us, and for feeling us because far too
often, that has not been done.
The last point I will make is this. Do not let this be
recorded as an act of unconscious bias, and why do I say so?
Look at the list of countries who are listed, and you will see
that they are almost all former colonies and people of color.
And look at the countries who, in spite of being able to open a
bank account within hours in Delaware or Wyoming, within hours
in Luxembourg or Zurich, and they remain off of these lists
that speak about the risk to money laundering, and look and see
where the divide comes. I believe that this committee has a
keen eye for fairness and equity, and all we ask today is for a
level playing field.
One of the solutions we will leave you with is that the
Treasury ought to be truthful to its mandate. It says that it
wants to be risk-sensitive. If it wants to be risk-sensitive,
then it needs to focus on where the money is rather than
creating rules that act as a proxy to money laundering or
terrorism financing, and it has found the answer, even if
fortuitously or serendipitously this year, by following the
money with the Russian sanctions.
I thank you and I pray that we can use technology,
communication, sharing of information, but above all else,
fairness and transparency to ensure that our people are not
further punished from being able to participate in their lives,
through their economies, through their savings, and with their
families across borders and businesses. Thank you very much.
[The prepared statement of Prime Minister Mottley can be
found on page 61 of the appendix.]
Chairwoman Waters. Thank you so very much, Prime Minister
Mottley.
Now, without objection, I would like to submit statements
for the record from the Caribbean Community Secretariat, the
Government of Antigua and Barbuda, and MoneyGram International,
Incorporated, that echo many of the things that Prime Minister
Mottley stated in her testimony.
Without objection, it is so ordered.
I now recognize myself for 5 minutes for questions.
Prime Minister Mottley, thank you again for your testimony
on this vexing issue of bank de-risking. In your testimony, you
explained that the international community, including the
United States, tends to incorrectly perceive the volume and
impact of financial crime that moves through the Caribbean as
compared to other countries like Switzerland, the United
Kingdom, and even the United States. The European Union has
high-profile examples of years-long anti-money laundering
failures, such as Danske Bank, through which Russian oligarchs,
including Russian President Putin, have laundered billions of
dollars. And yet, instead of looking inward, it is Caribbean
nations and non-sovereign territories that the United States
blacklists for money laundering or tax reporting deficiency.
You have argued that such blacklists and similar reports
are one reason why the Caribbean is incorrectly perceived by
correspondent banks to be riskier. For example, the United
States Department of State prepares an annual report with input
from the listed countries called the International Narcotics
Control Strategy Report, or INCSR. The purpose of this report
is to describe the efforts to combat all aspects of the
international drug trade, including money laundering and
financial crimes.
INCSR is an important and useful report, but it only
provides negative information about listed nations without
describing their efforts to improve their ability to fight
financial crime. This seems to not provide a full picture of
the actual risks that exist. That is why I proposed H.R. 8798,
the INCSR Improvement Act, which would amend the law to require
INCSR to include examples of anti-money laundering improvements
made in the list of countries. I believe that including such
information will also be useful for the Congress in
understanding the countries whose activities are being
reviewed.
Prime Minister Mottley, can you please comment on the
effects that international blacklists and reports like INCSR
have had on perception about the banking risk in the Caribbean,
especially in terms of how correspondent banks incorporate that
information in their risk evaluation and decisions about
whether to offer services within a listed country? And
specifically, can you comment on my proposal to make changes to
the INCSR report?
Ms. Mottley. Thank you very much for that question, and it
is very appropriate. The reality is, as I said, the listing has
been recognized by the Bank of International Settlements as
perhaps the greatest reason why correspondent banks leave and
remove their relationships, and, therefore, these lists are
deleterious. We believe that if we can move these lists off, we
are in a position to be able to at least have a better chance
to make the case that the substantive concerns that we all have
to fight crime are being met.
The reality is that the State Department's report--and once
again, we have been complaining for years--is prepared by
junior officers. It is not robust, it does not allow us a right
of response, and it does not take into account when
improvements have been made during the course of the year. This
is not an exam. This is our life, and this is real for our
people. When banks remove themselves and say they are not doing
business, and an investor has a choice between a country in the
Caribbean or a country elsewhere where he can seamlessly move
his investments, he is going to go elsewhere.
And that is why we say that these reports have a
disproportionate consequence in excluding us and making us
financial pariahs and making us uncompetitive. And we feel that
if you can pass legislation that: one, includes a right for us
to respond; and two, since we live in a world of real time, if
we have improvements, they ought to be taken in real time
rather than waiting for the next year's report in order to take
account of the improvements that have been made by countries.
Why? Because in the course of the year, that country can lose 5
percent of its economic activity, 7 percent, 2 percent, all as
a result of its failure to be able to attract investment.
And equally, what I haven't spoken about is the millions of
dollars that we have to spend as a small state to try to
satisfy those considerably-larger questionnaires that exist in
circumstances where we know that the money isn't in us, and
that it is not us where the money launderers are hiding their
money in plain sight. But you are coming to us to give yourself
a sense of comfort, and that is our concern with these lists.
And secondly, when we comply with the list, what happens?
The goalpost has moved, and a new list comes out with different
concerns, and we have seen it whether in terms of money
laundering and terrorism finance or in terms of tax
transparency with the OECD. And that is why if you go back, we
are continuously on these lists, facing the consequences of
that withdrawal. Thank you.
Chairwoman Waters. Thank you. I agree with you, Prime
Minister. And as we heard several months ago at the roundtable
in Barbados, and as we are likely to continue to hear today,
the incompleteness of these international reports can have a
profound impact on whether a correspondent bank decides to cut
off all business to a country.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 5 minutes for
questions.
Mr. McHenry. Thank you, Madam Chairwoman, and thank you,
Prime Minister, for being here. This is an important issue, but
in de-risking, we want to make sure that the knock-on effects
of this are not so severe that we actually go against our
common interest here. But the way this de-risking is carried
out is because of jurisdiction, or industry, or an area is
deemed to be high risk for money laundering. That is at least
what the financial regulators will say, what these institutions
that are moving out of territories will say.
My question to you is just a very direct one. What is your
government or your country doing to counter that perception, or
what they would say is fact, but I think we would say is
perception. What are you doing to counter that perception?
Ms. Mottley. Thank you. We have had to pass substantive
laws to deal with these issues since 9/11. I was attorney
general when 9/11 happened. I was around when Resolution 1373
and all of those other resolutions were passed when the U.S.A.
Patriot Act was passed. The U.S.A. Patriot Act has not stopped
money laundering in this country. The U.S. Patriot Act has not
stopped money laundering in Europe. You have seen the evidence
of it this year as you have gone after the oligarchs and as you
have put sanctions on others.
At the same time, our country has had to divert money away
from social spending and critical infrastructure spending in
order to ensure that we do not have our banks cut off from the
rest of the world. And to that extent, that is why my citizens
have to face 4 weeks or 5 weeks to open a bank account as a
young kid with no background of any kind of problems in any
society because you are now coming into an adulthood.
Similarly, if you decided to have a company here, to try to
invest in Barbados, more often than not, it will take 4 or 5
weeks to open an account. If you go to Delaware, you can open
it up within matter of hours, in a twinkle of an eye. If you go
elsewhere in Europe, in a twinkle of an eye. In spite of all of
those things, we have had to spend this money just to be able
to not be level, but to come close to having a chance of having
economic activity.
Mr. McHenry. So, what are you using? Are you using
technology to speed up that process?
Ms. Mottley. We are using technology. In Barbados, we have
just introduced a national digital identity verification card,
and that is to help us expedite the process in spite of what
else we are fighting for in terms of our advocacy.
Mr. McHenry. But you are talking about a digital
identification card?
Ms. Mottley. Digital identity card.
Mr. McHenry. We don't have that in the United States.
Explain to me what that is.
Ms. Mottley. A card that helps you to validate who you are
digitally to give you access to other services so that the
banks can take a chance on you in a more credible way, but that
costs us millions of dollars to do. In the same way equally,
our banks are using a metric, which is, in fact, far more
rigorous than yours. You have a metric of $10,000 for money
laundering. Our metric is the equivalent of $5,000, so that
every transaction over $5,000 has to be able to be monitored
and examined. And the bottom line is that in every instance, we
are doing--I say this with Madam Chairwoman, like women, we are
doing twice as much as you to be considered half as good as
you.
Mr. McHenry. I have no follow-up because I, in fact know it
is true, sadly, but I also know the effects, which is that you
are working twice as hard and actually are twice as good,
perhaps more. So along those lines, you are taking active
concerted efforts to address these concerns, and you are
working actively to do that. I think that is an important
message.
And Madam Chairwoman, thank you for holding this hearing
because it does bring up a big issue that we talked about a
couple of Congresses ago domestically, but we need to talk
about in terms of our trusted trading partners. In a
complicated world, we need to make sure that our closest
countries are our closest friends, and we need to treat them
like our closest friends.
And I think for too long, we have thought of many of our
neighbors to the South as great places to go visit without
thinking, we need a trading relationship, not a visiting
relationship, and we need to change this mentality of our
closest neighbors, who are actually deeply moored with us and
in our economy, and that is an exchange. That is not a one-way
street. It is a two-way street. We need to make sure it is done
that way. So Madam Prime Minister, thank you for being here.
Thank you for your testimony.
Ms. Mottley. If I may, the reality is that we are family,
and apart from being family, there are opportunities that can
exist to improve your conditions and our conditions. But
nothing has happened between the U.S. and the Caribbean since
the passage of the Caribbean Basin Initiative Act more than 40
years ago. And if we don't create the opportunity to expand the
trade, which now stands at $35 billion, with which you have a
trade surplus of $12 billion, there is far more work that can
be done, far more investment that can be done. And there are
issues. For example, even as we fight the issue of fertilizer,
Trinidad has surplus capacity on natural gas and fertilizer,
but they can't get it here because of other issues that you
have resolved for Europe, and you have resolved for Chevron,
but not for Trinidad and Tobago. There are a number of issues
that I believe again--
Mr. McHenry. Okay. This is also a trading relationship
conversation, I see.
Ms. Mottley. Yes, it is more than trade, and we are family
there too.
Mr. McHenry. Yes.
Ms. Mottley. But basically, what really is happening is
that we are not having the opportunity to do what we should be
doing: trade with each other substantively and to create and
work together collaboratively to fight crime. And we have that
relationship with Southern Command. We have that relationship
with other agencies in this country, but it is almost as if the
left hand and the right hand don't know what the other is
doing.
And all we are asking you to do in this committee is to
bring clarity and to have a sensitization that if Treasury
wants to really fight crime and fight money laundering, do not
drive the transactions underground by forcing us to find
alternative means to trade and to send money to each other. And
whether it is a digital one or whether it is the unregulated
crypto exchanges, or whether it is buying jewelry, people will
find ways to send remittances and will find ways to continue to
trade because we do not produce all that we need in order to
live.
Mr. McHenry. Thank you.
Chairwoman Waters. Thank you, Mr. McHenry, and I would like
to thank our distinguished witness for her testimony today.
Without objection, all Members will have 5 legislative days
within which to submit additional written questions for the
Prime Minister through the Chair, which will be forwarded to
the witness for her response.
We will now take a brief recess to bring forward our second
panel of witnesses. Thank you very much.
[brief recess]
Chairwoman Waters. The committee will come to order. I
would like to welcome our second panel of distinguished
witnesses to the committee: Mr. Wazim Mohamed Mowla, the
assistant director and lead of the Caribbean Initiative at the
Adrienne Arsht Latin America Center, Atlantic Council; Ms.
Wendy Delmar, the CEO of the Caribbean Association of Banks;
Mr. I. Wayne Shah, the senior vice president of financial
institutions and the head of the Caribbean region at Wells
Fargo Bank, as well as the executive director of the Financial
and International Business Association; Mr. Amit Sharma, the
CEO, founder, and director of FinClusive; and Ms. Liat Shetret,
the director of global policy and regulation of Elliptic.
You will each have 5 minutes to present your oral
testimony. You should be able to see a timer that will indicate
how much time you have left. I would ask you to be mindful of
the timer so that we can be respectful of everyone's time.
And without objection, your written statements will be made
a part of the record.
Mr. Mowla, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF WAZIM MOWLA, ASSISTANT DIRECTOR, CARIBBEAN
INITIATIVE, ADRIENNE ARSHT LATIN AMERICA CENTER, ATLANTIC
COUNCIL
Mr. Mowla. Good morning, Chairwoman Waters, Ranking Member
McHenry, and distinguished members of the committee. It is my
privilege to address you this morning on the impacts of de-
risking in the Caribbean and strategies for ensuring financial
access.
First, I congratulate the committee for prioritizing the
withdrawal of correspondent banking relations and, by virtue of
holding this hearing, underscoring your commitment to
addressing this issue, one that is critical to both the
Caribbean and the United States. I would also like to note that
it was an honor to accompany Chairwoman Waters to Barbados
earlier this year and participate in the Caribbean Financial
Access Roundtable in which the issue of de-risking was raised.
Before I begin, I would also like to acknowledge the much-
needed comments and insights from the Honorable Prime Minister
Mia Mottley of Barbados, as well as the other witnesses who are
joining me today, including Wendy Delmar and Wayne Shah, who
are both part of the Atlantic Council's Financial Inclusion
Task Force.
Members of the committee, as you have heard today and will
continue to hear, the withdrawal of correspondent banking
relations, or de-risking, is having a significant impact on the
health, functioning, and development of Caribbean economies.
Financial institutions list the Caribbean as the most effective
region globally, with some countries losing close to half of
all correspondent banking relations over the past decade. De-
risking has adverse effects on key economic sectors including
tourism, remittance flows, and access to international trade,
finance, and credit. To put it simply, de-risking is
effectively cutting the Caribbean off from the rest of the
world, bringing any means of economic development and
resilience to a halt.
Because of the extreme vulnerabilities these countries
face, they are in a constant state of economic survival,
consistently depending on global finance to rebuild after
hurricanes to attract foreign investment into emerging
industries, and whose citizens rely on the imports of food,
fuel, and goods to maintain the quality of life. All of this is
only possible if these countries have access to correspondent
banking. And while de-risking has severe impacts in the
Caribbean, the United States, its national security, and its
interests are not spared.
First, de-risking limits Caribbean countries' ability to
access the U.S. dollar. This presents a challenge for U.S.
agencies as it is counterproductive to addressing money
laundering concerns if businesses and individuals are forced to
use alternative currencies or avenues to transact payments.
Often, this can become a place for criminal networks to hide
illicit flows, making it more difficult for U.S. agencies to
combat them. Here, there is a clear national security risk.
Because of the Caribbean's proximity to countries that house
illicit actors, such as Venezuela and Cuba, the region is then
exposed to becoming the future hub for criminal financing if
de-risking goes unaddressed.
De-risking also limits U.S. economic influence. U.S.
companies seeking to shorten supply chains near shore to the
region are likely to face barriers such that they cannot pay
service and product suppliers. For companies looking to invest
in emerging industries, such as the energy markets of Ghana,
Trinidad and Tobago, and Suriname, correspondent banking will
be vital to ensuring that the U.S. private sector is able to
compete for contracts. Further, continued de-risking and loss
of access to the U.S. dollar presents an opportunity for
Caribbean governments and financial institutions to seek new or
strengthen existing relationships abroad, notably with China.
While Caribbean governments and people rely on the U.S.
dollar, it is not the only internationalized currency. While
the euro is an alternative, Caribbean governments face similar
de-risking challenges with banks in the European Union. The
result is an opportunity for the Chinese RMB and its banks to
strengthen ties with the region. The draw of new banks and RMB
usage from China is likely to be attractive for most Caribbean
countries and can even influence Taiwan's allies in the region.
At present, 5 of Taiwan's 14 remaining allies are CARICOM
members. Except for Haiti, these countries have each lost more
than 30 percent of the correspondent banking counterparties
since 2011. If the severity and frequency of de-risking rises
in the region, this can be an added incentive for Taiwan's
allies to pursue a switch in diplomatic recognition.
Members of the committee, I urge you to take legislative
steps to address de-risking in the Caribbean to promote
financial inclusion and safeguard U.S. interests. Never has
there been more of an appetite for the United States and the
Caribbean to expand cooperation and strengthen their
partnership, but doing so will require tangible and decisive
action. The INCSR Improvement Act is one such example, which
will help Caribbean financial actors and government leaders
annually underscore actions taken to address money laundering,
drug trafficking, and financial crimes, and the Caribbean
Stakeholders Engagement Act is another, which will ensure that
those that are most affected by de-risking have a seat at the
table.
Members of the committee, I speak to you today as a
Caribbean American, someone who has a vested interest in the
well-being, prosperity, and security of both the Caribbean and
the United States, and I can clearly and sincerely state that
correspondent banking underpins the core of the U.S.-Caribbean
economic relationship. It has an impact, not just on Caribbean
citizens, but on U.S. citizens as well. Taking actions today
and in the future can ensure that we as neighbors, as Americans
and Caribbean citizens, can build a future that is safe and
prosperous for everyone.
Thank you once again for the honor and the opportunity to
appear before the committee today. I look forward to answering
your questions.
[The prepared statement of Mr. Mowla can be found on page
75 of the appendix.]
Chairwoman Waters. Thank you. Next, we have Ms. Wendy
Delmar, who is the CEO of the Caribbean Association of Banks.
STATEMENT OF WENDY DELMAR, CEO, CARIBBEAN ASSOCIATION OF BANKS
(CAB)
Ms. Delmar. Chairwoman Waters, Ranking Member McHenry, and
distinguished members of the committee, good morning. I am
honored for the opportunity to shed light on a matter that may
be deemed the proverbial thorn in the side for banks and
financial institutions in the Caribbean. As a Caribbean
national and career banker, the onslaught of de-risking
activity, and its resultant adverse impact on the banking
industry and economies of the region, has been both
disheartening and deeply concerning.
As chief executive officer of the Caribbean Association of
Banks (CAB), I am proud to state that the CAB was the first
regional organization to sound the alarm as early as 2015
relating to de-risking activity in the Caribbean. Since then,
we have worked assiduously to bring to the forefront the
challenges faced by the region resulting from the loss of
correspondent banking relationships, while concurrently
striving to identify and execute possible solutions.
It is agreed that prior to the increase in regulatory
requirements aimed at addressing money laundering and the
financing of terrorism, banks and other financial institutions
within the Caribbean enjoyed mutually-beneficial correspondent
banking relationships with the United States' correspondent
banks. However, as noted by Ian De Souza in 2017, in a research
paper commissioned by the CAB on the unintended consequences of
de-risking, the scaling up of efforts related to anti-money
laundering and combating the financing of terrorism ultimately
resulted in a deteriorated cost-benefit position for the
business of Caribbean banks and other financial institutions.
Yet, regrettably, and quite candidly, the current arrangements
through which the international financial system has chosen to
relate to Caribbean banks and other financial institutions has
rendered the region disproportionately dependent on
correspondent banking services, thereby exacerbating the
adverse effects of de-risking.
In my written submission, I have developed the foremost
areas of concern related to the matter. Noting however the time
restrictions for this morning's hearing, I will provide a brief
summary.
The Caribbean is comprised primarily of small island
developing states. As such, foreign direct investment is
significant to the gross domestic product of Caribbean
economies. De-risking perpetuates the perception of the region
as high risk, which negatively impacts investor appetite. The
likely resultant decline in foreign direct investment (FDI) has
a multiplicity of ramifications from the macro to micro
economic levels.
Moreover, access to international financial markets is
paramount for Caribbean jurisdictions given that most countries
are, in fact, net importers. Therefore, the availability and
access to goods, from grocery store items to vehicles, is
dependent on well-functioning correspondent banking
relationships. At the height of de-risking activity, Belize,
for example, lost nearly all correspondent banking
relationships. Wire transfer services, the processing of credit
card payments, and the clearing of checks issued by United
States banks were unavailable. In a jurisdiction heavily
dependent on tourism, the ramifications of the previous would
die off.
Additionally, banks and other financial institutions within
the Caribbean continue to contend with significant increases in
operational costs, driven almost primarily by compliance
initiatives. This is representative of one of the most
deleterious unintended consequences of de-risking, which is the
burden inadvertently placed on all banks within the region to
discredit the relentless perception and perpetuation of the
region as a high-risk jurisdiction.
In this regard, I draw attention to the annual
International Narcotics Control Strategy report, previously
mentioned by PM Mottley. Though this may not be the committee
responsible for the report, I wish to commend Chairwoman Waters
for her interventions resulting in proposed amendments to the
text of the report, which, if successfully adopted, will
increase the validity of the report, and hopefully result in a
more factual and less disparaging representation of the
Caribbean.
With the foremost in mind, I offer the committee the
following strategies for improvement: one, the development and
implementation of common and preset international compliance
standards; two, the consideration of correspondent banking
services as an economic and humanitarian good; three, the
support of a regional approach to improve the cost-benefit
position of correspondent banks; and four, to improve the
provision of information to inform the International Narcotics
Control Strategy report.
Ladies and gentlemen, I thank you for the opportunity again
to present to you this morning, and I am open to any questions
that you may have.
[The prepared statement of Ms. Delmar can be found on page
56 of the appendix.]
Chairwoman Waters. Thank you, Ms. Delmar. Next, we will go
to Mr. Shah. You are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF WAYNE SHAH, SENIOR VICE PRESIDENT, WELLS FARGO &
COMPANY; AND VICE CHAIR, FINANCIAL AND INTERNATIONAL BUSINESS
ASSOCIATION (FIBA)
Mr. Shah. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, good morning. I am Wayne Shah, senior
vice president of the Financial Institutions Group at Wells
Fargo and Company and a board member on the executive committee
of the Financial and International Business Association (FIBA),
of which Wells Fargo is a longstanding member. I appreciate the
opportunity to be here today and I look forward to sharing with
you the many ways in which Wells Fargo is working to support
our correspondent bank customers in the Caribbean.
I will speak to you today in two capacities: first, I will
discuss Wells Fargo's activity in the Caribbean; and second, I
will discuss FIBA's efforts in this area. I work for Wells
Fargo Corporate and Investment Bank and support both domestic
and international financial institutions through a dedicated
industry coverage team. Wells Fargo has provided strategic
correspondent banking services to the Caribbean banks for more
than 50 years. Our commitment to the region's growth and
development is underscored by our market share and the number
of countries where Wells Fargo services are available. Wells
Fargo provides correspondent banking services to banks at the
regional, head office, and country level. Today, we provide
services to over 20 countries in the region.
Following the 2008 financial crisis, the process known as
de-risking began to show up in the Caribbean. De-risking refers
to the phenomenon of financial institutions terminating or
restricting business relationships with clients or categories
of clients to avoid risk rather than manage it. In 2007, Wells
Fargo and FIBA created the Caribbean Roundtable to highlight
and discuss pressing matters for the Caribbean banking
community. FIBA ultimately attributed de-risking to a change in
perception that the Caribbean banks have become high risk.
According to FIBA, de-risking seemed to impact smaller banks to
the greatest extent. These banks were no longer able to access
international markets, execute foreign payment and trade
services, or support cross-border credit cards. However, during
this time, banking services necessary to support the region
continued to be available through larger, unaffected financial
institutions.
Instead of exiting banks, Wells Fargo embarked on a
significant effort to work with respondents on enhancing their
Bank Secrecy Act/Anti-Money Laundering (BSA/AML) programs.
Wells Fargo's focus was to understand, improve, and align risk
management objectives. Wells Fargo established and funded an
annual Caribbean conference whose purpose was to create a forum
to work with Caribbean banks in navigating change. The
conference is focused on building a better, safer, and
financially-inclusive Caribbean ecosystem.
As a FIBA board member, I would like to also take a few
minutes to talk about the contributions FIBA made in response
to de-risking in the Caribbean. Built on a legacy that spans
over 40 years, FIBA is a non-profit trade association, and an
international center for financial excellence. Their membership
includes the largest financial institutions from Europe, the
United States, Latin America, and the Caribbean. FIBA is
recognized by the financial services industry, regulators, and
law enforcement as a center of excellence with deep knowledge
and expertise in AML Compliance, and high-level education and
training programs.
In 2009, FIBA first raised concerns about the potential
loss of support for correspondent banking in the Caribbean.
Over the next several years, FIBA invited stakeholders from
Caribbean governmental agencies, Caribbean financial
institutions, the U.S. Treasury Department, and U.S. regulatory
agencies to debate and discuss potential solutions. To date,
FIBA could not find any empirical evidence to believe that
Caribbean banks had lesser abilities regarding BSA/AML. In
fact, FIBA's view is that the Caribbean banks that remain in
the market have invested heavily in BSA/AML compliance and risk
management measures.
Caribbean banks are also currently highly compliant with
international guidelines and industry best practices. In FIBA's
opinion, the era of de-risking small Caribbean banks has long
been over. However, many challenges remain that still
jeopardize financial inclusion for the Caribbean. These
include: one, making sure history does not repeat itself and
de-risking does not affect the larger Caribbean banks; two,
encouraging correspondent banks to return to the region; three,
establishing a view that the Caribbean is a region of safety
and soundness for financial services; four, encouraging
independent country and counterparty risk analysis; and five,
calibrating regulatory mandates and addressing unintended
consequences of legislation and regulations.
On behalf of Wells Fargo and FIBA, thank you for letting me
speak today, and I welcome your questions.
[The prepared statement of Mr. Shah can be found on page 81
of the appendix.]
Chairwoman Waters. Thank you, Mr. Shah. Mr. Sharma, you are
now recognized for 5 minutes to present your oral testimony.
STATEMENT OF AMIT SHARMA, CEO & FOUNDER, FINCLUSIVE
Mr. Sharma. Thank you, Chairwoman Waters, Ranking Member
McHenry, and the distinguished members of the committee. I am
honored by your invitation to testify before you today. I look
forward to sharing my views on the impacts of de-risking to our
national, international, and economic security, as well as the
capabilities of new technology and innovations happening in the
traditional and non-traditional financial services industry, in
particular as they represent many solutions to de-risking as
well as the inherent contents of financial system integrity.
By way of background, I am the CEO and founder of
FinClusive. We are a hybrid financial and regulatory technology
company that connects traditional banking with blockchain-
enabled payments and virtual asset networks. And we do this by
providing a full stack embedded anti-money laundering set of
capabilities, bringing a number of integrations globally for
Know Your Customer (KYC) transaction monitoring, analytics,
digital identity solutions, and legal entity identifiers, all
to provide a utility for Know Your Customer, AML, and other
financial crimes compliance protocols.
My colleagues here today have provided a thorough
definition and description of de-risking itself and the manner
in which financial exclusion in the Caribbean consequentially
is linked to the growth and continued uncertainty of growing
anti-money laundering obligations over many, many years. And I
wish to focus my oral statement on the attendant risk of de-
risking and the uncertainty that we believe provides more
financial solutions than detriments to the financial services
industry.
First, it is important to note that financial excluded or
underserved is disproportionately the vulnerable parts of our
society from low/moderate income to global poor, those lacking
in financial and credit history, jurisdictions labeled by many
governments, including our own, and global standard setters
like the Financial Action Task Force as being particularly weak
in anti-money laundering or consequently working through
corruption issues, as well as certain types of activities like
money services businesses, remittances and trade finance,
mobile and web-based applications, and, increasingly, those
that are in the financial technology and the blockchain
industry that are increasingly looked at by traditional
institutions as inherently higher risk.
The importance of financial inclusion cannot be overstated,
and much of this has been discussed today, but, in fact, the
remittances and economic consequences for just global trade
also cannot be overstated. In fact, over 3 times official
development assistance is happening through global remittance
flows and many times, for certain jurisdictions, that is one-
third or more of their GDP.
To formulate solutions to de-risking and financial
exclusion, we must take note of a couple of really important
trends, and the first is the recognition that there continues
to be an exponential increase in non-bank, technological, and
web-based applications for finance and banking. And these are
very important peer-to-peer transactions, virtual asset level
transactions, and, alike, are increasingly available to many
who just do not have access to traditional financial services.
Secondly, this growth has given a lot of regulatory
agencies pause because of the uncertainty and unknown
considerations associated with technologies that just look and
operate differently from traditional financial services,
banking, and payments.
And finally, this growing body of regulations is, in fact,
causing significant challenges for new and emerging entrants
that are trying to provide financially-inclusive opportunities
that then have to put policies, procedures, licensing, and
other applications in place that are often costly and
burdensome.
There are several important areas where solutions are being
orchestrated within the context of the Caribbean and, indeed,
globally in the service of financial inclusion and addressing
de-risking. Several of them include enabling marginalized
communities to be furnished digital wallets directly so that
virtual assets can be funded directly into them, and to provide
them access to vital economic resources to pay between each
other and merchants providing vital assistance.
Linking those digital wallets to accounts provides a
gateway between fiat stores of value and virtual assets.
Governments themselves are issuing their own digital
currencies, which can automate financial access, and, in fact,
provide official assistance and other necessary services.
Globally, donors are increasingly using virtual assets to
provide needed assistance directly to recipients in need, and
also issuing digital identity credentials that can be served as
not only global Know Your Customer (KYC) utilities, but to
verify and validate individuals and the transactions that they
undertake.
In sum, we must look at these tools as not only driving
financial inclusion activities, but inherently, these very
attributes of the technologies serve to strengthen the
financial crimes compliance and anti-money laundering
objectives themselves. While financial innovation continues
unabated, we must stop with this false binary choice of a
system that may provide financial access versus threaten
financial system integrity, because inherently they are linked.
I thank you again for your time, and I look forward to your
questions.
[The prepared statement of Mr. Sharma can be found on page
86 of the appendix.]
Chairwoman Waters. Thank you, Mr. Sharma. Next, we will
have Ms. Shetret. You are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF LIAT SHETRET, DIRECTOR, GLOBAL POLICY AND
REGULATION, ELLIPTIC
Ms. Shetret. Good morning, Chairwoman Waters, Ranking
Member McHenry, and distinguished members of the committee. It
is my privilege to address you at today's hearing on the topic
of de-risking. Thank you for prioritizing this important topic.
I will focus my testimony on why de-risking happens, the
consequences of de-risking, and how technological innovations
can help minimize the practice of de-risking.
My name is Liat Shetret. I am the director of global policy
and regulation at Elliptic, the global leader and provider of
anti-money laundering compliance solutions to virtual assets
businesses and regulators globally for nearly a decade. We
equip financial institutions, crypto asset businesses, law
enforcement, and regulators with the tools and insights they
need to manage risk, including, for example, to identify,
assess and act upon illicit and criminal crypto transactions
recorded on the blockchain. Elliptic makes sense out of
blockchain data and identifies trends and typologies that help
our customers understand and evaluate the risk exposure and
make risk-based decisions.
De-risking is not a new issue. In 2015, I co-authored a
report commissioned by Oxfam U.S., entitled, ``Understanding
Bank De-Risking and its Effects on Financial Inclusion.'' In
that report, we explored the drivers and responses to de-
risking, highlighted case studies of financial access, and
provided recommendations for banks, regulators and bank
customers who have been de-risked.
Not much has changed in terms of the complexity and
detriment of the de-risking problem. However, the urgency of
addressing de-risking of correspondent banking relationships,
specifically in the Caribbean and other regions, is
significantly heightened. We have heard about this at length in
testimonies before mine. One piece that has not been mentioned
is the stark gender gap in financial resilience in the
Caribbean, where 56 percent of men can reliably access
emergency money, but only 39 percent of women report being able
to do so.
While de-risking practices have not been localized in any
particular population, community, or industry, in recent years
there has been an aggregation of results best described as a
trend towards de-risking of sectors, including correspondent
banks and specific financial corridors and regions. These
account closures have had a ripple effect on financial access
for individuals and businesses who rely on access to financial
services with regional and national security implications.
Financial institutions have significantly scaled back their
risk appetites. These declining risk appetites, coupled with
rising global scrutiny of anti-money laundering and countering
the financing of terrorism rules, are the most commonly-cited
reasons for de-risking.
Digging deeper, we note that underlying the practice of de-
risking is the assumption that the affected customers present a
higher risk of utilizing their bank accounts as a medium for
raising, moving, and storing funds that are somehow tainted by
illicit activities, such as money laundering, terrorist
financing, or tax evasion. Specifically, correspondent banks
which provide back-end services such as check clearing, foreign
exchange trading, and fund transfers on behalf of other
financial institutions have been identified as a key
vulnerability in Anti-Money Laundering/Combating the Financing
of Terrorism (AML/CFT) regimes. In short, the risk is simply
not worth the reward.
De-risking is an issue that impacts entire markets. All
invested stakeholders, bank regulators, and bank customers and
clients appear to be acting rationally and in their own best
interests. However, in doing so, they have created unintended
consequences for market integrity, financial inclusions AML/CFT
objectives, and, worryingly, have compromised national security
interests. A lack of structured and systemic response to the
issue of de-risking is perpetuating the challenge of regulatory
arbitrage, which is the practice of utilizing more favorable
laws in one jurisdiction to circumvent less-favorable
regulation elsewhere.
International standards urge institutions to adopt a risk-
based approach. Regulators proactively advise financial
institutions to assess their policies and allocate resources
according to their unique risk profiles and risk exposure.
Although this approach is designed to allow for flexibility, it
also introduces ambiguity. Inappropriate risk avoidance has
replaced effective risk management. Rather than reducing the
risk of criminal activity in the global financial sector, de-
risking potentially increases systemic vulnerability.
How can these objectives be balanced? De-risking is a
problem of exclusion that is remedied by inclusion,
specifically the inclusion of technology actors. For the
Caribbean, convening an action-oriented task force or committee
of affected parties, including financial institutions,
regulators, and trusted members of the private sector, such as
tech companies, will bring innovative solutions to
historically-challenging problems.
Congress should explore legislation to facilitate the
acceleration of digital identification, offering clarity and
certainty to a liquidated banking concept. As the digital
economy has evolved, the need to update and expand the
definition of compliance concepts such as customer due
diligence and Know Your Customer rules must also evolve. New
legislation should explore KYC elasticity, the idea that these
rules can be expanded to fit economic development and security
realities straddling digital and traditional markets.
Congress should expedite the thorough exploration of
blockchain-based technology solutions that enhance U.S. dollar
dominance globally, including a stablecoins framework and
central bank digital currencies (CBDCs) which will ensure that
market efficiency, privacy concerns, and interoperability with
economic blocks, such as their Caribbean counterparts, will be
considered.
Many challenges remain in addressing the balance between
financial integrity and inclusion. However, there are also many
opportunities to address these issues by operationalizing
public/private sector initiatives that address concepts such as
identity and transaction monitoring. Moving into a digitized
economy gives banks the opportunity to innovate, manage, and
mitigate risks effectively. Technology innovations, such as
blockchain, serve as an enabler to every stakeholder involved
in a de-risking conundrum.
On behalf of Elliptic, thank you for the opportunity to
speak here today, and I welcome your questions.
[The prepared statement of Ms. Shetret can be found on page
100 of the appendix.]
Chairwoman Waters. Thank you, Ms. Shetret. I now recognize
myself for 5 minutes for questions.
Ms. Delmar, as the CEO of the Caribbean Association of
Banks, you represent the collective interest of banks domiciled
in the Caribbean to strengthen the regional banking sector. I
understand it can take weeks or even months to open up a bank
account or to get transactions approved through the
correspondent banks. What are the reasons given by the
correspondent banks to the respondents or from correspondents
to the individual and entity customers with such delays?
Ms. Delmar. Thank you for the question. As it would have
been submitted in one of the exhibits by the Caribbean
Association of Banks for our discussions this morning, what we
have found is there is very little to no communication
specifically as it pertains to the closure of respondent banks
by the correspondent. As far as the opening of accounts, the
banks have now been forced into a position of extreme
monitoring, as I tend to put it, where we are spending
inordinate amounts of time trying to ensure that, from a KYC
perspective, the customers meet the regulatory requirements
necessary to ensure that we are operating above the line or
within compliance with regulatory standards. It is not,
however, a situation where the correspondent bank necessarily
dictates what is required for the opening of accounts, but
rather, the respondent banks' attempts at ensuring that every
transaction that stems from these accounts will be deemed
appropriate by the correspondent, thereby not jeopardizing the
relationship with the correspondent banks.
Chairwoman Waters. Could you take a moment to tell me what
steps your member banks have taken to address the concerns of
the correspondent banks in order to attract these services?
Have any of these efforts been successful, and why or why not?
Ms. Delmar. Okay. As far as the relationship with the
correspondent banks is concerned, the respondent banks at this
stage have spent inordinate amounts of money in ensuring that
we have invested in technology so that there is easy and
significant monitoring of transactions through the processes
that come in. We have also ensured that the relationships are
maintained with the correspondent banks by being able to
respond to questions that may come back to us, depending on the
transactions that will be processed through the correspondent
banks in the very shortest periods of time. As far as the
information coming back, we have not seen any reentrance of
correspondents who have left the banking region, aside from one
more recently, which was really spurred by an increase in the
volume of transactions that we would have seen being processed,
primarily because of an acquisition that was made of an
international bank, which, of course, then drove up the amount
or the volume of transactions being processed.
Again, the question on our end remains whether it is a
situation of noncompliance from an AML perspective, or whether
or not it holds true that because of the size of the
transactions being processed, as well as the volume of
transactions being processed, that we are being penalized from
ensuring that these correspondent banking relationships remain
strong.
Chairwoman Waters. Mr. Shah, in April of this year, Prime
Minister Mottley and I co-hosted the Caribbean Financial Access
Roundtable, which brought together heads of state, Members of
Congress, financial institutions, industry associations, think
tanks, international organizations, and other stakeholders to
advance concrete solutions to this continued problem of de-
risking in the Caribbean. One idea that I raised, which
received a great deal of support from across the spectrum of
roundtable participants, was a proposal to establish an
examiners academy here in the United States to train State,
local, and Federal examiners on Bank Secrecy Act issues, and
also train foreign examiners to ensure that baseline standards,
mission, and evaluation are uniform. My idea was inspired in
part by the stories from banks in the U.S. about the dramatic
differences in the reviews of banks and services typical to
rural America versus the types of activities that one sees in
Miami or other centers of international finance.
You were there. What is your perspective on this proposal,
both as a leading correspondent banker in the region and as a
representative of the financial and international bank business
association whose members are banks of all sizes and types
doing business overseas?
Mr. Shah. Thank you very much for the question, Chairwoman
Waters. I support 100 percent the idea of a training academy.
In fact, one of FIBA's cornerstones is a training academy where
they train regulators and bankers and provide a lot of feedback
for the industry.
There are two main issues when it comes to looking at a
training academy. We know that our examiners are very well
versed with the Federal Financial Institutions Examination
Council (FFIEC) manual, and they understand the BSA/AML
regulations. The problem is that it is not a one-size-fits-all
approach. So, a regulator that just spent a lot of time in the
Midwest working with retail banks comes into Miami and almost
has a heart attack when he sees international transactions from
Colombia and Brazil, and the Caribbean. It is not an
opportunity where he is very familiar with those transactions.
Sometimes what you find is that when you look at his approach,
our members have told us that he starts with his enhanced due
diligence hat, and everything is high risk. That makes the
examination a little different from how it would have been if
he were with a small regional bank.
The second part is, when you look at assessing a bank's
risk and you are training for it, that the risk-based approach
that we have been taught to apply is usually very subjective,
so we would need two things to happen: first, we would need
guidance that talks about exactly what we are being examined
against; and second, when we have a business that is
correspondent banking, for example, automatically, everybody
thinks that is high risk. It is high risk for a bank that does
not have a program in place to manage those risks, but it is
just business where a bank that spends a lot of time putting in
programs and technology to be able to manage the risk and do
the business successfully.
I do agree with you that we need some sort of training
academy. I think it would help the industry. I think it would
be something that would level the playing field so that
examiners are all reading from the same book, but I do believe
that we would need proper guidance as to how the rules and
regulations are applied. And every bank is specific, and every
bank has a different risk profile, so--
Chairwoman Waters. Thank you.
Mr. Shah. Thank you.
Chairwoman Waters. Thank you very much. The gentleman from
Arkansas, Mr. Hill, is now recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman, and thanks for
holding this hearing. Many of us have lamented President
Obama's, and President Trump's, and President Biden's lack of
emphasis on the Western Hemisphere, the Caribbean, Central
America, and all of Latin America, so I commend you for
engaging with our great friends in the Caribbean. It's so
critical to our economy and their economy. We are inextricably
linked. Thank you for holding this hearing, and I am intrigued
by what I have heard today. I think the presentations have been
excellent. I am delighted to have had her excellency, Prime
Minister Mottley, with us as well. She is a great global leader
on financial matters.
The Caribbean has its share of challenges. If you Google
fraud and schemes in the Caribbean, a long list by country
comes up of real challenges out there for the citizens and
individual Caribbean countries. And, of course, we have had
testimony in this panel for many, many years over our own
citizens here in the United States who were victims of, ``Sir
Allen Stanford's'' crimes in Antigua, which certainly didn't
help the reputation of the region.
My question first to Mr. Shaw is, do you believe that the
financial action task forces and the financial intelligence
bureaus of our Caribbean nations are up to par? Are they doing
good work, because that is where some of this starts?
Mr. Shah. Yes, I do believe that those organizations do
good work, and they have been very helpful in raising the bar.
A lot of the issues that you see in the Caribbean are not
specific to the Caribbean. They happen all over the world, and
the impact from those issues are looked at differently. So, the
same financial crime occurring in Europe or the United States,
when it happens in the Caribbean, it is magnified. In the case
of Mr. Stanford, he was actually from Texas.
Mr. Hill. Yes. We don't need to delve into that. Just, do
you think they are doing a good job?
Mr. Shah. I think they are doing a great job.
Mr. Hill. Thank you for saying that. You have an eyewitness
to that.
Ms. Delmar, do you agree that the governments in the
Caribbean are doing a good job in their financial action task
forces and their financial intelligence bureaus?
Ms. Delmar. Absolutely. And I wanted to lean on what was
said a little bit earlier in that bad actors exist everywhere.
And I think that given the limited resources that we have in
the Caribbean, and again, based on the scale of these islands,
any one infraction against the law is seen as a significant
infraction. However, I believe that everyone involved is having
a similar dialogue, and in terms of ensuring that from a
legislative and regulatory perspective, we are keeping up to
standard. And from a banking perspective, we are also ensuring
that we show up what is required from a KYC and monitoring
process as well.
Mr. Hill. Thank you for that.
Ms. Shetret, you talked a lot about, and this applies to
Mr. Shaw's testimony, too, that fintech, of course, can help
lower compliance costs. One of the largest banks in Florida is
in my constituency in Arkansas, and I know what their AML/BSA
compliance burden is monthly trying to comply with FinCEN, but
they use fintech to lower that cost. Isn't that a way to really
help our Caribbean nations be a more banked place and make it
easier for correspondent banking if we used technology to sort
through the AML/BSA compliance?
Ms. Shetret. Thank you. Absolutely. Fintechs do lower
compliance costs in a way, and the way they do that is by
removing the noise. So reducing false positives, compliance
teams can be focused on high-risk areas. They can utilize their
resources more smartly in a place with lower capacities or
lower resources. You get to focus on your work and your teams.
Mr. Hill. Yes. Thank you. That is helpful. I think that
helps our citizens in the Caribbean nations and it helps our
correspondent banks as well. And this de-risking thing comes
from a lot of regulation put on by this Congress that raises
the cost that makes it more difficult to comply, so I think
fintech is part of that solution.
But, Mr. Shah, if the U.S. financial institutions are
exiting from correspondent banking, who is stepping into the
Caribbean market? Who are you seeing stepping into the
correspondent banks there?
Mr. Shah. We have seen a couple of payment processors
stepping in.
Mr. Hill. Who is that?
Mr. Shah. There is--
Mr. Hill. You can submit it for the record. Any other
commercial banks that have stepped in from Europe or elsewhere?
Mr. Shah. There are a couple of banks, well, banking-type
organizations, financial organizations from Europe.
Mr. Hill. If you would submit those for the record, that
would be very, very helpful to outline who is coming into that
market, if U.S. financial institutions are stepping out due to
the regulatory burden. Thank you, Madam Chairwoman. I yield
back.
Chairwoman Waters. You are welcome. Thank you, Mr. Hill.
The gentlewoman from New York, Ms. Velazquez, who is also the
Chair of the House Committee on Small Business, is now
recognized for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman. This is an
important hearing, and I really appreciate you doing this.
Mr. Shah, Puerto Rico possesses a high number of CBRs given
its integration with the U.S. banking system. As the only
member of this panel representing a major U.S. financial
institution, could you please provide us with an overview of
these connections, and what are your suggestions for deepening
their impact?
Mr. Shah. Pardon me. I didn't hear the beginning of your
question as people were leaving the room. Could you repeat that
for me?
Ms. Velazquez. Puerto Rico possesses a high number of
constituent bank relationships (CBRs) given its integration
with the U.S. banking system. As the only member of this panel
representing a major U.S. financial institution, could you
please provide us with an overview of these connections, and
what are your suggestions for deepening their impact?
Mr. Shah. Currently, we support Puerto Rico with
correspondent banking, and one of the largest banks there is a
customer of ours with over 40 or 50 percent market share. So,
we are supporting that region. It is not in my purview, it is
not part of the English-speaking Caribbean, but I will be more
than happy to have someone respond to you with some of the
details.
Ms. Velazquez. Thank you. What options do we have for
breaking the stigma about the concentration of illegal
activities in Puerto Rico and other Caribbean nations, like we
have been this past year, that triggers financial institutions
decision to de-risk?
Mr. Shah. I think financial institutions make their
decision to de-risk based on their risk appetite and the
profiles of banks that they want as customers. Individual banks
need to make that determination themselves. The stigma, I
think, should be driven by what we see in terms of prosecution
of financial crime and actual cases of financial crime. And in
the Caribbean, there are very, very few areas and instances
where we see high-level financial crime being prosecuted, or
the instance of validated cases of financial crime. That is
part of the problem where the perception does not meet the
reality.
Ms. Velazquez. Thank you. Ms. Delmar, does the rise of
cryptocurrency in the region pose a threat to your
harmonization efforts?
Ms. Delmar. Thank you for the question. At this stage, we
have not seen a significant influence in the region, which
suggests that this is not an ongoing issue or something that we
need to be absolutely concerned about. However, we also
recognize, as was previously discussed on some of these panels,
that people will find unique and creative ways of ensuring that
they are able to get through the banking system in ways other
other than banking. And so, again, from the banking community,
we have been keeping a very clear focus on activities around
crypto within the region, but to date, we have not seen
anything that is suggestive of a significant concern.
Ms. Velazquez. Thank you.
Mr. Mowla, how does the steadily-reduced access to
financial services in the Caribbean due to banks' de-risking
efforts affect the prosperity and security of not only the
Caribbean region, but the United States as well?
Mr. Mowla. Sorry. Could you please repeat the first part of
the question?
Ms. Velazquez. How does the steadily-reduced access to
financial services in the Caribbean due to banks' de-risking
efforts affect the prosperity and security of not only the
Caribbean region, but also the United States as well?
Mr. Mowla. Thank you for the question. Mostly,
correspondent banking is vital for cross-border payments. So if
people want to send remittances back to the Caribbean, want to
invest in certain sectors in the region, they are likely unable
to do so if correspondent banking is not available. When we
talk about nearshoring, when we talk about new U.S. economic
policy, growing investment in our own hemisphere, we need to
have access to the correspondent banking in order to have that
sort of influence.
Ms. Velazquez. Thank you. Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much. The ranking member
of the committee, the gentleman from North Carolina, Mr.
McHenry, is now recognized for 5 minutes.
Mr. McHenry. Thank you, and thank you, Madam Chairwoman,
for hosting this hearing today or organizing the hearing today.
We have heard a lot about risk management, compliance, and
profitability, and I appreciate the witnesses on this panel.
Ms. Shetret, is it fair to say that when a customer is
unbanked or de-risked, they do not simply disappear or go away?
Ms. Shetret. Yes. That is correct.
Mr. McHenry. Okay. So, the customer still needs to be
banked regardless of the risk, correct?
Ms. Shetret. Yes, also correct.
Mr. McHenry. Okay. Is it accurate to say that when one bank
terminates a customer's account through, ``de-risking,'' it is
not really de-risking at all, but it is re-risking?
Ms. Shetret. Absolutely, that is correct. I would agree
with that statement. The reason I agree with that is because
the risk doesn't disappear into the ether. It is simply moved
or shifted into another space. That other space might be a
smaller bank, a smaller institution that can't cope with the
size of risk that is being shifted on to it. It doesn't have
the anti-money laundering controls in place. It doesn't have
the framework to deal with it. It might also shift into other
more unsavory jurisdictions that are not observing any kinds or
maybe minimal or lacks regulatory structures in place, and that
is the concept of regulatory arbitrage. And then, it might
shift altogether underground, which is something we need to
avoid.
Mr. McHenry. Okay. And are we talking about illicit
businesses here on the main, or are we talking about legal
businesses?
Ms. Shetret. Both legal and illegal businesses.
Mr. McHenry. Is there a mechanism to get to illegal
businesses? We are not going to ask the bankers to do this,
right? We are going to ask the accountants, the FBI to do it,
right? It seems like this is shifting the responsibility of a
government obligation onto the private sector in some ways.
Ms. Shetret. The private sector does need to step up and
become police of sorts to make sure that they are keeping bad
actors out of their platforms and systems.
Mr. McHenry. Okay. Let's shift to the legal businesses,
maybe disfavored businesses, maybe people, businesses catering
more to those who are living on the wrong side of the tracks,
maybe mostly engaging in cash, because that is how they have to
manage their credit risk because they don't have credit, right?
So, you are taking those perhaps small businesses--they are
illegal--that are disfavored, and you are taking them into
less-sophisticated institutions, and saying we have done a good
job, right?
Ms. Shetret. Yes.
Mr. McHenry. It doesn't seem like that should be sound
public policy, or it shouldn't be a sound policy outcome.
Ms. Shetret. I will bring it back to the risk-based
approach that both international standards and jurisdictions
ask of financial institutions to account by, which is that you
need to, as a financial institution, assess the risk of the
customer in front of you, medium, small, whatever, whomever is
standing in front of you--legal, illicit--understand the source
of the funds, and then based on that, mitigate those risks.
Smaller institutions or institutions that do not observe AML/
CFT frameworks are not equipped to handle those kinds of
businesses, and they get shut out of the system as they sort of
jump between banks trying to access financial services.
Mr. McHenry. Okay. And is this driven by AML/BSA
requirements? You are seeing de-risking?
Ms. Shetret. Partially driven by that, and also a
profitability calculation where in some instances, it just
doesn't reward financially to bank high-risk customers, for
example, nonprofit organizations that are moving funds for
humanitarian needs to different parts of the globe that require
more due diligence.
Mr. McHenry. Okay. But the due diligence piece--that means
you have to have more people, more employees reviewing these
account-level transactions?
Ms. Shetret. Not necessarily. This is where we would say
that fintech solutions come into play, and we need to innovate
around to--
Mr. McHenry. They come into play, but that is not the
driver here.
Ms. Shetret. Right, not the driver.
Mr. McHenry. Right. We just passed our AML/BSA reform
package last Congress, with a major rewrite of FinCEN, the
beneficial ownership regime here. The goal here, or at least
the goal when we started the conversation when Republicans were
in charge was to drive the expense structure away from people
into technology. And this could be a less-burdensome thing so
that these types of accounts could actually still be banked.
Ms. Shetret. Yes, 100 percent.
Mr. McHenry. And that apparently is not the case.
Ms. Shetret. That is not what is happening right now.
Mr. McHenry. Okay. Anybody think it is happening?
[No response.]
Mr. McHenry. No? Okay. We have our public policy work cut
out for us still, Madam Chairwoman, and while we have made
strides, we have more strides to make. Thank you all for your
testimony and for being here. Thank you for raising this
important international and domestic challenge here. Thank you,
Madam Chairwoman.
Chairwoman Waters. Thank you, Mr. McHenry. The gentleman
from California, Mr. Sherman, who is also the Chair of our
Subcommittee on Investor Protection, Entrepreneurship, and
Capital Markets, is now recognized for 5 minutes.
Mr. Sherman. Thank you. I believe I am the only former tax
collector in Congress. Why I would then be able to get elected
is something to be studied elsewhere. But I do think that it is
critical that we look at our anti-money laundering and our tax
enforcement laws, and accomplish those purposes that could
involve trillions of dollars to the U.S. economy, and then take
a look at making sure that we are good neighbors and friends to
those in the Caribbean, and help our Caribbean neighbors engage
in every kind of economic development, except financial
obfuscation and the tax shelter business. And I realized that,
especially for the Cayman Islands, those businesses are very
profitable, and they may not want to give them up. We should be
willing to provide technical assistance to help our Caribbean
friends deal with money laundering, et cetera, et cetera.
I will ask our witnesses, are there countries in the
Caribbean that want that kind of help, and others, perhaps the
Cayman Islands and others that specifically don't want that
kind of help? Ms. Delmar?
Ms. Delmar. Thank you, Congressman Sherman. It certainly is
always in the best interests of our people when we can receive
support that will consider all of the challenges that we are
facing and all of the opportunities and solutions in addressing
challenges of this nature. Certainly, from a legislative
perspective, I believe that there is adequate monitoring, as
mentioned previously, and laws to ensure that even those
companies, for example, those banks are being monitored, so
that their transactions fall within the required compliance
regimes. However, as you have indicated, from a technical
support perspective, I have no doubt in my mind that we would
welcome the opportunity.
Mr. Sherman. Thank you. Without objection, I would like to
put in the record an article from the Global Financial
Integrity organization, dealing with financial crime in Latin
America and the Caribbean and understanding each country's
challenges.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Sherman. So, we ought to be providing technical
assistance. I'll shift to a different question. Many banks are
ending their correspondent relationship, not because of
anything that a government has done, but because of what a
government might do. They are concerned that Caribbean
countries will apply bank secrecy laws or come up with other
legal requirements that then conflict with American Know Your
Customer laws.
Would it be helpful, Mr. Mowla, if Caribbean countries were
to pass laws explicitly stating that complying with U.S. Know
Your Customer laws is fully legal under their legal system,
eliminate the risk that banks would be whipsawed?
Mr. Mowla. Thank you for the question. I think what is
really important here is dialogue, perhaps more dialogue
between the U.S. and Caribbean counterparts.
Mr. Sherman. Do you think there are Caribbean countries
willing to pass a law saying, go ahead, do business here, and
you can also comply with American law, we are not going to tell
you that you can't comply with American law?
Mr. Mowla. I believe so. Caribbean countries and leaders
are pragmatic actors. All that they are looking out for is the
quality of life of their citizens, and if that is something
that it would take, I think they would be open to doing so. I
can't speak for any Caribbean leader and what exactly he or she
may do, but it is something I think would be up for discussion,
which is why I think dialogue is the way to go.
Mr. Sherman. I would point out that Antigua, the Cayman
Islands, the Bahamas, Bermuda, the British Virgin Islands, and
Turks and Caicos currently have zero corporate tax that makes
them a tax shelter. The G7 has recently put together a program
that we are almost in compliance with ourselves applying a 15-
percent minimum corporate tax. And it would certainly be
helpful if our Caribbean friends were to join that scheme until
all the corporations in the world, at least all the
multinational corporations in the world, need to pay a 15-
percent tax. I look forward to working on these issues, and I
yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Florida, Mr. Posey, is now recognized for 5 minutes.
Mr. Posey. Thank you very much, Madam Chairwoman. Ms.
Shetret, what does research say about the effectiveness of
anti-money laundering laws in combating underlying crimes, such
as drug trafficking and terrorism?
Ms. Shetret. We are fairly effective in having the criminal
framework in place. What now matters is the implementation and
to ensure that the implementation occurs across jurisdictions
in a standardized manner. So, what we are seeing is that while
some countries are stepping up to implement those and adapting
those broad principles into their local legislation frameworks,
the challenge becomes across countries and communicating,
prosecuting, investigating cases when they don't interact, or
when they don't have the same standards in place, or perhaps
more lax standards.
Mr. Posey. Thank you. Anti-money laundering regulations
have shifted substantial law enforcement costs burden to
financial institutions. How can the Federal Government
contribute to reducing those costs?
Ms. Shetret. I'm sorry. Could you repeat the question,
please?
Mr. Posey. Sure. Anti-money laundering regulations shift
substantial law enforcement costs to financial institutions.
How can the Federal Government contribute to reducing those
costs?
Ms. Shetret. Yes. One of the things that needs to happen is
an additional kind of practical clarity and guidance around,
what do these concepts mean in practice? We have seen now that
we are almost in a hybrid economy that is both digitized and
both cash-intensive in many countries, and so redefining a lot
of the same bread and butter concepts from compliance just into
the new practical behaviors in which we operate with updating
these principles. And clarifying, basically removing ambiguity
is what needs to happen.
Mr. Posey. Okay. Thanks. What role might the Federal
Government play in improving the quality of data available to
financial institutions to form their anti-money laundering
regulation responses?
Ms. Shetret. When it comes to data at the moment, it is
spread across different agencies. And one thing that could be
useful is sharing back with industry and with banks, financial
institutions, a holistic view of, for example, insights from
suspicious activity reports. What is it that are sort of macro
trends that are being observed around criminality or
typologies, or regions, or specific areas as the
susceptibility, so that industry can respond? At the moment,
there is a lot of communication coming towards government, and
a lot of work is being done to process those amounts of data,
but having more dialogue around actionable insights could be
more timely in helping banks respond.
Mr. Posey. Do you personally think the reforms instituted
by Congress and the Executive Branch in the wake of Operation
Choke Point have effectively addressed the abuses of that
program?
Ms. Shetret. I'm sorry, sir. Could you please repeat the
question?
Mr. Posey. Sure. Do you believe the reforms that were
instituted by Congress and the Executive Branch in the wake of
Operation Choke Point effectively addressed the abuses of that
program?
Ms. Shetret. Yes. Operation Choke Point from 2013 really
gave the Department of Justice actionable work in which it
subpoenaed over 50 different agencies across industries to
bring forward activities from organizations that were really
not both legal and illegal, stigmatizing them and offering them
a reputational risk, which, since then, banks have really not
been able to shake off. There is an opportunity to understand
that definitions of risk--high, medium, and low risk--must be
tailored and unpacked specifically to industry and actors to
avoid kind of sweeping, and thus, sectoral or industrial
stigmatization, which is a little bit of a leftover ripple
impact from Operation Choke Point.
Mr. Posey. Okay. Thank you. What types of changes do you
think Congress should make to improve the efficiency and
fairness of our anti-money laundering laws?
Ms. Shetret. The United States has a big role to play and
plays it quite actively in a variety of international fora. The
Financial Action Task Force has been mentioned, the Wolfsberg
Group. There is a real opportunity when it comes to the
Caribbean and other regions to utilize regional organizations
to help use American clout in those forums, to push for
additional detail and ambiguity, dispelling a lot of those
regulations that are being put out. Additionally, there is an
opportunity to push on innovation and bring innovative actors
to the table and make sure that we have an opportunity to share
solutions for some public policy issues that are continuing to
trouble Congress and otherwise.
Mr. Posey. Thank you. My time has expired, and I yield
back. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. The gentleman from
New York, Mr. Meeks, who is also the Chair of the House
Committee on Foreign Affairs, is now recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman. And I thank all of
our panelists. Let me start out with Mr. Mowla. I represent one
of the most diverse districts in the country, and a significant
number of my constituents are immigrants who use banking
services to remit money back home to their family members, and
loved ones, and their home country. But the ability to send and
receive these funds is dependent on the ability to use the
banking services and access them at reasonable costs.
You noted in your testimony that fee hikes and
correspondent banking services, for example, and the use of
wire transfers are an obvious negative impact on the customer,
but it also seems to have a trickle effect. And the more that
these individuals turn away from using banking services, the
harder it will be for correspondent banking, which is typically
fee-based, to cover the cost of compliance.
My question is, we always focus on underbanked communities
here in the United States, but we also must assess the policy
that exacerbates circumstances for underbanked communities
abroad. Can you please explain what the impact of de-risking is
on our diaspora and immigrant communities here in the United
States, like many of the people that reside in my Congressional
District?
Mr. Mowla. Thank you for the question. I have been living
in Queens for quite some time. I definitely would love to
answer this. First, in the Caribbean, remittances basically
supplement working-class income. We saw this in Jamaica during
the pandemic, where remittances actually went up because it was
seen, like Prime Minister Mottley said, that we are all family.
We needed to help Jamaica when the tourism industry closed down
because of the pandemic. Now, it has the same effect in
immigrant communities, especially the Caribbean diaspora
population as well, because they are disproportionately
affected, especially as people of color. And if they cannot pay
the fees in order to send remittances home, then they have
family members who are unable to sort of have their own
incomes, but also travel back to the United States.
As you well know, many in the Caribbean diaspora don't just
come for a week, or a weekend or two. They come for weeks. They
come to shop, they eat at restaurants, they stay in hotels, and
it actually becomes a vibrant part of the U.S. economy.
Thinking about Queens, you are thinking about a tristate area.
Texas, California as well, so it all has a circular effect. So,
being able to help sort of the Caribbean populations who
receive these remittances has an effect that allows them also
to purchase goods from the United States. The Caribbean is
reliant on importing goods for most of their local businesses,
and the tourism industry. Bed sheets, pillowcases, all of that
is really bought in the United States. Now, how are they able
to buy it? They are only able to buy to it if they can receive
remittances from the diaspora in the United States.
Mr. Meeks. Thank you for that. And let me go to Ms. Delmar
quickly. Caribbean countries require access to the
international capital markets, and most of their economies run
large and persistent physical trade deficits with the rest of
the world and they heavily rely on imports for food, fuel, and
capital goods not produced domestically. So, I was heartened to
see that, for example, Barbados led the Colombian Trade and
Investment Forum earlier this month. This exploration and
potential collaboration, I think, could be just the type of
innovation needed to foster prosperity in CARICOM countries and
on the continent of Africa. In what ways do you think we in the
United States can support unique solutions to the challenges of
growth and prosperity by drawing on the talent and potential of
diaspora communities?
Ms. Delmar. Thank you for that question. You are correct in
that. The Caribbean remains very receptive to opportunities for
innovation and creativity in terms of ensuring that we maintain
vibrant economies. And like you rightly mentioned and pointed
out, Barbados' initiative in ensuring relationships are being
established with the African Export-Import Bank (Afreximbank)
in Africa is one of those areas that we see as a potential
opportunity for us to continue to maintain that vibrancy that
we need to maintain healthy markets.
Similarly, with the U.S., we are hoping that the
relationships that we have lost through correspondent banking
will be returned based on the discussions that are happening
now, but also the opportunities to continue to trade in more
meaningful ways. For example, we want to ensure that U.S.
citizens will see the Caribbean, and certainly through the
diaspora will see the Caribbean as a place to invest, and
invest safely, because the Caribbean maintains the same levels
of monitoring that the U.S. requires that we do. And so, we
should be seen as a safe zone as opposed to the perception of a
high-risk jurisdiction. The Caribbean sees itself as a third
border to the U.S., and through that alone, it says that we are
here to do business. We want to ensure the safety of the
financial services sector, and the Caribbean Association of
Banks and our members always ensure that we conform to the
requirements of regulation to ensure that the markets remain
safe.
Mr. Meeks. Thank you very much. I yield back.
Chairwoman Waters. The gentleman from Missouri, Mr.
Luetkemeyer, is now recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Ms. Shetret,
I think you mentioned a minute ago the words, ``reputational
risk,'' and I looked up the definition of this. According to a
supervisory regulation letter from the Federal Reserve,
``Reputational risk is the potential that negative publicity
regarding an institution's business practices, whether they are
true or not, will cause a decline in the customer base, cost of
litigation, or revenue reductions.'' Whether it is true or not,
and that's according to the Federal Reserve, so when examiners
go in and they intimidate the banker, the loan officers, the
executive board, the board itself by saying there is a
reputational risk to what you are doing, not even knowing
whether it is true or not, it is their interpretation, it is
their idea, it is their belief that it could be happening
rather than factually saying it is happening, is to me a very
poor way of going about regulation. Do you think it is
appropriate to monitor banking services based on risks that are
not based in fact?
Ms. Shetret. I agree that it is important to make sure that
we are based in facts and in factual assessments, particularly
utilizing on-the-ground information that examiners are
obtaining. Attempting to leave all biases at the doorstep is
very important. The relationship building between an examiner
and a financial institution should be an open one, one that
allows for influencing each other with information.
Mr. Luetkemeyer. You made a comment ago about Operation
Choke Point. Do you understand what I am talking about here?
Operation Choke Point was when they were doing this
intentionally, knowing that they were trying to drive a
business out of business that was not doing something illegal.
They were trying to intimidate the banks into getting rid of
financial services or squeezing an industry or an individual
whenever you don't even know if it is true. This is the
horrible part about Operation Choke Point is that they were
going in with their own personal biases versus fact, and that
can't happen.
I just spent the last several months working with the FDIC
Comptroller, the CFPB Comptroller, the FDIC, the Federal
Reserve, and FinCEN, as well as credit union folks, trying to
take out the independent ATM operators based on the fact they
believe there is money laundering going on, which they finally
admitted was not going on. They were intimidating the banks
into cutting off financial services based on something that
wasn't true. What is the recourse that these industries, these
individuals have when they get squeezed out of being able to
have accounts in banks?
Ms. Shetret. The good news is Operation Choke Point is
over, and I would caution--
Mr. Luetkemeyer. Oh, it is not. It is going full speed. As
I just said, I just got done working on this issue and just got
a letter back on it about 6 weeks ago to stop the nonsense. It
is still going on today. It is still going on from the
standpoint of the far left. It is trying to intimidate banks
and cutting off services to energy companies. That goes on in
this committee right here. So, it is still going on today. I am
going to apologize to you for interrupting here, but don't
misunderstand. This is still there. It has just taken a
different form. You may proceed.
Ms. Shetret. Financial institutions were required to
operate logistically. They are going to go where they can
operate openly, freely, and conduct their business. If we are
closing that opportunity for them, they will just go elsewhere,
and they will go to the places where they can operate without
the fear of examiners coming in. Practically, what I would say
is that examination books and guidance needs to be updated. It
needs to be updated from a variety of different perspectives,
including around personal conduct, around what is actually
tested, how it is tested, the kind of evidence that financial
institutions need to submit. And there needs to be cautioning
around bias and the reputational challenge and adverse media
associated with it.
Mr. Luetkemeyer. I have a bill, and it has actually passed
the House, that stops the nonsense. It forces banks to disclose
to the customer when you close an account why you did it so
that the customer actually knows what the problem is, so they
can then hopefully remedy that situation, or the next place
they go, they can show that we fixed the problem, or down the
road it can be remedied, and so that there is not this bias
that is going on, this reputational risk threat that is going
on, so we can stop the nonsense. So, it is important to me, and
I think that we understand that the regulators are the ones who
are imparting this reputational risk nonsense out there.
The other ones they are promoting is sort of interpretation
and this intimidation. Now, the banks have to push back on this
and say, show me where I am wrong. Prove to me that there is a
problem here. I don't support banks that have problems, but I
do support the proposition that we have to make the examiners
do their job, which is to only examine with regards to whether
the laws are being complied with, not to make stuff up, which
reputational risk, according to definition by the Fed itself,
says could not be true.
Ms. Shetret. I agree to that. Thank you.
Mr. Luetkemeyer. Thank you very much. I yield back.
Chairwoman Waters. Thank you very much, Mr. Luetkemeyer.
You and I may have something we can work on together.
Mr. Luetkemeyer. [Inaudible].
Chairwoman Waters. Thank you.
Mr. Luetkemeyer. Let me write this down.
Chairwoman Waters. The gentleman from Colorado, Mr.
Perlmutter, who is also the Chair of our Subcommittee on
Consumer Protection and Financial Institutions, is now
recognized for 5 minutes.
Mr. Perlmutter. Thank you, and I have a question first, but
then I want to respond to something Mr. Luetkemeyer had to say,
so I hope he stays in the room for a few minutes. I want to
thank the panel for being here in Washington on one of our
busiest days where we each have, like, five committee meetings
going at the same time. I just want to apologize in advance.
Other people are running around. I had a chance to meet many of
you when I visited the Caribbean with the chairwoman and
participated in the roundtable that the Prime Minister
established and the chairwoman put together. Mr. Shah, I am
going to start with you, sir.
Chairwoman Waters. Excuse me. One moment before you do
that. Mr. Luetkemeyer is anxious to get out, and you wanted to
engage him?
Mr. Perlmutter. But I have to do the first question to lead
to the second question and the response. Okay. I will start
with Mr. Luetkemeyer, to let him get out of here. There are
sort of three things that are potential risks--crypto, drugs,
and tax shelters--that we saw. And one of the things that came
up a lot was safe banking actually, Mr. Luetkemeyer, where we
have your bill on dealing with Operation Choke Point to stop
that reputational risk component. And to Mr. Luetkemeyer's
credit, his bill is in the Safe Banking Act, which provides a
safe harbor for banks that provide banking services to the
marijuana industry. His bill has passed the House 7 times now,
and we are going to get it passed in the Senate, I think, in
the next few months. So, we are going to be able to deal with
that reputational risk concern that you have because much of
what they are facing in the Caribbean, it was clear that there
had been some redlining going on, in my opinion, of the entire
region, which is a doorstep to America, and they are our
friends and we ought to treat them like friends.
And we aren't in the banking industry, with the exception
of Wells Fargo, quite frankly. A lot of people had withdrawn
because of these reputational concerns, some of it dealing with
cannabis. And we can at least address that if we get that done,
that bill passed that has a lot of your language in it. That
was the only thing I wanted to say to the gentleman.
Mr. Luetkemeyer. I thank the gentleman, and we are working
together on that bill diligently, and your efforts are to be
commended. But yes, I think where there are problems, we need
to be concerned about it, whether it is illegal drug dealing,
money laundering, or whatever the illicit problem is. But I
think reputational risk is something that should be off the
table because the way that is defined, the way they use it as
an intimidation tactic is something that can't be tolerated.
But I support your efforts and anybody else's efforts here to
make sure we have some clean entities to go to and handle money
and transactions in an effective and efficient way.
Mr. Perlmutter. And I thank the gentleman for sticking
around for a second.
Mr. Shah, welcome. I didn't forget about you. We saw Wells
Fargo was one of the few American banks left doing
correspondent business in the Caribbean. In your testimony, you
described how despite the risks, your bank chose to stay in the
region and work to mitigate those risks. Specifically, you
described how Wells Fargo worked with other banks, other
Caribbean banks to help them improve their anti-money
laundering and Bank Secrecy Act programs. Can you please expand
on what types of information and tools you provided to help
these other institutions improve their risk management?
Mr. Shah. Thank you for the question, and it is nice seeing
you again. As part of our business, one of the things we do is
conduct independent analysis and risk analysis for the
counterparties and the countries in which we do business, so we
take a hands-on approach to working with our respondent banks.
In the effort to elevate them, we have done three major things.
One is engage them to understand their programs and how that
fits into the business type that they are doing. The second
thing we talked about is how well they comply with the
necessary rules and regulations that make them safe. And one of
the safeguards that we take pride in is making sure that we
accept transactions that are safe and sound, and we prohibit
transactions that are in the shadows so that we protect the
U.S. financial system. That is our main priority.
We spent a lot of time with remediation, working with them
to explain to them our risk management policies and procedures.
We have an annual get-together for all of our customers where
we talk about the new rules and regulations, our way of looking
at them, how we manage risk, alignment of risk appetite, and
what they should expect in terms of challenges. We also work
with the industry through FIBA to make sure that they have
available training, to make sure that they have a forum for
discussion and to air their concerns, and to react with them,
and work with them to make sure we clear that up. So, we
provide a great deal of support not only in banking them, but
also helping them navigate with the changes.
Mr. Perlmutter. Thank you, sir. My time has expired. I
yield back to the Chair.
Chairwoman Waters. Thank you very much. The gentleman from
Texas, Mr. Williams, is now recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Madam Chairwoman, and
when we are talking about money laundering risks, we cannot
ignore the absolute disaster at the Southern border. Over 2
million people have been apprehended this fiscal year alone,
and this number doesn't include those who successfully evaded
Border Patrol agents. Even The New York Times admitted this
summer that drug smuggling revenues are estimated to be up $13
billion this year, up from only $500 million in 2018.
And open borders--I live in Texas, full disclosure, so I
have been down there a lot--are not only enriching
multinational criminal organizations, but the consequences are
also having a very real impact in our communities. The Texas
Department of Public Safety alone has seized more than 340
million lethal doses of fentanyl this year, and we all know
what a small dose of fentanyl can do to people. Additionally, a
record number of migrants have died along the Southern border
this year: 750. The Biden Administration must start thinking
about this seriously, and they are not doing it.
Ms. Shetret, from the financial services perspective, what
are some ways we could better track the proceeds from illicit
activities flowing to drug and human trafficking organizations?
Ms. Shetret. At the moment, financial institutions are able
to follow the basic policies and procedures in place that are
very manual and very labor-intensive. They are basically
looking for a needle in the haystack to try and identify those
particular proceeds within the banking system, and that is
cumbersome. If we start thinking about how we could implement
some innovative transaction monitoring, perhaps those that are
blockchain-based, what we might find is that there is a concept
of traceability that goes and provides visibility end to end.
Where has money been? Where is money going?
And so, when we think about innovating around the U.S.
digital dollar, whatever that might look like, and the
thoroughness of work that needs to go into developing that,
something that is blockchain-based will allow us to better
identify and track, stop, cease, confiscate, and hold illicit
proceeds so that we are able to prescreen rather than post-
investigate those kinds of instances.
Mr. Williams of Texas. Yes, a lot of things have been
happening after the fact. One way to make it easier would be to
secure the border and have fewer people in the business, right?
But if you go down there, it is just unbelievable what you are
seeing, the drug traffickers in there and so forth with these
young kids. But if we would get after it and really secure the
border, we would slow a lot of this down.
As we talk about de-risking, I feel like I need to share my
experience when I was targeted under Operation Choke Point. I
am probably the only person in this room who has been affected
by Operation Choke Point. I received a call several years ago
from my bank, and I was told that I had 24 hours to move my
money out of there because they no longer wanted to do business
with me. I am a car dealer, and they didn't want to do business
with me. This is a bank I was on the board of for 24 years,
with no problems, and they decided in 24 hours that they didn't
want my business because they no longer wanted to do business
with me. And I have been with this bank, as I said, for a long,
long time. To this day, they have never told me why.
I can't imagine what pressure the bank had to sit down in a
community where everybody knows everybody, would have had to
sit down and say, okay, who is going to call Roger and tell him
that? I can't imagine the pressure they had to stop doing
business with me. It must have been unbelievable. And this just
shows if this can happen to a sitting Member of Congress, on a
board of directors, or somebody who has been in the community
forever, it can happen to anyone, and it is a total crisis. And
I was lucky that I had a bank that would take my business,
which was a decent business, 89 years we have been in business,
but some people don't have that luxury. I know you have looked
at Operation Choke Point and its effects on the marketplace.
You talked a little bit about it just a minute ago.
Can you talk about the negative consequences of
indiscriminately de-risking entire industries? There were at
least 40 industries on a piece of paper somebody wrote down, so
we don't do business with them. We don't want to do business
with them. And these are family-owned businesses. This is
capital that people have put in, their own money, and to just
be wiped off the board is not the way that we are supposed to
do things here in America. Quickly, can you talk about some of
the consequences that you have seen in wiping out industries?
Ms. Shetret. I am sorry to hear of your personal experience
there. Thank you for sharing that. I think that the
disappearance of brick-and-mortar banks, the disappearance of
kind of that personal interaction is one consequence that we
are seeing, which emphasizes the need for digital Know Your
Customer (KYC) so that we understand who you are when you come
to bank. The loss of sectors means that we are having entire
swatches of business that are going where they can find banks.
If that is out of the United States, that is where they will
go. They will go find the first opportunity to properly bank
and conduct their business, which means that innovation is
leaving, which means that there is a movement. The borders are
becoming inconsequential if the provision of services is not
maintained here. There is a loss of intellectual property,
there is a loss of jobs, and we need to find a way to offer
banking services. There is a financial inclusion risk where
people who had access, ATM businesses and so on, are unable to
maintain bank accounts. That is challenging across-the-board,
and is actually inhibiting financial inclusion.
Mr. Williams of Texas. Okay. I yield my time back, Madam
Chairwoman.
Chairwoman Waters. Thank you. The gentleman from
California, Mr. Vargas, is now recognized for 5 minutes.
Mr. Vargas. Thank you, Madam Chairwoman. I appreciate very
much this hearing, and I learned quite a bit. In fact, most of
my questions have been answered. However, one of the questions
that I did have, my good friend, Mr. Hill from Arkansas, was
pursuing. Of course, he always has very insightful questions
and perspectives. He has great experience both in the private
sector and in government, and he asked, what happens when
American financial institutions leave? Who takes their place?
And I think he asked all of you to get back to him on that.
But if you could maybe speak a little bit about that now,
because my question was going to be, is it the Chinese banks
that have established themselves? And I understand that China
uses the U.S. disengagement as an opportunity to expand its
Belt and Road Initiative (BRI) in the Caribbean and challenge
U.S. diplomatic and economic regional influence. Recently,
seven Caribbean countries--Antigua-Barbuda, Barbados, Dominica,
Grenada, Guyana, Jamaica, and Trinidad and Tobago--have signed
BRI agreements with China. As a result, Chinese investments in
the Caribbean will total over $16 billion in infrastructure and
financial partnerships over the next 25 years.
According to the Caribbean Development Bank, Caribbean
countries have readily grasped Beijing's offer of easy
financing as traditional U.S. financing partners have pulled
out of the region. To all of the panelists, can you provide
some information about this? Because it does concern me.
Mr. Mowla. Thank you for the question. I think the United
States has the upper hand in the situation relative to Chinese
engagement in the Caribbean. China has a very one-dimensional
relationship with the Caribbean, usually economic. You
mentioned the Belt and Road Initiative. You mentioned
investments, potentially Chinese correspondent banks and
Chinese currency in the region. The U.S. has a more
multidimensional relationship. We think about politics. We
think about security. We think about diplomacy. These are all
things that the U.S. does well. You just have to look at the
U.S. Southern Command and the trade winds exercise in the
Caribbean as a prime example, and now what the U.S. needs to
compete is more on the economic side. Their economic linkages
do exist there, but they exist in trade. They exist in
investment appetite. Where it is severely lacking is in the
correspondent banking, in de-risking.
And as I said before, many of the U.S. economic policies
that have been recently announced specifically at the Summit of
the Americas, PACC 2030 being announced by Vice President
Harris, none of that will matter if correspondent banking is
not available to Caribbean countries, to people their
institutions.
Mr. Vargas. Anybody else?
Mr. Sharma. Thank you for the question. I will offer a
couple of thoughts on this as well. Part of the challenge here
is exacerbated by some of the thoughts conveyed earlier as
related either to reputational risks and/or sanctions policy by
the U.S. Government. If, for example, and I commend the great
work, Madam Chairwoman, on looking at revisions on how, for
example, the INCSR report works, because if banks look at an
official U.S. Government document that effectively labels a
region as high risk, U.S. institutions governed by U.S.
regulators will leave that region, leaving holes for both
investment, technological, technical assistance, and financial
services opportunities.
You rightly point out that one major government, China, has
very much increased its investments not only in the Caribbean,
but across the world, Latin America, Africa, et cetera, where
U.S. institutions, U.S. companies, have either been denied by
way of sanctions policy or by various U.S. Government and other
initiatives that have either labeled directly or indirectly
those countries, those jurisdictions as being categorically
higher risk.
And then, as my colleagues here explained, if an
institution regulated by U.S. regulators is now doing the cost-
benefit analysis of saying one is higher compliance risk, and,
therefore, I am going to be scrutinized more and potentially
subject to sanctions, low profits, or both, there is no
incentive to do business there. I would say that part of the
solution set is to create incentives by way of policy and
legislative measures that actually incentivize positive foreign
direct investment, including financial services access, into
one of the most vibrant financial and capital markets on the
planet, the United States.
And one of those ways, especially to the advent of
financial technology applications, web-based digital asset
applications, is one can now have the ability to put
individuals households, corporations, and nonprofits in those
regions into U.S.-based accounts, which would promote those
regions, invest in those regions, and reestablish less of an
enforcement-centric work of financial services and foreign
policy in a much more incentivized development orientation that
we really need to reorient our national and economic security
policy.
Mr. Vargas. Thank you, again. I found this hearing to be
very positive, and I appreciate the chairwoman. Thank you.
Chairwoman Waters. Thank you very much, Mr. Vargas. The
gentleman from Ohio, Mr. Gonzalez, is now recognized for 5
minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. Ms.
Shetret, I am going to start with you and pick up on the China
theme. We talked a little bit about this already. If you could,
I would like you to sort of outline how does China's Belt and
Road Initiative, from a financial standpoint and a sanctions
avoidance standpoint, works in Africa? And then from that
parallel, how do you see it potentially playing out in the
Caribbean?
Ms. Shetret. Thank you for the question. Since 2008, I have
been working in the Horn of Africa, and I have seen the rise of
the Chinese economic power. And I think I almost see it as the
Back to the Future situation of the Caribbean, so I would like
to describe it from that perspective.
The Chinese initiative at the moment is not time-bound.
There is patience in the making, and we have seen that unfold
over the years in Africa. What I have specifically noted is
that around 2013, when many of the major banks de-risked
businesses in the Horn of Africa and essentially left, what we
saw was that China stepped up in a variety of different ways.
For example, all Chinese-manufactured phones are hardwired with
wallets that are directly connected to potential Chinese
currencies and, essentially, bypassing settlement from the U.S.
dollar.
Mr. Gonzalez of Ohio. Essentially pulling them away from
the dollar-based system.
Ms. Shetret. Exactly. And what that means when it comes to
national security instruments such as sanctions and sanctions
implementation is that enforcing sanctions becomes that much
harder because the settlement is no longer against the U.S.
dollar. We have no visibility into those transactions. We shoot
ourselves in the foot in trying to follow the money and track
that process.
Mr. Gonzalez of Ohio. So, the de-risking has led to this
situation in Africa vis-a-vis China. Can you draw a parallel to
maybe some fears we would have from a de-risking in the
Caribbean standpoint? Do you think China would implement a
similar policy potentially and set up with essentially bases
around which to bypass the dollar-based system?
Ms. Shetret. Yes. The parallel is certainly drawn, and it
is certainly there. I would see a situation in which again, the
patience, the build-out of mega projects that are
infrastructure-based are accompanied by soft-tech solutions
from China that are meant to establish economic power, and that
is done across industries. In a situation in which there is
full de-risking across the Caribbean, there are still
businesses that need to operate tourism that needs to happen,
activities, financial accessibility globally that will need to
be ongoing. And whomever steps up to provide those services,
Chinese actors included, will win that business, and that is
the only option that would be left on the table.
Mr. Gonzalez of Ohio. Yes. The fear being what we have seen
happen in the Horn of Africa, we will see again in the
Caribbean, obviously.
Ms. Shetret. Yes.
Mr. Gonzalez of Ohio. What, in your eyes, is the best
response from a U.S. standpoint in terms of preventing that
sort of thing from happening?
Ms. Shetret. I would encourage us to expedite our
exploration of the U.S. digital dollar, understanding what it
could look like, assessing its opportunities and risks
globally. There needs to be a U.S. dollar dominance assessment
that encourages innovations.
Mr. Gonzalez of Ohio. I don't want to go too far on this.
Dollar dominance is, frankly, a priority of mine, and I think
of most members of this committee. I am not a CBDC digital
dollar guy, but I know it is being negotiated, and I think if
we are smart about articulating a stablecoin bill that mandates
U.S. dollar-based reserves and makes sure that the stablecoins
that are proliferating across the globe, the private
stablecoins are dollar-backed essentially, I think that
strengthens the dollar. I think that adds to our ability to
implement sanctions and from both national security and
innovation standpoints, puts the U.S. at the forefront of what
I believe is one of the most exciting technological advances of
my adult life. And I say that to encourage those negotiating on
the bill to continue on, be thoughtful, and solicit feedback
from those of us on the committee who spent a lot of time in
this area. And with that, I yield back.
Chairwoman Waters. Thank you so very much. And those who
are negotiating, I hear you loud and clear. Thank you very
much.
The gentlewoman from Ohio, Mrs. Beatty, who is also the
Chair of our Subcommittee on Diversity and Inclusion, is now
recognized for 5 minutes.
Mrs. Beatty. First of all, let me thank Chairwoman Waters
for holding this hearing today, and to all of our witnesses,
thank you for being here today. I think we have all learned a
lot. I am going to take about 20 seconds of my time for
personal privilege, to thank the chairwoman for allowing me to
join her at the chairwoman's CODEL to Barbados and to the
Bahamas earlier this year. I had the honor of meeting with
Prime Minister Mottley, who was on the panel before this one,
and I want to make sure the record indicates that I thank her
for her testimony and for participating in this hearing. Again,
this chairwoman is making history.
When we talk about de-risking and its impact not just on
the Caribbean, but the United States as well, certainly we have
heard and we all know that it is a critical issue, and I am
glad that we are calling attention to it. For all of those who
are watching us, many of our brothers and sisters from the
Caribbean, we hear you, and this is very real. I would like to
begin by touching on some of the topics that we discussed,
Chairwoman Waters, on your CODEL because many of the things we
are hearing here today from our witnesses, we also heard in our
roundtable.
Mr. Mowla, let me start with you. I know we have covered a
lot today, and some of the things I am going to ask about,
maybe several of you have touched on. But I want to talk about
how we can provide technical assistance for legal and
regulatory uniformity across the region or how we could support
a consortium, I think, pilot, maybe that goes across the
region. Do you have any thoughts or suggestions on anything we
could do that would be particularly effective with this issue?
Mr. Mowla. Thank you for the question. I think, as I stated
before, dialogue is very important. Being in the region to
CODEL was a prime example of doing so by having regulators,
banks in the region, meeting their different counterparts in
the Caribbean, and understanding that yes, this is about
business, but it is also about personal lives, about quality of
life, and having that personal relationship is very, very
important.
Technical assistance, not just being in the embassies in
the Caribbean, but across the Eastern Caribbean, only where
they usually are only worked out of because of Barbados being
in some of the smaller islands that are maybe not part of
CARICOM. Building a consortium, yes, making sure that policies
are harmonized. Harmonized, yes, but also contextualized to the
different circumstances of each Caribbean country, even
subregions as well.
The Atlantic Council is currently alongside some of our
partners here on the panel, looking to promote a U.S.-Caribbean
banking forum alongside CAB, alongside FIBA, alongside a lot of
other organizations that have been in the space for the past
decade. Ensuring that there is a space for dialogue, that there
is a way for U.S. regulators, U.S. legislators to go down to
the region on an annual basis to ensure that there is much more
harmony between what we are essentially talking about is just
access to the global financial system, access to be able to buy
food, access to be able to buy goods, access to affordable
healthcare, and to purchase healthcare outside of the Caribbean
region.
Mrs. Beatty. Okay. I want to thank you for that, and I
think the key word is, ``communicating.'' Look, this is not
new. I can remember coming on to the Financial Services
Committee, and meeting with the World Bank, and talking about
the same issues with remittances and how much money we could
withdraw from accounts to send back home. One of the things
that we are hearing is that there has been this whole list of
evaluating nations' risks deals dealing with money laundering
and the financing of territories, and these lists certainly
flag certain countries, many of which are the island nations in
the Caribbean, as high risk and in need of greater monitoring.
Can you tell me, Ms. Delmar, how we can come up with a
better system or any ideas you can give us to help us be able
to properly assess money laundering? How do we assess this and
the risks objectively and fairly, because I do believe that it
is unfair. I do believe that just as we deal with systemic
racism in our countries, there are things that happen that are
not just, and I know Chairwoman Waters has some legislation. I
only have a few seconds left, so you may have to respond in
writing to me.
Ms. Delmar. Okay. Thank you so much for the opportunity.
Certainly, I think that there is a place for the INCSR report.
I think, unfortunately, as it is being utilized now, it does
not allow us to get the full gist of what is happening in the
Caribbean, how we are actually fighting and combating the
scourge of anti-money laundering and terrorist financing. I
would be more than happy to submit to you a more formal
response in respect of time, but certainly I think that this
perhaps is an actual gateway to addressing and understanding a
little bit more of the specific nuances of each Caribbean
Island. Thank you.
Mrs. Beatty. Thank you, and thank you, Madam Chairwoman.
Chairwoman Waters. You are certainly welcome. Thank you.
The gentleman from Guam, Mr. San Nicolas, is now recognized for
5 minutes.
Mr. San Nicolas. Thank you very much, Madam Chairwoman, and
thank you so much for hosting this hearing, and thank you to
the panelists also for your excellent presentations. I wanted
to begin by making it very plain that Guam and the Territories
of the United States empathize with you. We get blacklisted
multiple times, usually by the European Union. It is very
frustrating, especially being a member on this committee and
having to contend with the European Union blacklisting us for
being a money laundering risk and a terrorism financing risk.
And our own banks in our Territories, including Guam, are FDIC-
insured, are regulated by the Treasury, and are regulated by
the Comptroller of the Currency. We have all the trappings of
U.S. options, and yet we suffer circumstances very similar to
yours. And so, I wanted to first begin by thanking Chairwoman
Waters for having this hearing to call attention to this issue,
and to also put on the record the circumstances of our U.S.
Territories that are very much the same as our brothers and
sisters in the Caribbean.
My question is pretty simple, and it is related to
something that we contend with on our end. If a U.S. Territory,
which is part of the U.S. financial system, is still suffering
the consequences of being blacklisted by these so-called
watchdog types of operations, how does the Caribbean propose to
be able to remedy their circumstances when Territories of the
United States themselves are suffering the same? I guess I will
pose it to Ms. Delmar.
Ms. Delmar. Certainly, there are challenges for us in
wrapping our minds around, how do we consistently get ourselves
off of these blacklists, as you are clearly experiencing as
well in Guam. We continue to ensure that we highlight the
positives that are being done in the Caribbean region from a
legislative perspective. We continue to be open to dialogue.
Opportunities like this are not missed by the Caribbean. But it
really boils down to whether or not, like we previously said,
there is adequate communication and understanding the nuances
that govern the various jurisdictions within the Caribbean.
We have islands now that are subject to U.S. law, where we
have Caribbean islands that are subject to European law just by
virtue of the fact that we were established in more instances
than not under the U.K. systems. So, I think it is something
that has to be dealt with as a common good, that has to be seen
as a common opportunity by the European watchdogs, as you put
it, as well as the U.S. Government, and the members of CARICOM,
and the wider Caribbean in ensuring that we are able to outline
succinctly the ways in which the Caribbean will be viewed. And
that comes across also in the written submission provided by
the Caribbean Association of Banks.
Mr. San Nicolas. Thank you for your response. Does anyone
else on the panel wish to add to the question or the
conversation?
Ms. Shetret. I would like to add in two quick points,
please. One is that the methodology that is used to assess a
particular jurisdiction being put onto a particular list can
absolutely be revisited. There is an opportunity to look at the
methodology not just from an anti-money laundering and
counterterrorism finance perspective, but to consider other
components, for example, the stage of development of that
country. Is there a famine in that country? What is the
financial inclusion methodology that could also be coupled into
that so that there is more of a holistic approach to
methodologies that put particular countries and jurisdictions
on lists?
The other piece is that there needs to be a strengthening
of a dispute resolution or an ombudsperson capability of
getting removed off of that list, so that once you are on the
list, it doesn't need to take years and years to get off the
list. What are some ways in which parliamentary action, swift
action could potentially get you an expedited removal from the
list to hopefully remediate any potential concerns,
reputational concerns that the jurisdiction is absorbing?
Mr. Shah. I would like to add, from the industry
perspective, that every time one of these lists gets updated
and we see some islands on there, some countries on there, we
ask the question, what is the consultative process and
communication for you to get on the list? Is somebody making
these decisions in a vacuum? Where is the communication? How do
you have a dialogue to verify that these countries need to be
on the list? That is one thing I would think from an industry
perspective makes sense, that before somebody gets on a list,
just like we are trying to do with the INCSR report, let's have
that dialogue. Let's have that confirmation and make sure that
the place on the list is deserved.
Mr. San Nicolas. My time has expired, Madam Chairwoman, but
those are all excellent points that I very much support. Thank
you very much for the opportunity.
Chairwoman Waters. Thank you very much. The gentlewoman
from North Carolina, Ms. Adams, is now recognized for 5
minutes.
Ms. Adams. Thank you, Madam Chairwoman, for hosting today's
hearing. Most of the correspondent banks are the largest
financial institutions, like your bank, Mr. Shah, Wells Fargo,
and others, including Citibank and Bank of America. There are
some small financial institutions offering this service, but it
is not too common. I would imagine that is because it is
expensive to maintain the overseas staff and branches, and
because the anti-money laundering and sanctions compliance is
expensive. Mr. Sharma, Mr. Shah, Ms. Shetret, is it a good idea
to facilitate the entry of more small and medium-sized
financial institutions into the correspondent banking services,
and if so, how do you think Congress can help facilitate that
entry? Mr. Sharma, do you want to go first?
Mr. Sharma. Yes, thank you very much for the question. I
absolutely agree that smaller and medium-sized institutions
should certainly be encouraged and facilitated, both by way of
regulatory as well as legislative enablements and
encouragements. In addition, as several of us talked about
earlier, the advent and innovation of non-bank financial
services, web-based applications that are actually providing
access also give a very good opportunity to provide direct
access for cross-border payments that are either remittance
bound, corporate payments, and trade finance. And some of these
innovations actually do not require the dependencies on global
clearing banks, or custodians, or correspondent banks at all.
And I think that part of the Stablecoin Act, part of the work
that this committee has been doing in looking at digital assets
and blockchain-enabled financial services can absolutely
stimulate those while also enabling and reinforcing U.S. dollar
strength, especially with respect to U.S. dollar-backed digital
currencies that also serve to enable immediately small and
medium-sized institutions in the United States.
And I would say finally that we already have a great
opportunity to do so by some of the comments that were made
earlier, the diaspora communities and those regions of the
country that have direct connections to Caribbean nations.
Those diaspora communities, be they small businesses or
households, can be enabled for direct connections for financial
access in ways that are enabled. And I would also look to--
Ms. Adams. I want to move on and give some time to Mr.
Shah.
Mr. Sharma. --CRA and other enablements that way, too.
Ms. Adams. Okay. Thank you. Mr. Shah?
Mr. Shah. When you look at the environment for
correspondent banking, usually the large banks have a
significant infrastructure and program to manage those risks.
It is always a good idea to have many providers of the service.
Small and medium-sized banks would also have to invest in a
similar infrastructure and program, and also be able to respond
to the regulators like a big bank would. From my perspective,
it is always a good idea to have more and more folks providing
the service as long as they can manage the risks appropriately.
Ms. Adams. Okay. Ms. Shetret?
Ms. Shetret. I agree with what has been said so far. Thank
you.
Ms. Adams. Okay. Thank you very much. Let me ask Mr.
Sharma, can you briefly discuss how new fintechs are playing a
role in the correspondent banking space in the Caribbean?
Mr. Sharma. Absolutely, and I want to commend a previous
panelist, the Prime Minister from Barbados. Barbados and many
other Caribbean nations are exploring the use of technology,
particularly blockchain technology, for purposes of asset
issuance--in other words, digital assets, including central
bank digital currencies. Secondly, the ability for peer-to-peer
payments directly that do not require a specific financial
intermediary that enables both the secure and equitable access
between counterparties, again, corporates and otherwise, and
that innovation is being seen in the Caribbean, in particular.
A previous question on how Caribbean nations can actually
prove what they are doing to provide security and risk should
also assess the level of inclusion opportunities that are
provided, including through the use of financial technology
applications, and that should be leveraged, that should be
assessed and considered when thinking about the security risk
management, AML, and other considerations that they are
actually undertaking because some of those innovations are, in
fact, providing inclusion and greater transparency in tandem.
Those are some examples.
Ms. Adams. Thank you, sir. I am out of time, Madam
Chairwoman, so I yield back.
Chairwoman Waters. Thank you so very much. The gentleman
from Wisconsin, Mr. Steil, is now recognized for 5 minutes.
Mr. Steil. Thank you very much, Madam Chairwoman. Ms.
Shetret, we have spoken today about the breakdown of
correspondent banking relationships and its impact on Latin
American and Caribbean countries, rightfully so, but these also
are one-sided. And I would love for you to shed a little light
about the other end, the correspondent banking relationships
with U.S. financial institutions that facilitate business with
American companies. And can you talk about how American
businesses and workers would be impacted when international
financial flows would be disrupted?
Ms. Shetret. I'm sorry, could you clarify the question?
Mr. Steil. We have a little bit of noise there with the
door, but we have talked about the impact that this would have
on Latin American and Caribbean nations. What is the impact
here in the United States of America, the other side of the
coin, if you will?
Ms. Shetret. Yes. One of the things that we are seeing here
is that there is a brain-drain innovation, and things are not
quite flourishing as much as we would like to see, because,
essentially, businesses are moving to where they can operate
openly and freely, and that is difficult to see. America is a
wonderful place to innovate, and we would like to keep that in
this country, so there is a concern around brain drain there.
The other piece is that the regulatory framework requires a
little bit more adjustment to be clear and to allow for
innovation to bloom here, and that is something I would point
out.
Mr. Steil. Thank you. Let me continue on with you. In your
opening statement, you spoke about how de-risking is, I think,
``perpetuating the challenge of regulatory arbitrage.'' Can you
explain how this dynamic plays out, and does aggressive de-
risking from the U.S. potentially yield global financial flows
to countries such as China, which may have very different
standards?
Ms. Shetret. The concern of regulatory arbitrage is real,
and what happens is that there is no standardization globally
that is being enforced. What we see is that one country
implements particular frameworks that then doesn't get
translated. This impacts the opportunity to investigate, to
share information. The criminal codes are different. The
legislation varies, and there is no common language. Sharing
information under very complicated memorandums of understanding
becomes an ordeal. It is not timely. This is particularly
difficult when we look at governments that are not necessarily
cooperative with international frameworks; we do require
information sharing because criminality does know no boundaries
or barriers, and we do need information sources around the
globe.
One of the things that we have been seeing is that the
ambiguity of the risk-based approach, national regulators are
coming out to put more detail behind that, but that is
happening at a different pace. It is happening at a different
speed and at a different level of detail across countries. So,
I do hope that the Financial Action Task Force and its
counterparts by region, for example, in the Caribbean, the
Caribbean Financial Action Task Force will spend more time kind
of putting those details behind expectations around how to
manage high-risk customers.
Mr. Steil. Thank you. Let me shift gears somewhat here with
you. When we look at ways to mitigate the impacts of broad-
based de-risking, I think it is important to consider the role
that digital currencies can play in bringing marginalized
regions safely back into the financial system, and this is
especially true for island nations where it is more challenging
to move physical currency. One concern that is often brought
up, I think incorrectly, is that cryptocurrency can't be part
of the solution in this, and some will make arguments that
crypto is a conduit for illegal activity. I disagree with that
premise. Do you think crypto, in particular, presents an
outside risk with respect to illicit finance?
Ms. Shetret. I disagree with that premise as well. Thank
you for sharing that. I think that criminals are opportunistic.
They will go wherever they can manage loopholes, wherever they
see gaps. And we see that they have been successfully utilizing
all sorts of instruments globally, including the traditional
financial sectors. And it is not a surprise that they are also
using crypto in the virtual asset space, non-fungible tokens as
well to act. But what we have seen by and large is that because
of the capability to trace illicit finance, we actually have
eyes and ears on the ground, so to speak, as to where illicit
financing is ongoing. The capabilities of prescreening are
really helping us understand where it is happening so we don't
cash out. There are opportunities with crypto specifically that
allow companies and centralized exchanges that are regulated to
stop transactions that they see are illegal and illicit.
Mr. Steil. I agree with you that crypto provides
opportunities to actually mitigate the impacts of de-risking.
Ms. Shetret. Absolutely.
Mr. Steil. Recognizing the time, Madam Chairwoman, I yield
back.
Chairwoman Waters. Thank you. The gentlewoman from
Massachusetts, Ms. Pressley, who is also the Vice Chair of our
Subcommittee on Consumer Protection and Financial Institutions,
is now recognized for 5 minutes.
Ms. Pressley. Thank you, Madam Chairwoman. As the
Representative of the third-largest Caribbean diaspora in the
United States, this hearing really resonates deeply with me. In
my district, the Massachusetts 7th, many of my constituents,
many of my neighbors send remittances to their families in
Haiti and throughout the Caribbean, which have really proven to
be a lifeline amidst the financial hardships of the pandemic
and, of course, global inflation as well. Remittances help
working-class families stay afloat when they need it the most
and have demonstratively reduced poverty in several countries.
Mr. Mowla, according to the Atlantic Council report, which
you co-authored, the Caribbean has seen a decline in
correspondent banking relationship since 2015, with the World
Bank citing the region as the most severely affected by this
phenomenon from a global perspective. As a result, remittances
to my constituents and to their families have become more
expensive, if not denied or delayed entirely. Can you please
expand upon how the decline in correspondent banking
relationships is harming working-class families in the region?
I just wanted to build upon that question from my colleague,
Congressman Meeks, earlier.
Mr. Mowla. Thank you for the question. Mostly, as I
mentioned to Congressman Meeks, remittances supplement working-
class populations' incomes. It is what people use, especially
when there is job loss and poverty. We saw this with the
pandemic, where 10 CARICOM countries have tourism-dependent
economies. During the pandemic, tourism shut down, which meant
that they were unable to go to work. Where were they able to
get an income supplement to buy food, to purchase healthcare,
to access education? It came from remittances. We saw this in
Haiti. We saw this in Jamaica.
Now, the pandemic was just 2, 3 years, still ongoing, but
we think about disasters and extreme weather events.
Remittances help. They help with taxes. They help across-the-
board. At the same time, remittances, when they are delayed,
when they are much more costly, it affects the people who are
in the U.S. itself. They are then going to be unable to send
remittances, and they themselves, especially people in
Massachusetts, New York, and Florida, who are already living in
sort of underserved communities, are going to have to pay more
and more each time.
Ms. Pressley. Thank you. Again, I would like to explore
this a bit more. For countries like Haiti and Jamaica, we know
that remittances accounted for 20 percent of their GDP in 2020
alone. So if the decline in correspondent banking relationships
continues, what will be the impact on these nations' economies?
Mr. Mowla. For countries like Jamaica, it is 20 percent of
the GDP, but then you have tourism, which is about 25 percent
of GDP, so almost half of their GDP has been wiped out during
the pandemic. And when there are limited remittances, what
happens is that when you have limited economic stability, it
can create political instability. When people don't have jobs,
when people are impoverished, they have to find other ways of
making money. It can lead to sort of petty crime. Women and
children are disproportionately affected. They can become
victims of human trafficking. It creates broad political
instability when you couple that with other factors such as
climate change, energy insecurity, and high food prices. This
creates a very worrisome picture in the Caribbean, especially
over the long term.
Ms. Pressley. Worrisome, devastating. And for a region
disproportionately vulnerable to climate disasters and
dependent on the tourism industry, finding a solution to this
de-risking problem is really critical. Mr. Mowla, in the report
you co-authored, you listed a number of possible solutions to
this problem. Specifically, you discussed categorizing
correspondent banking as critical market infrastructure for the
important role these relationships play in Caribbean economies.
Can you elaborate how this categorization would increase access
to financial services in the region?
Mr. Mowla. Yes. Both in the U.S. and globally, it would
identify correspondent banking as a global public good, as a
human right basically. As Prime Minister Mottley stated in the
previous panel, doing this will give added justification for
international financial institutions to incorporate
correspondent banking as critical market infrastructure in
development packages and development finance, and USAID
assistance after extreme weather events. It also helps to sort
of underscore the vulnerabilities that these countries are
facing, even high- and middle-income countries, allowing them
another justification to be able to access concessional
financing and blended finance as well.
Ms. Pressley. Thank you, and thank you to our distinguished
Chair for this historic hearing. This is certainly an issue of
critical economic, racial, and immigrant justice, and we can't
sit idly by.
Chairwoman Waters. Thank you. The gentlewoman's time has
expired. The gentlewoman from Texas, Ms. Garcia, who is also
the Vice Chair of our Subcommittee on Diversity and Inclusion,
is now recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Madam Chairwoman, and I
want to thank you for bringing this very important topic to the
table. I, too, was on the trip with you when we visited
Barbados and the Bahamas and started looking at this issue. It
is good to see the Prime Minister back. It is good to see so
many of you that we met during that trip, and we hope that we
can build on this and come to some solutions and some
legislation that would be of assistance. I wanted to start with
Mr. Sharma, Mr. Shah, and Ms. Shetret.
Most of the correspondent banks with the largest financial
institutions, like your bank, Mr. Shah, Wells Fargo--and I was
really pleased with the remarks you made earlier. And of
course, we also included Citibank and Bank of America. There
are some small financial institutions offering services, but it
is unusual, I would imagine, just because it is expensive to
maintain the overseas staff I think you all talked about during
the forum, and our branches because the anti-money laundering
and sanctions compliance is expensive. I think the Prime
Minister mentioned that. It is a good idea to facilitate the
entry of more small and medium-sized financial institutions
into correspondent banks. Do you think we need to do more of
that, or what specifically do you think, Mr. Shah, we need to
be doing to help to just get more banking in the Caribbean?
Mr. Shah. When you look at some of the reasons outlined for
banks leaving, there were largely three major reasons. The
first one was that the Caribbean was now recognized as a high-
risk jurisdiction for a multitude of reasons and maybe the
wrong perception. That was the catalyst that basically said, if
I am going to be in a high-risk jurisdiction, it is easier for
me to exit than to mitigate the risks, because operating in
that jurisdiction will require an immense amount of resources
and investment.
The second thing that a lot of the banks looked at is how
well did the region itself respond to new legislation and the
ability to mirror risk appetite with U.S. financial
institutions, so that was the second challenge. And when we
talk about encouraging banks to go back in there, there is this
notion and everybody talks about it, the risk-based approach.
So for a small or medium-sized bank, their view on a risk-based
approach for correspondent banking might be totally different
from a bank that has a program equipped to manage correspondent
banking risks. I think small banks going in there need to be
wary that they face the same challenges larger banks face.
Ms. Garcia of Texas. Right. As you may recall, during that
forum I mentioned that, to me, just listening to all of you, it
reminded me a lot of the challenges I have with bringing banks
into my district, which is 77-percent Latino, very heavy with
Spanish-language speakers, because banks are really not
interested in having branches in some parts of Houston. You
were sort of redlined. And similarly, it appears that you all
have been redlined from the U.S. banking system. To quote the
Prime Minister, I do see you, and I do hear you, and I feel
you, and I think we are committed to making some changes, and
again, to focus on how similar it is. We don't want to
duplicate in any changes any of the exclusionary regulations.
We need to be more and more about being inclusive. And I wanted
to ask Ms. Delmar, can you be more specific about how de-
risking practices impact remittance payments?
Ms. Delmar. Certainly. As far as the cost of remittances
goes, it is one of the major factors that impedes the ability
to send money back home to families. The other thing that we
need to be mindful of that is remittances form part of the core
of our existence in the Caribbean region. We have a number of
families whose children go to school in the United States, and
it is tantamount to their survival that we are able to transfer
money between the countries, between the jurisdictions. The
cost of remittances at this stage is highly prohibitive, and it
has a resultant impact on the overall operational expenses of
the Caribbean banks, the majority of which now are also
indigenous banks. So they are small banks, trying to find
innovative ways of ensuring that they are able to serve the
populations, and that is one of the critical areas. Of course,
I am happy to provide you a written report with a little bit
more in-depth responses, given the time constraints.
Ms. Garcia of Texas. Okay. Thank you. Madam Chairwoman, I
would like to insert in the record a study that was made by the
Texas Association of Businesses just this last year, ``Anti-
Money Laundering Regulation, Correspondent Banking, and the
Adverse Economic Impacts for the U.S.-Mexico Bilateral
Relationship,'' because, Madam Chairwoman, as you know, this is
not just the Caribbean, although that is our focus today. It
impacts all of the Western Hemisphere Latin American countries.
And I thank you again, Madam Chairwoman, for your leadership.
Chairwoman Waters. You are welcome.
Ms. Garcia of Texas. I will look forward to working with
you on your bill.
Chairwoman Waters. Thank you.
The gentleman from West Virginia, Mr. Mooney, is now
recognized for 5 minutes.
Mr. Mooney. Thank you, Madam Chairwoman. Fossil fuels are
essential for affordable energy here in the United States.
Under President Trump, the United States achieved energy
independence. According to the major accounting firm,
PricewaterhouseCoopers, the oil and natural gas industry
supports 9.8 million jobs, which is 5.6 percent of total U.S.
employment. Coal is a lifeline for West Virginia's economy. In
the State that I am blessed to represent, West Virginia, coal
supports over 29,000 jobs. West Virginia is the second-largest
coal producer in the nation, accounting for 13 percent of the
total U.S. coal production. Yet President Biden, as he did when
he was Vice President under President Obama, has made it his
mission to wage war on the fossil fuel industry. Some of his
more-objectionable nominees have openly called for banks to
deny financing to fossil fuel companies. De-risking is when
banks limit certain services or relationships with customers to
avoid regulatory concerns or problems, like money laundering.
Ms. Shetret, the current Administration has made its
opinions on the fossil fuel industry very clear. Given your
work on de-risking, especially in a post-Operation Choke Point
world, can you explain the effects of de-risking entire
industries and what impact that can have on the United States
and our competitiveness?
Ms. Shetret. Thank you for the question. To be clear,
sectoral de-risking is counter guidance and counter
international standards. That is absolutely not the goal of
regulation, and it is not the goal of the framework that is
being touted. In fact, it is quite the opposite of risk-based
approach, case-by-case analysis, and so in blanketing sectors,
we are actually shooting ourselves in the foot, so to speak.
And we spoke about the concept of re-risking where if we do
ultimately de-risk entire sectors, what happens is that risk
goes elsewhere. It is re-risked into potentially smaller
businesses or smaller financial institutions that can't manage
the compliance burdens that come with that, or it might go into
Chinese counterparts. Wherever it might go, the challenge is
that the risk does not disappear, and that is the bottom line,
and we run the risk of doing that by eliminating sectors
altogether.
Mr. Mooney. Thank you. The point I am making here is that
everything we are hearing from our witnesses today about the
effects of de-risking in the Caribbean can also be said about
this current Administration's approach towards fossil fuels.
For example, Ms. Delmar, you stated, ``De-risking activity
perpetuates the perception of the region as a high-risk
jurisdiction, which in turn has an adverse effect on investor
appetite.'' The same holds true in the United States. The Biden
Administration seeks to negatively affect investor appetite and
steer capital away from fossil fuel companies, while killing
millions of American jobs. It is critical that we do not
abandon the fossil fuel industry in this country. The so-called
Inflation Reduction Act raises taxes on West Virginia's coal
industry to provide subsidies for electric vehicles in big
cities. That is devastating to West Virginia workers, while
doing nothing to bring down energy costs. Thank you, Madam
Chairwoman, and I yield back.
Chairwoman Waters. Thank you. This is the Financial
Services Committee. The gentleman from Missouri, Mr. Cleaver,
who is also the Chair of our Subcommittee on Housing, Community
Development, and Insurance, is now recognized for 5 minutes on
financial services issues.
Mr. Cleaver. Thank you, Madam Chairwoman. Yes, that is what
I hoped we would talk about today, but there has been
digression. Ms. Delmar, would it be of any value if the U.S.
Department of the Treasury would work with the Caribbean
Financial Action Task Force to help build a greater technical
capacity?
Ms. Delmar. Thank you for the question. Certainly, we
believe that there is the opportunity to continue the dialogue
so that we ensure that, again, the policies are reflective of
what happens in the Caribbean islands and sets us apart from
perhaps the rigorous nuances associated with these policies and
legislations that are implemented in the United States?
One of the things that has to be considered in decision-
making is the size and scale of the Caribbean islands and our
ability to respond effectively and efficiently to the changes
that we seek on a constant, ongoing basis around policy change.
And so, yes, I believe it is something that we will be open to,
to working with you to ensure that there are policies that are
put in place that also take into consideration what makes the
Caribbean a third border to the U.S., small, interconnected
islands, that are, to a large extent, in more instances than
one, heavily reliant on the opportunities to trade with the
U.S. to remain viable vibrant economies.
Mr. Cleaver. Thank you. I was here with our children and
increasingly very few others in the aftermath of the 2008
economic collapse, but it was infinitely easier for us through
the Dodd-Frank Act to deal with our entire system because all
of the banks in the United States operate under the same laws
and requirements. And I am just wondering, and I have become a
fan of USAID--I have seen what they have done all around the
world, in Africa for example, where I have many relatives, at
least in Tanzania. And I am thinking that I don't know how
active the USAID is in the Caribbean. I think you probably
could answer that one first. Are you aware of USAID presence
in--
Mr. Mowla. Yes. They are extremely important to disaster
response, especially after hurricanes, as well as currently on
food security production.
Mr. Cleaver. Yes. They do a lot of that around the world.
The point I am trying to make is that USAID may be able to help
build the technical capacity in the Caribbean. When you list
the things that you need most desperately, I am assuming that
for us to get rid of this redlining, I can't think of another
blacklining, brownlining, whatever we want to call it. But it
would seem to me if you know where that sits on your priority
list, maybe that ought to be a request from a USAID, either
from the task force or from this committee, to develop a
program so that they can help build this technical capacity,
but do so with some kind of standardized compliance
requirements connected with Dodd-Frank.
Mr. Mowla. I would say--
Ms. Delmar. Sorry. From my perspective, the concern there
for me would be whether or not this would be considered
recognized by the regulators, the U.S. regulators specifically,
noting that while we may build technical, it has to be done in
conjunction with the U.S. regulators, of course, I would
imagine, to ensure that it is identified, it is recognized as
acceptable, so that we are re-onboarded in some instances and
are able to establish relationships. And I say that in the
context that the Caribbean has consistently, from 2015 up until
the present day, spent inordinate amounts of money trying to
figure out what are the challenges, specifically, why are we
consistently being faced with the issues of de-risking? And
today, we find that the conversation keeps changing in terms of
what should we do, and all of these things are capital-
intensive for us. But wouldn't it be better if we had
standardized compliance?
Mr. Cleaver. Yes, absolutely. And maybe that is one of the
requests we need to make to USAID. My time has run out. Thank
you, Madam Chairwoman.
Chairwoman Waters. You are welcome. The gentleman from
Massachusetts, Mr. Auchincloss, who is also the Vice Chair of
the committee, is now recognized for 5 minutes.
Mr. Auchincloss. Madam Chairwoman, I appreciate you hosting
this hearing. It has been educational for me. My questions are
for Ms. Shetret on stablecoins' usage for correspondent
banking. You said in page 4 of your written testimony, in a
section entitled, ``Innovation and Technological Solutions to
De-Risking,'' that Congress should explore legislation to
facilitate the acceleration of digital dollars. And you
described that CBDCs have a high adoption rate in the
Caribbean, with eight countries fully deploying one, and that
if the U.S. develops our own digital dollar, it should be
interoperable with other nations' CBDCs.
Now, I am a committed CBDC skeptic in terms of the United
States and the Federal Reserves, the statutory authority to do
it without getting Congress' approval and to the necessity of
it here in the United States when we have a flourishing
ecosystem of private stablecoin issuers. Can you describe
whether you see any particular need for it to be a CBDC that
would be interoperable with Caribbean CBDCs or whether if we
mandated interoperability for private stablecoin issuers here
in the United States, that would fulfill the same end state?
Ms. Shetret. Thank you for the question. I think it is the
latter piece that is important here. It is the interoperability
piece of integrating into economic blocks. I think the concern
whether it is a CBDC or a stablecoin is isolationism and
creating a closed loop in which there is no way to conduct
trade, to conduct transaction monitoring, and to be able to
have visibility into risk and properly risk manage. I think the
suggestion and the proposal is to essentially make sure that
whichever direction we take that interoperability with the
Caribbean and globally is considered front and center.
Mr. Auchincloss. Agreed. And adding to the comments from my
friend from Ohio, Mr. Gonzalez, the stablecoin has tremendous
potential to amplify the U.S. dollar as the world's reserve
currency, which has been a huge source of strength for us
really since World War II. I want to give you the floor for
maybe 30 seconds to a minute, as well as any of your fellow
witnesses, who want to jump in here. Let's imagine that we have
a scenario where stablecoins are interoperable and are properly
collateralized both in the Caribbean and the United States, how
might they assist with correspondent banking and/or the
facilitation of remittances?
Ms. Shetret. The first piece of stablecoins I would like to
emphasize is the power of financial inclusion. It enhances the
opportunity for accessibility to services that, at the moment,
the unbanked or the de-banked don't have access to, and that is
a huge win. We, with correspondent bank de-risking, have
created an exclusionary barrier that stablecoins will allow us
to overcome. I think the other piece that comes with that is
that, again, it allows us to do anti-money laundering,
counterterrorism finance, transaction monitoring, customer due
diligence, all of the things that we need to be doing more
efficiently, and more effectively. It is faster. It is
potentially cheaper if we leverage technology properly. I think
I will allow other colleagues to share their views, but that
would be my bottom line.
Mr. Sharma. Yes. I will just add a couple of things. I
agree entirely with what Ms. Shetret has just said. The
underlying technology that facilitates stablecoins provides
through its attributes the immutability of ledgers, and the
traceability of transactions in much of the sector. And I
believe that it is very additive to the broader financial
services economy insofar as both inclusion metrics for direct
access as well as to alleviate leakage, waste, fraud, and
abuse, because again, the underlying technology provides some
of those capabilities from an anti-money laundering perspective
as well.
Mr. Auchincloss. Mr. Shah and Ms. Delmar, do you want to
jump in about the ability of stablecoins or the underlying
technology to assist or augment correspondent banking?
Mr. Shah. When you look at some of the major risks, the
actual mode of transmission of transactions is not really the
number-one issue. Ultimate beneficial ownership, figuring out
whom you are doing business with, the type of transactions,
whom you bank, and whom you choose not to bank, those are some
of the things that still continue to remain challenges,
regardless of whether you use hard currency or digital
currency.
Ms. Delmar. And I am also inclined to agree with Mr. Shah's
perspective, that we would need to do a bit more investigation
into ensuring that if this becomes the option or an
opportunity, that it actually addresses the issues posed by
correspondent banking.
Mr. Auchincloss. It is not a solution in search of a
problem in other words, as I fear that the U.S. CBDC would be.
Thank you, and, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much. I am so pleased
that Prime Minister Mottley came today and she not only set the
stage for, but participated with us being able to move forward
with an illuminating discussion. I do believe that we face the
issues, that the discussion was well-thought-out and well-
presented by all of you on the second panel, and I am very
optimistic, as a matter of fact. I think I almost joined with
someone on the opposite side of the aisle in ways that I never
thought I would, to deal with this issue. And so, I want to
thank the second panel for being here, for the time that you
have spent, and to say absolutely, again, thank you for your
testimony today.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
The hearing is adjourned.
[Whereupon, at 1:38 p.m., the hearing was adjourned.]
A P P E N D I X
September 14, 2022
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