Exodus of international banks from Pacific island nations threatens regional economic stability

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“Following the money” to disrupt criminal and terrorist networks is a central tenet of law enforcement and counterterrorism policymaking. For decades, this thinking has led to the development and worldwide implementation of ever more sophisticated anti-money laundering and counter-terrorist financing (AML/CTF) rules. There should be no doubt that AML/CFT controls, when effectively implemented, make it difficult for criminal and terrorist groups to conceal and use their illicit money.

The downside is that AML/CTF controls often unintentionally have a negative impact on the world’s least developed countries. The effects are particularly evident in the Pacific Islands, where a growing number of islanders are at risk of being alienated from financial services. Financial regulations such as AML/CTF controls can have the perverse and perverse effect of weakening the region’s global banking relationships at a macro level. During this process, financial transparency decreases and new vulnerabilities to money laundering and opportunities for criminal groups emerge.

In the Pacific, many countries are in the early stages of developing their financial infrastructure, and the continued development of these systems depends on assistance from the international private and public sectors.

Assistance from Australia and New Zealand, among others, has contributed to the development of the region’s regulatory and compliance regime. Organizations such as Australia’s AUSTRAC have played a role in developing the capabilities of financial intelligence units that are so critical to AML/CFT measures.

Relationships between international financial institutions (including Australian banks) and local and regional banks have played a critical role in the region’s financial infrastructure. These correspondent banking relationships enable international payments, currency trading, investments and remittances. Remittances from foreign workers are an important feature of Pacific island economies that ensure a balance of payments surplus in most host countries. In short, banking relationships with international financial institutions provide the connective tissue needed to support national banks in the Pacific.

The increasingly strict global AML/CTF regime and associated financial sanctions are forcing international banks to step up their monitoring of customers and transactions. These developments translate, of course, into positive results in terms of AML/CFT. However, there were other unintended effects.

The national banks of the Pacific, fearing to lose their international relations, implement these measures. However, while banking customers in Australia can generally respond quickly to banking ‘know your customer’ and due diligence requirements, this is often not possible in Pacific island countries. A central challenge has been the ability of Pacific Islanders to prove their identity. The region’s expansive monetary economy often makes navigating due diligence nearly impossible. Ultimately, the de-risking efforts of financial institutions are unintentionally weeding out or excluding Pacific Islanders from the region’s formal financial system. Thus, the political intention to increase the rate of financial inclusion produces the opposite: more exclusion.

Mitigating AML/CFT risks seems to be a clear business imperative, and financial institutions operating in the region are pulling out because they deemed the risks too great. Of Australia’s “big four” banks (ANZ, Commonwealth Bank of Australia, NAB and Westpac), ANZ is now the only financial institution to maintain a physical presence in many Pacific islands. The other Australian banks have chosen to reduce the risks associated with their financial footprint in the region. The net result of the policy – again – produces the inverse of its intention. A monopoly structure of the banking sector increases the cost to the consumer, potentially excluding Pacific Islanders from the ability to save and borrow to increase economic productivity.

The small market and its inherent regulatory and compliance risks, including foreign bribery, money laundering and weak regulatory structures and arrangements, make the region particularly unattractive to Australian financial institutions.

This exodus of major financial institutions from Pacific island nations has led to a growing reliance on new financial institutions that have a much less rigorous commitment to regulatory compliance, particularly with regard to anti-money laundering. money and foreign bribery. Some new institutions are said to be insufficiently cautious about customer due diligence regimes and policies. In the wake of the departure of the big banks, however, Pacific island nations have no choice but to use these institutions for personal and commercial banking.

This situation creates entirely new vulnerabilities, including opening the door to foreign interference and increasing the risk of serious organized crime in the Pacific. Increased reliance on foreign financial institutions, especially state-owned ones, could provide opportunities for passive and active economic influence across the Pacific. Of immediate concern are the economic and social impacts of an increasingly unregulated financial system, open to exploitation by local and transnational organized criminal groups. There is a real possibility that some Pacific countries will become global money laundering hotspots if further debanking of individuals and nations occurs.

Significant and collaborative policy work is needed to ensure that Pacific island nations have access to banking services while mitigating the threat of money laundering. The first step to solving this problem is to ensure that regulators and police in the region have access to financial intelligence and forensic capabilities. AUSTRAC, as part of Australia’s Pacific Intensification Policy, already provides analytical training, but this will not be enough.

In many Pacific countries, getting the tools and know-how to conduct forensic investigations is a tricky business. Here, policymakers can learn a lot from the Pacific Transnational Crime Network and its Pacific Transnational Crime Coordination Center (PTCCC). The coordination, intelligence sharing, collaboration and capacity development under the PTCCC have proven invaluable in the fight against transnational crime in the region.

While each Pacific nation has an obligation to establish its own financial intelligence unit, efforts to pool capabilities, such as forensic accounting, to support investigations could be the answer. A collaborative effort of like-minded countries, including Australia, New Zealand and the United States, could establish a mechanism to support the Pacific: perhaps a physical facility with international mentors and experts in material in partnership with Pacific Island staff in the Samoan capital Apia, such as the PTCCC.

Like the PTCCC, any such facility should be owned and operated by Pacific island states. This type of arrangement would go a long way in providing the kind of support needed. A collaborative center like this could provide the specialist investigations, compliance and policy support needed to reduce AML/CFT risks in the Pacific. The US-led Indo-Pacific Economic Framework for Prosperity signaled explicit action in the Pacific on capacity building and technical assistance, including collaborative efforts to strengthen tax and anti-corruption regimes. This could be another way for Australia and its allies to help develop programs that meet regional interests.

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