The Caribbean and money laundering: Waiting for the post-COVID-19 world

The Caribbean is often associated with money laundering and other forms of financial fraud. This association remains despite considerable efforts by Caribbean governments and professional organizations to enact anti-money laundering (AML) and counter-terrorism financing rules, as well as the establishment of regulations and collaboration with international and regional bodies. The past year has been no exception to this issue, as can be seen by the European Union’s blacklisting of a handful of Caribbean jurisdictions on account of either inadequate AML or tax transparency practices. The pejorative association has caused de-risking (the shutting down of correspondent bank relations between large banks and their Caribbean counterparts due to regulatory pressures over money laundering) and a significant decline in international financial services in the Caribbean. Moreover, COVID-19 has brought with it a number of other problems that have severely stretched government ALM and regulatory systems. Even the outbreak of the pandemic and resulting lockdowns have not led to a decline in criminal activity. Many of the same issues that Caribbean authorities faced in 2020 are likely to persist into 2021.

For much of the Caribbean, 2020 has been marked by pandemic-induced crises, a record hurricane season, and a brutal economic downturn. According to the International Monetary Fund’s October 2020 global assessment, the Caribbean economy—defined largely as the English-speaking countries, plus Suriname, Aruba, and Haiti—is expected to go from 0.7 percent real GDP growth in 2019 to -5.4 percent in 2020, with the heavily tourist-dependent Eastern Caribbean Currency Union countries looking at an economic contraction of -15.1 percent.

The massive and unexpected economic downturn related to COVID-19 has impacted how Caribbean governments deal with money laundering and other forms of financial fraud. Generally speaking, the pandemic has limited resources, as government spending has prioritized addressing COVID-19; challenged identity verification—key to Know Your Customer (KYC) programs—due to social distancing and a heavier reliance on technology; increased use of virtual assets in money laundering scams; increased use of pyramid schemes; and slowed legal actions. COVID-19 has also complicated the process of conducting National Risk Assessments, a key requirement in designing anti-money laundering and combating the financing of terrorism (CFT) programs.

The European Union also dealt another blow to the Caribbean. Europe has been wrestling with money laundering and financial fraud problems for years, but the size and scale of recent money laundering scandals from two member states—Estonia and Latvia—in addition to ongoing problems with Deutsche Bank have caused Brussels to push for tougher money laundering and tax transparency laws. Consequently, the EU has started blacklisting countries that fail to bring their money laundering and tax avoidance standards to Brussels’ level of financial cleanliness.

In May 2020, the EU announced that they intended to add the Bahamas, Barbados, and Jamaica to their money laundering blacklist unless these countries demonstrated a concerted effort to meet EU standards. After failing to achieve this, these countries were added to the EU’s blacklist in October 2020.

European Union High-Risk Countries Blacklist

Source: European Commission

In the Caribbean, the EU’s hardline approach was seen as unwarranted and hypocritical considering the track records of a number of European countries— including Cyprus, Estonia, and the Netherlands. Furthermore, the EU blacklist was viewed as more rigorous than the standards upheld by the Financial Action Task Force (FATF)—an intergovernmental organization established in 1989 on the initiative of the G7 countries to develop policies to combat money laundering. The organization’s mandate was later expanded to include terrorism financing.

One Caribbean economist, Marla Dukharan, argued that the EU was “weaponizing” rules on tax avoidance and money laundering, driven by a defense of “its high-tax, high-public-spending form of government from competition from countries that opt for less of each.” Dukharan also noted that the use of tax and anti-money laundering requirements “effectively discriminate[s] against smaller and mostly nonwhite countries to make it harder for them to compete economically.” Equally noticeable was the EU’s failure to include the United States, the United Kingdom and Russia on the list, all of which have their own sets of money laundering problems. This gave the appearance that the EU did not wish to expend the political capital to go after larger, more powerful countries.

The EU moved ahead in October 2020, blacklisting Anguilla and Barbados for failing to meet the EU tax transparency standards. Yet, the Cayman Islands were removed from the blacklist. Again, the EU has followed different standards from more widely accepted tax transparency standards, and demonstrated unequal treatment depending on the country in question. Particularly, the EU has demonstrated more leniency for member countries to the Organization for Economic Cooperation (OECD), a collection of 37 more advanced economies—including the United States, Japan, Germany, France, the United Kingdom, Canada, Italy, and South Korea—which functions as a think tank providing standards for money laundering and working with the FATF.  

The Blacklist of Non-Cooperative Jurisdictions for Tax Purposes Adopted by the European Union on October 6, 2020

• American Samoa
• Anguilla
• Barbados
• Fiji
• Guam
• Palau
• Panama
• Samoa
• Trinidad and Tobago
• US Virgin Islands
• Vanuatu
• Seychelles

The Caribbean’s response to this list was summarized by an opinion piece from The Barbados Advocate: “It still boggles the mind why the European Union decided to blacklist Barbados when the record will show that this country continues to play by the rules. Like the Government of Barbados and the other stakeholders we too are baffled at the development which threatens the viability of the island’s international business and financial services sector.”

Looking ahead to 2021, three major trends are likely to shape the money laundering/tax evasion landscape. First and foremost, pressure from external forces on the Caribbean to deal with money laundering and tax avoidance are likely to remain a central factor, with Citizenship-by-Investment (CBI) likely to be a key issue. COVID-19 has also pushed greater digitalization of finance and the use of virtual assets, raising new regulatory and enforcement challenges, and de-risking will remain an ongoing issue vis-à-vis Caribbean economic development.

Each of the above-mentioned trends represent risks to the Caribbean’s economic recovery. While 2020 has been dominated by the pandemic-related collapse of tourism, 2021 is expected to see a gradual recovery. The IMF is forecasting 3.9 percent real GDP expansion in 2021, with the countries of the Eastern Caribbean Currency Union bouncing back at 5.8 percent. However, the tighter regulatory pressure on multinational banks—mainly from North America and Europe—is likely to leave the Caribbean facing continued de-risking challenges.

Considering the current tough business environment for banks in advanced economies—historically low interest rates, sharp contractions in economic activity in 2020, and chances for a pickup in bankruptcies and defaults in early 2021—maintaining business links in smaller Caribbean markets works against a reversal of de-risking.

In the U.S., the International Consortium of Investigative Journalists’ (ICIJ) release of “The FinCen Files” is likely to keep pressure on U.S. banks. According to the massive collection of files that were leaked, multinational banks in the U.S. processed more than $2 trillion in payments that the ICIJ identified as “suspicious” between 1999 and 2017. The documents purport to identify bank clients in more than 170 countries that the banks suspected were participating in potentially illegal transactions.

The Caribbean’s concern is that the EU’s constantly-changing standards for money laundering and tax transparency make them difficult to successfully achieve and maintain. The region has also created its own initiatives, such as the Caribbean Financial Action Task Force (CFATF), which is working with the Inter-American Development Bank and other organizations to improve governance. The Caribbean Development Bank is also taking an active role in offering assistance, sponsoring conferences, and implementing a wide range of rules and regulations to meet external demands. The frustration of changing standards also applies to the U.S., especially in regard to disclosure laws pertaining to the ultimate beneficiaries of transactions.

One response to this problem was suggested by Dr. Jan Yves Remy and Alicia Nicholls of the Shridath Ramphal Centre for International Trade Law, Policy & Services at the University of the West Indies: the EU’s “arbitrary” action should be taken to the World Trade Organization where it would be treated as a trade issue seeking dispute settlement between CARICOM and the EU. Alternatively, it could be raised through the dispute resolution mechanisms under the free trade agreement signed between CARICOM and the Dominican Republic (CARIFORUM), on the one hand, and the EU, on the other hand, under the CARIFORUM-EU Economic Partnership (CARIFORUM-EU EPA).

A positive sign, and perhaps a response to Caribbean criticism, occurred on December 10, when the European Parliament passed a resolution to revise the process of listing or de-listing a jurisdiction—making the process more transparent, consistent, and impartial. The resolution implicitly recognizes some of the discriminatory elements of the process, and would also add criteria to ensure that more countries are considered tax havens while also implementing safeguards to prevent countries from being removed from the blacklist too quickly. Additionally, the resolution would require that EU member states also be vetted and subjected to the same process as non-EU jurisdictions.

Another potentially positive development could come from the United States. Section 5213—addressing financial services de-risking of the U.S. Anti-Money Laundering Act of 2020—is part of the National Defense Authorization Act that seeks to deal with the ultimate beneficiary of transactions. That bill is expected to become law despite opposition from President Donald Trump. The provisions require federal agencies “to work to address de-risking through the establishment of guidance enabling financial institutions to bank with nonprofit organizations and promoting focused and proportionate measures consistent with a risk-based approach.”

Looking ahead, the Caribbean faces a number of challenges on the AML and tax evasion fronts. At the same time, the playing field between Caribbean countries and advanced economies is not level; larger and more powerful countries and regional blocs usually have more clout and influence in setting and implementing the financial regulatory agenda. However, the Caribbean remains an important region on the global geopolitical map, a card that Caribbean countries should more deftly play in Washington and Brussels. If not, the pathway into a post-COVID-19 world could be a little more complicated, especially if external forces further disrupt the region’s financial sectors, diversification of trade (in services), and revenues.

Scott B. MacDonald is the Chief Economist for Smith’s Research & Gradings, Senior Associate at the Center for Strategic & International Studies and a Research Fellow at Global Americans. He is also a member of the Caribbean Policy Consortium and has done considerable work on governance, money laundering and electoral politics in the Caribbean, Latin America and Europe. He is currently working on a book on the new Cold War in the Caribbean.

Bruce Zagaris is a partner with the Washington, D.C. law firm of Berliner, Corcoran & Rowe LLP, founder and editor of the International Enforcement Law Reporter, and former lecturer at the Law Faculty, University of West Indies, Cave Hill, Barbados. He is widely published, with his most recent book, International Criminal Law: Cases and Materials (co-author with Jordan J. Paust et al, Carolina Academic Press, 4^th edition, 2013).