Tatafu Moeaki, Governor, National Reserve Bank of Tonga

Tonga’s Governor of the National Reserve Bank, Tatafu Moeaki Wednesday, addressed the High Level Event on Correspondent Banking Relationships in Sydney with a clear focus on the challenges faced by Pacific Island Countries (PICs) regarding de-risking.

Moeaki highlighted the significant decline in Correspondent Banking Relationships (CBRs) in the Pacific.

“The decline in CBRs in PICs is severe, with the lowest access globally. The number of CBRs has fallen by nearly 50 percent since 2011, with USD CBRs dropping by over 60 percent, almost twice the global decline.”

He emphasised the severe impact this has on the region, noting that PICs have the lowest access to CBRs globally.

“The negative impacts of declining CBRs add to global financial matters, originating from pressure to comply with AML/CFT/CPF standards and profitability concerns.

“The unique characteristics of our island countries make robust CBRs and AML/CFT/CPF frameworks essential for safeguarding our financial systems.

“The loss of USD CBRs disproportionately affects countries highly dependent on remittances, such as Tonga, where remittances account for up to 39 percent of GDP,” he said.

Moeaki attributed these challenges to global pressures related to Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) standards and profitability concerns have also emerged, exacerbating the situation for small island nations like Tonga.

“In Tonga we are amending our Money Laundering and Proceeds of Crime Act to include Countering Proliferation Financing. More recently, profitability concerns are stated, which makes so much sense, yet difficult to understand from a World Bank Development poverty reduction perspective.

“Changing the goal posts from time to time is business as usual, but they do expose small island’s isolation, our small market size, relative weak institutions and elevated high unit costs of operations, reducing profit margins, further highlighting the region’s challenges in conducting business with the rest of the world,” he said.

Moeaki stressed the difficulty in maintaining compliance due to limited resources and capacity constraints.

“Constant changing of the international regulatory goal posts, with accompanying increased in regulatory expectations have caused certain global banks to halt the provision of CBRs to financial institutions in jurisdictions that they deem to have limited AML/CFT/CPF capacities, and lower profitability due to higher due diligence costs,” he said.

He highlighted the high costs associated with remittance transfers, stating that despite efforts to reduce costs, the Pacific still faces challenges in meeting global targets.

The Governor pointed out the adverse effects of losing CBRs, particularly on remittances, which are crucial for many Pacific Island countries.

“Efforts to reduce remittance costs have faced challenges due to the decline in CBRs, with fees remaining relatively high in the Pacific.

“Alternative solutions to CBRs come with high costs, and profitability considerations drive de-risking decisions, overshadowing low ML/TF/PF risks.

“There’s a strong correlation between AML measures, GDP, and robust CBRs, indicating international banks’ waning interest in small markets like the Pacific.

“PICs have focused on strengthening AML/CFT/CPF compliance but face challenges due to limited resources and capacity constraints,” he explained.

Moeaki acknowledged the slow progress in addressing de-risking and the limited effectiveness of alternative solutions.

“Concrete solutions and concerted efforts involving domestic and international partners are crucial to address de-risking challenges.

“Raising the appetite for offering CBRs is vital, and fostering a better understanding of PICs’ compliance status is essential.

“Utilising technology and diversifying revenue streams beyond traditional banking services are viable options,” he said.

He called for concrete efforts involving domestic and international stakeholders to find sustainable solutions.

The Governor proposed fostering a better understanding of the compliance status of Pacific Island countries and advocated for risk-based approaches tailored to the realities of small island economies.

“Closer engagements with international banks and regulators are necessary to ensure solutions meet the specific needs of PICs,” he said.

He emphasised the importance of transparency and openness in considering such arrangements.

Moeaki outlined various initiatives undertaken by PICs, including regional action plans and engagements with international partners and build on the following:

a. The Pacific Islands Forum (PIF) and the World Bank Group have jointly developed a CBR Roadmap following discussions among Finance & Economic Ministers (FEMM) and endorsed by our Pacific Leaders in 2023. This Roadmap closely aligns with the objectives outlined in the Pacific Island Regional Initiative (PIRI) de-risking action plan.

b. Under the Alliance for Financial Inclusion (AFI) Pacific Island Regional Initiative (PIRI), Pacific central banks formulated a regional de-risking action plan in 2019. This plan involves engaging with stakeholders in the United States, Australia, and New Zealand, establishing a de-risking baseline to monitor progress over time, enhancing AML/CFT/CPF assessment capabilities, and implementing technology-based solutions.

•to highlight, the need to consider how to ensure transparent data is made available for monitoring of progress with our efforts to combat de-risking, particularly given that SWIFT has decided to no longer make its CBR data publicly available.

•Utilising technology to address the challenges faced by PICs, should aim at providing affordable remittance products, ensuring accessibility for smaller/local banks and MTOs, and compliance with AML/CFT/PFT requirements, is another viable option.

•Banks to explore opportunities to diversify revenue streams beyond traditional banking services which may include providing financial products tailored to needs of customers in small markets, such as microfinance solutions.

c.Closer engagements with relevant international banks and regulators from the U.S, Australia, and New Zealand, are essential to ensure that developed solutions meet the specific needs of Pacific Island countries. In this context, we call for commitment from international banks and developed country regulators to work with the Pacific on workable solutions.

He called for closer collaboration with relevant international banks and regulators to ensure that solutions meet the specific needs of Pacific Island countries.

“Sponsoring a third-party agent with correspondent banking capabilities presents a practical solution, but cost implications must be considered.

“This approach could involve forming partnerships, providing capacity-building support, and ensuring regulatory compliance and oversight, he said.

Moeaki also emphasised the urgency of collaborative efforts to address the challenges faced by Pacific Island countries in maintaining Correspondent Banking Relationships.

“We emphasise the urgency and importance of collaborative efforts to roll out timely responses to the Pacific islands”

He expressed gratitude for the support from the World Bank, the Governments of Australia, the United States, and other partners, in finding timely and relevant responses to these pressing issues.