Financial Crime World

Pacific Island Countries Face Restrictions in Remittance Services Amid De-Risking

As millions of Pa’anga flow into Pacific Island countries this week for various celebrations, remittance services are facing significant restrictions due to de-risking efforts.

High Costs of Remittances in the Pacific Region

The average cost of remittances in the Pacific region stands at 9.1%, higher than the global average of 6.25% and three times higher than the United Nations’ global target of 3%. The G20 cross-border payments roadmap requires any remittance corridor to be no more than 5%, a goal that is unlikely to be met in the Pacific.

Impact on Overseas Workers

Fees for overseas workers sending remittances to Pacific Island countries are among the highest in the world, with de-risking reducing competition in the market as money transfer operators (MTOs) are forced to exit or face significant hurdles.

Alternative Solutions

Despite efforts by Pacific Island countries to address de-risking, progress has been slow and ineffective, with constant changes to goalposts. Alternative solutions to correspondent banking relationships (CBRs) have not effectively resolved the challenges.

  • Currency platforms like Currency Cloud and Convera are available but come with high costs, including initial onboarding fees, maintenance fees, and annual subscriptions.
  • The Crowns Agent Bank has also expressed interest in providing CBRs, but at a cost.

Assessment of Money Laundering/Terrorist Financing/Pirate Financing Risk

Regional partners such as AUSTRAC have assessed that the level of money laundering/terrorist financing/pirate financing (ML/TF/PF) risk associated with remittances from Australia to Pacific Island countries is low. However, this finding has not deterred de-risking, which is driven by profitability considerations and perceived AML/CFT/CPF risks.

2023 Basel AML Index for the Pacific

The 2023 Basel AML Index for the Pacific shows a strong correlation between anti-money laundering (AML) measures and CBRs. There is also a strong correlation between GDP and robust CBRs.

Strengthening Regulatory Frameworks

Pacific Island countries have mainly focused on strengthening AML/CFT/CPF compliance of banks and MTOs to address de-risking. Tonga, for example, has imposed more stringent requirements on MTOs, mandating that their overseas agents be licensed by relevant authorities.

Concrete Solutions Needed

To address these challenges, concrete solutions are needed involving domestic authorities, regional organizations, international partners, and global banks. Development partners can help Pacific Island countries strengthen their regulatory frameworks, enhance institutional capacity, and implement best practices in CBR and AML/CFT/CPF compliance.

  • Raising the appetite for offering CBRs to local banks and MTOs is an important first step rather than the outright blanket closure of accounts.
  • Fostering a better understanding of Pacific Island countries’ compliance status and better utilization of national and sectoral AML/CFT/CPF assessments are essential.

Technology-Based Solutions

Technology-based solutions should aim at providing affordable remittance products, ensuring accessibility for smaller/local banks and MTOs, and compliance with AML/CFT/PF requirements. Banks can also explore opportunities to diversify revenue streams beyond traditional banking services by providing financial products tailored to the needs of customers in small markets.

Closer Engagements with International Partners

Closer engagements with relevant international banks and regulators from the US, Australia, and New Zealand are essential to ensure that developed solutions meet the specific needs of Pacific Island countries.

Call for Commitment

In this context, we call for commitment from international banks and developed country regulators to work with the Pacific on workable solutions. Sponsoring a third-party agent with correspondent banking capabilities presents a practical solution, involving forming partnerships, providing capacity-building support, and ensuring regulatory compliance and oversight.

South Pacific Governors Meeting

The South Pacific Governors Meeting emphasizes the urgency and importance of collaborative efforts to roll out timely and highly relevant responses to the Pacific islands.