SURENDRA V THAPA

News releases regarding Citibank’s notification terminating correspondent banking relationships with Nepalese Banks including that with the Nepal Rastra Bank (NRB), framed this development mostly as a pure business decision. However, reading between the lines, Citibank terminated the correspondent banking relationships because for it, the revenue generated by its Nepalese correspondent banking business, paled in comparison to the actual compliance costs associated with ascertaining the legitimacy of the source and purpose of the US dollar transactions originating/settling in Nepal. In addition, the potential risk exposure to Citibank— primarily reputational risks and regulatory risks, such as possible penalties and other regulatory actions by the US regulators, should a transaction originating/settling in Nepal is found to be in violation of the Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) and/or sanctions regulations, far outweighed any current revenues and future growth prospects of Citibank’s Nepalese business.

While it is accurate to state broadly that processing transactions associated with Nepal became more expensive to Citi—because of increased compliance costs and the attendant increase in risks exposure, leading to reduced profit margins in such transactions, the benign representation/understanding of this development as just a business decision masks a deeper problem faced by Nepalese financial institutions, and in fact by the country as a whole. Despite the apparent chaotic noise of the Nepalese commercial enterprises, all signs seem to point to a future of increased commercial activity in Nepal due to factors such as its demographic trajectory (including a growing middle class), consumer desire for imported goods, ongoing and planned infrastructure projects, to name a few. Given this context, the “business decision” of Citibank appears counterintuitive until one takes a sober assessment of what actually is the regulatory environment for international banking and transactions these days. The money laundering and terrorism financing risks posed by transactions originating/settling in Nepal are germane to Nepal, which can be minimized only by designing and implementing an effective AML/CFT regime in Nepal.Fortunately for the Nepalese financial institutions at present, there appear to be other international partners willing to pick up where Citibank has left off. However, it would be foolhardy to entertain the notion that the Nepalese financial institutions can have the pick of the litter and frog-leap from one international bank to another if similar issues arise in the future.

A strategy opting for ad-hoc negotiations and bargaining, exemplified by the outcome of the Financial Action Task Force (FATF) plenary meeting in Paris in February 2012 where Nepal squeezed out a temporary reprieve from being blacklisted, will not be sufficient. As US dollar is the international reserve currency and as majority of the international transactions will still be conducted in US dollar for the foreseeable future, any country hoping to access and utilize the international banking system will have to comply with the rules governing the international banking system.

The constituents of the financial system in Nepal, including the legislators, regulators and the private sector, appear to be cognizant of the negative consequences should the country end up FATF-blacklisted. However, as evidenced by the Asia/Pacific Group on Money Laundering Mutual Evaluation Report on Nepal, compliance efforts by Nepal demonstrated a lack of proper understanding of the regulatory framework of the emerging international AML/CFT regulatory order and lack the operational capabilities.

Significant forces attributable to the constitution drafting and legislative negotiations have contributed to the blurry optics in this matter. However, the need for Nepal to continue accessing and using the international banking system will not change. Therefore, the need for an internationally compliant AML/CFT regime in Nepal, which is the prerequisite to effectively accessing the international banking system, also remains intact regardless of the outcome of the constitution drafting process or of the legislative deliberations. Well-functioning AML/CFT regulatory regimes bring greater transparency and integrity to the financial system. Further, such regulations also assist in managing effectively the different constituents of the financial system in a country like Nepal. All these factors only increase the confidence in the financial system in Nepal leading more people to confidently use formal channels to conduct transactions, while businesses and other enterprises will experience ease in accessing the international banking and financial systems and benefit further in the form of decreasing transaction costs. These beneficial dimensions should incentivize the various constituents of the Nepalese financial system to locate the required motivation and resources to formulate, design and implement a regulatory regime that inspires trust and confidence internationally and domestically.

source:Thapa, Surendra V(2012),"Nepalese financial system:Some recent developments", The Himalayan Times, 25 March 2012

Thapa is an attorney in the US.