Pacific hit as banks abandon remittance business

June 15, 2016

By Michael Field

AUCKLAND, New Zealand — International banks are shutting remittance accounts in the Pacific islands, in response to global financial regulation aimed at hampering money laundering. But the closures are hitting companies and families that rely on international money transfers.

Westpac Group, one of two Australian banks that until recently dominated banking in the Pacific, said in April that it would cut business ties with the government of Nauru, having ceased operations in five other Pacific island countries last year.

Australia and New Zealand Banking Group, the other Australian bank with major operations in the region, is also thought to be considering reducing its exposure — a move that would mark a significant backward step for the islands. ANZ did not respond to a request for comment.

Anti-money laundering laws have been tightened globally, in part to reduce the flow of funds to terrorist groups. As part of these efforts, banks have been reducing their exposure to potential risks — a procedure known as “de-risking.” In the Pacific this has included closing the accounts of money transfer operators (MTOs), the financial groups or middlemen through which remittances are sent.

For the islands, this is bad news. The World Bank has estimated that Pacific island countries receive annual remittances of around $470 million. The funds can be crucial — remittances account for up to 26% of gross domestic product in Tonga and 20% in Samoa, according to the bank. The Reserve Bank of New Zealand says that MTOs handle most of the transfers.

If MTOs were to be unable to operate, families could end up having to pay hundreds of dollars in transaction fees for bank transfers. Mark Flaming, regional project manager for the Pacific Financial Inclusion Programme, a U.N. administered nongovernmental organization based in Fiji, said it would cost Tongan families $950 a year in fees to receive remittances from banks. “This is really bad for [financial inclusion],” he said.

Pacific MTOs, which range from global groups such as Western Union to small village and island-based suppliers, handle most of the remittances from Australia, New Zealand and the U.S. to families in the Pacific.

Ranil Manohara Salgado, the International Monetary Fund’s chief of Asia and Pacific regional studies, said the organization was working with international bodies to create an environment where banks would not have to withdraw their services. “There are signs that some of the Western banks could withdraw, and that’s raising concerns,” he told Nikkei Asian Review.

One of the major surviving MTOs in New Zealand, locally owned KlickEx, said the industry had changed drastically because of de-risking. “Dozens of operators have closed,” KlickEx chairman Robert Bell said. “In Tonga, for example, there used to be one independent and locally-owned MTO for every 10,000 people or so. Now there are effectively none.”

Early in June, KlickEx learned that it had lost a High Court battle to stop Kiwibank, owned by the New Zealand government, from closing the last of its accounts. E-Trans, another MTO, has also lost its Kiwibank accounts, leaving Western Union as the only MTO still operating through Kiwibank.

In the High Court ruling, the judge noted the tension between the policy of regulating financial markets to limit the risks of serious crime and the financing of terrorism and the need for mechanisms to allow migrant workers to remit funds to their homes.

No other way

Reacting to the judgment, New Zealand Finance Minister Bill English told the finance website that there were no “radical solutions” that would keep MTOs in business. He said financial institutions had received strong warnings that they would be responsible for identifying the parties involved in money transfer transactions.

“So that’s creating a fairly careful, conservative environment, and it would be difficult to put in place legislation that pushed against that tide. We don’t really know the answer yet,” English said. He added that there was no scope for variation to international rules without “creating holes in the system.”

Migrant workers suffering problems from the reduction in the number of MTOs include hundreds of Filipinos involved in rebuilding Christchurch, New Zealand, in the wake of a 2010 earthquake, who are unable to send money home. “There has been very little focus on the human element,” said Jonathan Capal, of Developing Market Associates, which works with governments and companies to bring investment into emerging markets. 

Capal’s company manages a website called “Send Money Pacific,” funded by Australian and New Zealand aid, that helps people to use MTOs. He said de-risking is a fraught issue that is affecting global MTOs such as MoneyGram, as well as Western Union.

“The decision is often arbitrary,” Capal said. “For example, one of the largest banks in the region is closing all of [its] MTO bank accounts in New Zealand.” He added: “There is no terrorism in these countries; terrorism is not an issue.”

Flaming was also highly critical of de-risking in the Pacific. “The Australian banks have been here a long time and they have never wanted to be retail banks, it has all been about fees and those kind of operations,” he said.

Flaming said the pressure on the banks was coming from government financial intelligence units and not from corresponding banks. “No one wants to take on the anti-money laundering units.”

Furthermore, he said, de-risking was “throttling innovation” in the remittance business, including the transfer of money using mobile phones. “Pacific people are losing access to fast growing technologies as banks close down accounts with the money transfer operators … It is absolutely grim in the area of remittances now.”

Gloria Grandolini, the World Bank’s senior director of finance and markets global practice, said that closing MTOs could make the market murkier. “There is a real risk that turning away customers could actually reduce transparency in the system by forcing transactions through unregulated channels,” she said.

Last year, Westpac sold its banking operations in Samoa, Cook Islands, Solomon Islands, Vanuatu and Tonga to the Bank of South Pacific for 125 million Australian dollars ($91 million). Westpac retained its operations in Papua New Guinea and Fiji. Last December, it quit the remittance business.

David Tripe, a banking specialist at New Zealand’s Massey University said international banks had been drawn into Pacific business because margins were higher. But Pacific countries were also riskier than their developed neighbors, Australia and New Zealand, leaving them vulnerable in periods of risk aversion.

“There is some degree of political risk around potential government meddling, including issues around money laundering,” Tripe said, adding that running banks in the Pacific islands was relatively hard work for relatively little return, which was why Westpac had retained a presence in PNG and Fiji but sold its other interests.

Nikkei Asian Review deputy editor Zach Coleman in Hong Kong contributed to this report.

SOurce: Nikkei Asian Review