Unfriending

Blog

30 November 2018

Thanks to Facebook we all know what unfriending is. It is a way to ban a person from your (social) life. In terms of corporate governance, we call this ‘de-risking’. Businesses should work on risk management. That is why larger businesses have a separate risk committee as part of their supervisory board. The external supervisory authority (the central bank) even made this mandatory for financial institutions.

Risk management does by no means imply that you do not take any risks at all, as I have previously discussed in one of my columns. Taking (calculated) risks is expressly part of healthy business operations. Risk management implies that the already existing risks are defined and analyzed. Think about, inter alia, operational risks, financial risks and reputational risks. With every category it is indicated how much risk is acceptable to the business. This is called the ‘risk appetite’. This varies from business to business. To an airport an operational risk, e.g. a potential collision, is always completely unacceptable, but to a restaurant perhaps not so much. A bottle of wine that topples over is unfortunate but the mess can be cleaned up. De-risking radically gives short shrift to a certain risk, like with unfriending. The relationship with the client is broken off. A bank or an insurance corporation that wants to terminate its relationship with a customer often does this to avoid undesirable risks. The loss of the relationship (and hence the associated turnover) is taken for granted.

“Banks must be able to demonstrate that they are familiar with the background of their clients”

Nowadays de-risking also takes place at a higher level. Our international payment traffic runs, in a large number of instances, via so-called ‘correspondent banks’. We notice very little of this. However, on Curacao we are, as a country, fully dependent on these correspondent banks. If a business in Willemstad wants to transfer an amount in US$ to another business on Curacao or elsewhere in the world then the relevant payment is settled via a bank that is kept by the personal bank in the United States as correspondent bank. These kinds of banks also fulfill this role for other banks in the rest of the world. Of course they earn money with this. This is only a small amount per transaction, however due to the volumes it accumulates quickly.

This then makes it interesting from the perspective of risk management. Due to the quickly increased requirements imposed on financial institutions in the area of compliance, these institutions must be perfectly familiar with the background and solvency of their clients. As a consequence, money laundering and the funding of terrorist activities are prevented. Internationally this is priority number one. That is why banks must be able to demonstrate that they are familiar with the background of their clients. They do this by keeping an accurate and up to date customer dossier with all data. If the personal data of the client in these dossiers are not up to date then the banks can be reprimanded and fined by their central bank.

And now the true intentions are revealed: our correspondent banks in the United States do not deem countries like Curacao, Aruba and St. Maarten to be of commercial interest. On the other hand, there is the considerable (and proven) risk that many of our banks do not comply with the ever more stringent compliance requirements. You already understand the message: we are being de-risked. As a consequence, in the Caribbean and Suriname we are to an increasing degree unfriended by our correspondent banks in the United States. This is much more serious than you perhaps assume. Eventually this will put pressure on the pace and quality of our international payment traffic. The only solution is to give the highest priority to the observance of the compliance requirements. This is not always pleasant for consumers. But in the end it is in everybody’s interest. A good neighbor is worth more than a distant friend. Especially if he unfriended you.   

 

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Do you have a question about corporate governance? Please email it to governance@ekvandoorne.com and perhaps your question will be discussed in the next blogpost.