WorldCity Business Magazine

Trickle down

by Claudio Mendonca

For years, correspondent banks have been a key part of cross-border business. Through correspondent accounts, U.S. banks have provided foreign financial institutions a way to operate in the United States without the cost of opening their own bank branch.

The banking world sees correspondent banking as a way to give foreign banks – and foreign businesses – direct access to the U.S. financial system. But federal regulators see it another way: as a potential channel for money laundering and other illegal activity.

Worried about liability under the stringent bank regulations outlined in the USA Patriot Act and the Bank Secrecy Act, smaller U.S. financial institutions are ending their correspondent banking services. Big banks are still in the game, but they’ve become far more selective about the foreign banks they work with.

That cautiousness is leaving South Florida exporters and other trade-related companies in the lurch.

“It is a troubling situation because most trade with Latin America is financed through banks in Miami,” says banking specialist Clemente Vasquez-Bello, a partner with Gunster Yoakley law firm in Miami. “If this continues, it is going to make it difficult to trade – to the point of causing a negative impact on U.S. foreign trade.”

Impact of Patriot Act

Correspondent banking allows foreign financial institutions to conduct business in the United States and provide services for their customers in U.S. cities where they have no branch. Those services include foreign deposit accounts, wire transfers and check clearing.

After the Sept. 11, 2001 terrorist attacks, U.S. regulators toughened compliance laws to better control international transactions. But an unexpected effect of the regulations has been to discourage correspondent banking.

“It is a threat to trade in Miami and the U.S. in general,” says Marco Gomez, senior vice president of global treasury services at Bank of America. “Since the implementation of the Patriot Act, it is becoming more difficult to do business with the U.S. As a result, many exporters and importers in Latin America are choosing to do business with Europe or even deal directly with China.”

Miami is an important banking center and the Brickell Avenue banking district has more than 100 financial institutions – a concentration seen nowhere else in the United States outside of New York City.

But Gomez says fewer of those banks are now engaged in corresponding banking. And those left are working with a smaller number of clients abroad.

He says it is difficult to assess the impact on trade flows since the Patriot Act went into effect, but there is no doubt that trade is affected when mid-sized banks in Latin America have trouble accessing the U.S. financial system.

Alcides Avila, the head of the banking and finance group at law firm Holland & Knight, agrees that the decline of correspondent banking has had a dramatic impact.

“Smaller banks in the U.S. are finding that the costs of compliance in offering services – and the risks – are high,” says Avila. “It has been difficult for banks in Latin America.”

It is difficult to get quantitative information on correspondent banking services in South Florida. To determine how many banks have ended their correspondent banking operations – and the effect of those decisions – the Florida International Bankers Association (FIBA) and Federation of Latin American Banks (FELABAN) are conducting an economic impact study on the subject with Miami’s Washington Economics Group.

“If the financial system is the backbone of trade, we will wind up suffering from a financial osteoporosis,” says Gomez, who also chairs FIBA’s trade and finance committee.

Latin America is the most important trading region for South Florida, which sees the bulk of its imports and exports focused on that region. For the Miami Customs District, which encompasses airports and seaports in a swath running from Fort Pierce south to Key West, 42 of the top 100 trade partners in 2005 were located in Latin America and the Caribbean.

Furthermore, South Florida’s top six trade partners are from the region: Brazil, Venezuela, the Dominican Republic, Colombia, Costa Rica and Honduras.

China is the seventh most important trade partner.

The downturn in correspondent banking is so problematic for the banking community that an entire session at FIBA’s annual anti-money-laundering conference in February was dedicated to the topic.

Strategy for banks

At the event, Gunster Yoakley’s Vasquez-Bello told participants that foreign banks need to review their own practices and the requirements of their government, as well as to understand U.S. regulations.

“Foreign banks have to do their homework. They either get their house in order and meet requirements or go somewhere else,”Vasquez-Bello told the audience at the FIBA seminar. “If you’re going to be in the U.S.A., you better dance to our song.”

He urged foreign banks to study whether their countries’ regulations on money laundering are similar to those in the United States. In particular, he supports restrictions on the use of international money orders, which are an easy tool for money laundering.

Gomez, however, says the U.S. government and Congress have erred in treating correspondent banking as a high-risk activity.

“Risk is relatively low as long as you know who you are dealing with,” he says. “Ninety-nine percent of transactions are entirely legitimate.”

FIBA President Patricia Roth acknowledges that her organization needs to educate legislators and regulators in Washington.

Vasquez-Bello said he agreed, adding: “Congress needs to sit down and see the two sides of the equation.”