April 20, 2014

Amendments to the anti-money laundering act (AML)

 − effects on Guyana’s competitiveness if amendments not passed

Background

The amendment to the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Act is of national interest to Guyana. Besides the fact that Guyana is signatory to several treaties internationally that specify the need for such legislation and will have sanctions imposed for non-compliance with these obligations and requirements, if the amendments to this law are not passed by the stipulated deadline (May 27), Guyana will be labeled as ‘delinquent’ and will be subject to sanctions which will include restrictions on how we conduct business internationally.  Guyana will also be subject to heightened scrutiny of procedures involved in conducting business across our borders.

The Organisation of Economic Cooperation and Development is demanding that Guyana tightens its anti-money laundering act in order to comply with the recommendation of the Caribbean Financial Action Task Force (CFATF). The FATF recommendations are recognised as the global anti-money laundering counter-terrorist financing standard.

Benefits of AML/CFT legislation

If passed the AML/CFT amendments would give the Central Bank governor the right to maintain a list of terrorists, terrorist groups or organisations based on information being provided by the UN. The list would be circulated to financial institutions requesting information on whether they have funds in Guyana. The governor would determine whether to continue the transaction or business relationship or submit a “suspicious” transaction report immediately and cease all business transactions or business relationship with such a person or entity. The AG can then move to get the High Court to “freeze the funds of the designated entity.”

Guyana can benefit from a more robust AML/CFT regime as enhanced financial sector integrity and stability facilitates its integration into the global financial system. It also contributes to more transparent governance and effective fiscal administration.

The integrity of national financial systems is essential to financial sector and macroeconomic stability both on a national and international level.

Implication to Guyana’s competitiveness of not passing AML/CFT amendments

Money laundering and terrorist financing activities can undermine the soundness and stability of financial institutions and systems, discourage foreign investment, and distort international capital flows.

Failing to pass these amendments will affect Guyana’s competitiveness and prevent us from improving our position on the World Bank’s Doing Business Index. Presently, the government of Guyana is working assiduously to improve Guyana’s ranking on the DBI with the aim of moving from the present 114 (2013) to 80 by 2015. Under the Competitiveness Programme, 35 actions were identified as critical to achieving this goal and are being aggressively pursued. Specific effects on competitiveness include:

Trading Across Borders: The latest World Bank DBI Report stated that under the category Trading Across Borders Guyana’s ranking rose from 155 in 2007 to 84 in 2013.

Further improvements in this area will be stymied because local importers and exporters will be subject to more intense scrutiny when conducting business across borders.

Thus will affect the time and cost of doing business which will ultimately affect competitiveness at both the industry and national level.

Getting credit: Although Guyana’s ranking on the DBI under the category Getting Credit has been falling from 159 in 2007 to 167 in 2013, activities are presently ongoing to improving ranking in this area.

Guyana is in the process of establishing and operationalising a credit bureau.  The company has already been incorporated and will be issued a licence in the near future.

The relevant legislation for the efficient operation of this bureau is already in place.  Failure to have the AML/CFT amendments passed would likely see any progress in operationalising the credit bureau negated.  The cost of getting credit and on the whole all bank transactions – wire transfers, remittances – will become very expensive and this will pose a great deterrent to potential foreign investors.

Banking and financial services: Some foreign financial service firms have withdrawn from particular blacklisted jurisdictions rather than be tainted by association and suffer a decline in share prices.  Once particular jurisdictions are listed they may be placed as key terms on privately produced anti-money laundering software, designed to raise red flags and trigger enhanced scrutiny. Particularly with regards to wire transfer and correspondent banking, this means that transactions are slowed, and banks and other financial intermediaries have to spend resources applying extra scrutiny. Firms may simply refuse to process transactions from listed jurisdictions as such transactions become more trouble than they are worth.  And like many national lists, jurisdictions may not be removed from private lists even after being given a clean bill of health by the relevant international organisation. Finally, to the extent that correspondent banking relationships and wire transfers were attenuated or severed by risk-averse firms onshore, blacklisting threatened to wreck not just the offshore sector, but also every other internationally-connected sector as well, from tourism to remittances from citizens working abroad

Other areas affected

Investor perception: Foreign investors’ confidence will be negatively impacted as perceptions of non-transparency and corruption may be harboured by potential investors. This will constrict the flow of new investment, and precipitate capital flight, in turn causing a decline in government revenue and general economic activity.

Violation of corporate governance rules: western nations may be prohibited from doing business in Guyana as this may violate their corporate governance rules

CASE studies for reference

Kitts and Nevis: After being included on the FATF blacklist in June 2000, the government of St Kitts and Nevis denounced the initiative as a “sinister plot” which it would oppose (Johnson, 2001: 214).24. The same attitude was in evidence toward the OECD. In 2000 and 2001 crucial figures in government and the private sector calculated that they could afford to ride out the OECD and FATF campaigns, rather than suffer the direct and indirect costs of the reforms demanded (Author’s interview, government official, Basseterre, St Kitts and Nevis, January 2004). After seeing the economic damage caused by blacklisting, however, the reforms came to be judged as the cheaper option, and thus in 2002 St Kitts and Nevis backed down and complied with both initiatives.

Blacklisting by the FATF was followed by advisories, explicitly premised on this listing, issued by the United States, Canada and other OECD countries. Acting on the basis of the OECD list, some U.S. banks refused to recognise entities incorporated in the country. After eight months on the blacklists, new incorporations had fallen off by approximately half, and customers complained about the taint to their reputation as a result of dealing with a blacklisted jurisdiction.

Vanuatu: Resisting the OECD until May 2003 and the Cook Islands being listed by the FATF into early 2005.

Initial defiance based on a miscalculation of the costs of resistance compared with reform, was followed by economic damage resulting from the reputational costs of blacklisting. This in turn was followed by increasing pressure for compliance, culminating in the adoption of internationally-mandated reforms.

In explaining Vanuatu’s initial decision to oppose the OECD, a senior industry figure and member of the local regulatory body was explicit: “The government could not see how compliance could bring sufficient income to replace the loss which would occur in revenue and on-flow benefits” (Offshore Investment, July-August 2003). Between June 2000 and May 2003 this calculation changed as the economic damage caused by blacklisting became apparent.

Foreign banks cut off the National Bank of Vanuatu from international foreign exchange markets, and it had to buy U.S. dollars via local subsidiaries of Australian banks, imposing increased transaction fees and delays. Banks such as Barclays, HSBC and Chase Manhattan refused to process electronic transactions from Vanuatu, and most major American banks still only accept transactions from Vanuatu intermittently. (Ministry of Tourism Industry & Commerce)