Addressing gaps in financial compliance, upgrading digital infrastructure, and improving regulatory capacity can help Pacific countries build economic resilience and protect vital financial links.
The Pacific region, with its diverse and vibrant cultures, faces unique financial challenges. Geographic isolation, small economies, and susceptibility to disaster risk compound these challenges.
One of the most pressing issues is maintaining correspondent banking relationships, which are crucial for international trade, remittances, capital flows, public sector financing, and overall economic stability.
As globalization increases, these financial relationships become even more essential for connecting the Pacific region with the global economy.
Losing these relationships could force countries to rely more on informal financial networks, threatening financial stability and economic growth. However, correspondent banking relationships are at risk due to high compliance costs, perceived risks, and the small market size of these nations.
The decline in correspondent banking relationships can result in higher transaction costs, increased use of risky fund transfer methods, and reduced access to international financial services, all of which can harm economic activities and livelihoods.
There are several critical areas where Pacific countries need to improve their technical compliance with the standards of the Financial Action Task Force, a global initiative to combat money laundering.
While some countries have made significant progress, others still face challenges in the effective implementation of the global standards, particularly in areas such as customer due diligence, targeted financial sanctions, and internal controls.
Many Pacific countries struggle to achieve substantial levels of effectiveness, especially in supervision and preventive measures. There is an urgent need to strengthen work in the areas of anti-money laundering, countering the financing of terrorism, and countering proliferation financing. This includes strategies, improvement of legal frameworks, investment in compliance infrastructure, and increasing resources for supervision.
Areas to focus on include:
Risk-Based National Strategies. Countries need to develop or update national risk assessments to support risk-based national anti-money laundering, countering the financing of terrorism, and counter proliferation financing strategies. These strategies should include clear objectives and measurable indicators for maintaining or enhancing correspondent banking relationships.
Strengthening Legal Frameworks and Compliance with International Standards. There is a need to revise laws and regulations to ensure full compliance with the global Financial Action Task Force recommendations most relevant to correspondent banking relationships.
This includes areas such as correspondent banking, targeted financial sanctions, and customer due diligence. By aligning their legal frameworks with international standards, Pacific countries can demonstrate regulatory harmonization, enhance their credibility, and attract more correspondent banking relationships. Including enhanced due diligence mechanisms for high-risk countries and individuals, especially in cross-border trade and remittances, could further safeguard financial integrity.
Increase Capacity and Awareness. Investing in digital public infrastructure supporting compliance and ongoing training and capacity-building for regulatory authorities and financial institutions is crucial. This can involve collaborating with international development partners, technical assistance, and training providers to supplement domestic resources.
By enhancing digital public infrastructure and the skills and knowledge of those responsible for implementing financial crime measures, Pacific countries can improve their overall compliance and effectiveness. Moreover, raising awareness among the private sector about the importance of compliance could help create a more robust financial ecosystem.
Public Communication Strategy. Transparency and communication are vital for maintaining correspondent banking relationships. Pacific countries need to publicly share information about their compliance measures, such as those related to correspondent banking, customer due diligence, and targeted financial sanctions.
By making this information accessible, global banks and their regulators can better assess the country’s adherence to international standards, reducing the risk of service withdrawals due to compliance concerns. Regular public reports and independent audits could further boost credibility and demonstrate a commitment to global standards.
Higher GDP per capita does not always correlate with better compliance. While economic resources can aid compliance, they are not the sole determinant. Political will and strong governance are key to achieving high levels of technical compliance and effectiveness, regardless of a country’s economic situation. The role of political stability and leadership in driving reforms is crucial, as a proactive approach to regulatory changes can often offset economic constraints.
Pacific countries using established foreign currencies generally perform better in terms of technical compliance and effectiveness. This is likely due to closer regulatory ties and additional financial resources from the issuing economies.
However, some domestic-currency Pacific countries also achieve reasonable compliance through strong political will and focused assistance. Currency usage is just one aspect of the broader financial ecosystem; finance sector openness and cross-border partnerships influence compliance.
Pacific countries heavily dependent on remittances often perform worse on the global standards related to correspondent banking. This highlights the need for these countries to prioritize compliance in areas that directly impact their access to international financial networks.
While remittances are a vital lifeline for many, the growth of digital payments and remittance channels presents opportunities to modernize compliance approaches, reducing reliance on traditional banking.
Strengthening financial compliance in the Pacific is essential for sustainable development, enabling countries to maintain global banking ties and access critical services like remittances, trade, and development finance. By addressing financial crime regulations, improving digital infrastructure, and embracing digital transformation, Pacific Island nations can build resilient, inclusive economies in an increasingly connected world.
Source: blogs.adb.org
