FINANCE Minister Dr Nigel Clarke has made it clear that the central bank will not be risking its correspondence banking relationships to facilitate transfers among foreign currency accounts locally and overseas.

He was responding to questions tabled by Opposition spokesman on finance, Fitz Jackson, at Tuesday’s meeting of the House of Representatives, questioning the current arrangement which requires an international currency transfer and incurs charges to both overseas and local banks.

Dr Clarke noted that the central bank has no means of independently verifying third-party clients in the local Real Time Gross Settlement (RTGS) system, and would therefore be assuming the anti-money laundering (AML) due diligence compliance responsibility for commercial bank clients. He said this would result in increased risk exposure for the Bank of Jamaica (BOJ).

“In addition, given the current climate where Jamaica has been blacklisted by the EU [European Union] and graylisted by FATF [Financial Action Task Force], resulting in increased and enhanced monitoring by all foreign jurisdictions including the US, the BOJ is not prepared at this time to undertake the risk of negatively impacting our critical correspondence banking relationships,” he told the House.

Furthermore, he argued that any such move could contribute to the promotion of “dollarisation” of the economy — aligning the Jamaican dollar with the United States dollar. At the same time, he advised that close to 44 per cent of the private sector’s banking assets were denominated in US currency at the end of January 2022, compared to 41.6 per cent for the similar period of 2021.

The finance minister explained that all foreign currency held by commercial banks, other than cash, are held overseas in their foreign correspondence banks, and as a result the settlement process for foreign currency transfers between local commercial banks involves their respective correspondence banks via the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network — a funds transfer system for international payments.

He noted that there is currently no payment and settlement infrastructure locally that allows for foreign currency transactions without using a funds transfer system for international payments.

“Transfers of foreign currency between accounts, whether between an account held locally to one held internationally or between two local foreign currency accounts, must be processed through the foreign correspondence bank,” Clarke stressed, noting that due to the cost of doing business, both the correspondence banks and the local banks levy fees for these transfers, which are passed on to customers.

Dr Clarke also explained that the BOJ facilitates the payment and settlement of domestic financial transactions, which are supported by the local settlement and payment infrastructure — RTGS and Automated Clearing House processes.

Participants in these settlement systems, which allow banks to manage daily financial and liquidity risks in the domestic financial market, include the Government, the central bank, deposit-taking institutions, commercial banks, merchant banks, building societies, the Accountant General’s Department, and the Jamaica Central Securities Depository.

The BOJ currently facilitates foreign currency transactions for itself, the Government, regional central banks and multilateral institutions through SWIFT — an arrangement in which its correspondence banking relationships play a critical role.

Dr Clarke said only RTGS participants can conduct the settlement of US-dollar transactions in the system on their own behalf, which requires the involvement of the banks’ foreign correspondents via the SWIFT network.

“Any third-party transaction through RTGS would have to be settled by SWIFT. Some third-party transactions would raise a red flag for our overseas correspondence bank in respect of AML CFT [combating the financing of terrorirsm] concerns. This is in the context that the BOJ has declared to its correspondence banks that its clients are the Government of Jamaica and regulated financial institutions, as the bank doesn’t offer retail relationships to the general public,” he stated.

Commercial banks report that the volume of personal and commercial transactions done in foreign currency accounted for three per cent of the total number of transactions done through the banking system from 2015-2021.