## BELIZE'S CORRESPONDENT BANKING RELATIONSHIPS: RECOVERY AND THE WAY FORWARD

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---

### Introduction — scale and initial impacts
- Belize lost 83 percent of its correspondent banking relationships (CBRs) during 2013-16.
- Correspondent banks terminated over two-thirds of their CBR accounts with domestic banks from mid-2015 to early 2016.
- The Central Bank of Belize (CBB) lost two of its five CBRs.
- Out of the ten licensed banks, only one (Canadian) bank did not lose CBRs; the largest, indigenous bank lost all its CBRs.
- Offshore banking sector was particularly hit.
- McLean and others (2017) estimate potential output loss of about 1 to 4.5 percentage points of GDP, on average, from 2017 to 2021 under a low CBR-stress scenario.
- The cost to strengthen AML-CFT compliance since mid-2015 ranged from US$0.5 million to US$2 million.
- The total value of CBR transactions fell from 260 percent of GDP in 2015 to below 240 percent in 2016.
- Documented effects: cost pressures on banks; difficulties executing US dollar transactions including check-clearing; longer processing times and significant decline in value of wire transfers; income losses for exporters/importers; suspension of US dollar check clearing; shift in deposits away from domestic banks.

### Evolution of CBRs and payment flows
- System-level payment flows:
  - Total value of payment flows rose to US$4.5 billion in 2017 from US$4.3 billion in 2016.
  - Volume of total flows increased 29 percent (Y/Y) in 2017.
  - Inbound flows rose 10 percent (Y/Y) in 2017.
- Fees and maintenance:
  - Reported wire transfer fees at one domestic bank: about US$100 per transfer in 2015; US$300 per transfer in 2016; declined to around US$30-40 currently.
  - Maintenance fees with correspondent banks reportedly increased from about US$140,000 per year in 2016 to US$145,000 per year in 2017.
- Shift toward domestic banks:
  - Total value of payment flows handled by domestic banks increased to 40 percent of total flows by Q4 2017, from 30 percent in Q2 2015.
  - Domestic banks were able to maintain their Global Active Correspondent Banks (ACs) throughout 2015-2017.
  - For international banks, number of CBR accounts and Global ACs declined and value/volume transacted weakened; in late 2017 one international bank lost its largest CBR.
- Currency composition:
  - US dollar transactions accounted for 88 percent of total CBR flows in 2017, down from 95 percent in 2015.
  - Euro transactions rose to 10 percent of total flows in 2017 (more than threefold since 2015).
  - Since 2015, Global ACs providing US dollar and Euro settlement have declined and been replaced by smaller correspondent banks and nonbank payment service providers.

### Remaining risks to CBRs and potential economic effects
- Broad characterization:
  - CBR pressures appear to be easing but risks remain: CBR counterparty credit risk, withdrawal risk, and supervisory gaps that could re-intensify CBR pressures.
- CBR counterparty credit risk:
  - Number of non-Global ACs increased from 10 in Q2 2015 to 17 in Q4 2017; number of Global ACs declined from 5 to 2 in the same period.
  - Some replacement ACs have capital ratios below Belizean banks.
  - Nonbank payment service providers are not subject to prudential capital adequacy requirements, implying higher counterparty credit risk.
  - Services such as acceptance of US dollar checks remain restricted.
- Concentration and withdrawal risk:
  - Two non-Global ACs (NGAC1 and NGAC2) collectively accounted for around 50 percent of total USD settlement in 2017 after a U.S. global AC reduced services since 2016.
  - For Euro payments, NGAC2 and a nonbank payment service company (NGAC3) collectively accounted for around 90 percent of total settlement in 2017 after withdrawal of some global ACs in 2016.
  - Reliance on a small set of ACs raises operational and financial stability risks.
- Supervisory and ML/TF risks:
  - Belize’s implementation of the AML/CFT legal and regulatory framework needs enhancement.
  - The CBB lacks sound and effective systems and tools for conducting AML/CFT risk-based supervision of domestic and international banks.
  - The IFSC does not properly license, regulate and supervise non-bank financial institutions (“IFSC financial institutions”) and trust and company service providers (“TCSPs”).
  - Beneficial ownership information for legal persons and arrangements is not always available and up-to-date.
  - The Financial Intelligence Unit (FIU) is upgrading systems but overall effectiveness in producing financial intelligence can improve; system not yet resulting in effective prosecutions and convictions of money laundering and confiscation of illegal assets.
  - Belize will undergo an assessment by Fourth Round of the Caribbean Financial Action Task Force (CFATF) in 2022; weak assessment results could lead to listing and significant reputational risks.
- Offshore sector and cryptocurrencies:
  - IFSC offers, via a high number of registered agents and intermediaries abroad, establishment of complex entities without mechanisms to ensure beneficial ownership information is available, accessible, and timely.
  - The IFSC licenses financial institutions (for example, foreign exchange, insurance, and trading service providers) without requirement to have a presence in Belize; many lack physical presence in Belize.
  - Some IFSC entities might be offering cryptocurrency services; Belize does not provide regulations for cryptocurrency services and does not sufficiently supervise the sector.
  - Cryptocurrency features cited as vulnerabilities: pseudo-anonymity, potential for peer-to-peer transactions avoiding intermediaries, cross-border reach—making them susceptible to criminal misuse.
- Recent crime context:
  - Recent cases of drug trafficking activities in Belize raise risks that proceeds could be laundered through the banking sector.

### Supervision, IFSC changes, and sector composition
- IFSC measures and sector changes:
  - In 2017 the IFSC introduced higher annual license fees for some IFSC financial institutions.
  - Higher capital requirements (example: capital requirement for trading in securities increased from USD 100,000 to 500,000) reduced the number of some institutions while increasing overall capital requirements.
  - Total number of financial institutions decreased from 275 to 236.
  - Most financial institutions and TCSPs do not have a physical presence in Belize.
- System concentration and counterparty capital profiles:
  - Some newer correspondent providers are UK intermediaries between Belizean banks and a major US bank, providing AML assurance to major US banks, including onsite inspections.
  - Capital-to-asset ratios vary: some correspondent banks have capital ratios below Belizean banks; nonbank providers lack prudential capital requirements.

### Relation between CBR flows and economic activity (empirical evidence)
- Empirical setting:
  - Sample period: Q1 2013 to Q4 2017; sample: four domestic banks and four international banks; panel regression N=136.
  - Two models estimated:
    - Model 1: LOAN_{i,t} = β1 NPL Ratio_{i,t} + β2 INBOUND_{i,t} + μ_t + ν_i + ε_{i,t}
    - Model 2: LOAN_{i,t} = β1 NPL Ratio_{i,t} + β2 INBOUND_{i,t} + β3 INBOUND^2_{i,t} + μ_t + ν_i + ε_{i,t}
  - Definitions: LOAN_{i,t} = Total loan in each bank; NPL Ratio_{i,t} = The ratio of gross NPL to total loan in each bank; INBOUND_{i,t} = Value of inbound flow in each bank; INBOUND^2_{i,t} = Square of value of inbound flow in each bank; ν_i = Period specific effect; μ_t = Country specific effect.
- Estimation results (panel regression Q1 2013-Q4 2017; N=136):
  - Model 1 (Dependent Variable LOAN):
    - NPL Ratio: -0.9294** (standard error (0.4594))
    - INBOUND: 0.1746* (standard error (0.0959))
    - Constant: 225.47*** (standard error (11.8175))
    - Bank Fixed Effects: Significant***
    - Period Fixed Effects: Significant***
    - R^2: 0.9799
  - Model 2 (Dependent Variable LOAN):
    - NPL Ratio: -0.7750*** (standard error 0.335088)
    - INBOUND: 1.1660*** (standard error 0.139783)
    - INBOUND^2: -0.0026*** (standard error 0.000301)
    - Constant: 181.9103*** (standard error 11.25862)
    - Bank Fixed Effects: Significant***
    - Period Fixed Effects: Significant***
    - R^2: 0.9876
  - Note: Standard errors are clustered by bank and period. Sample consists of Atlantic Bank, Belize Bank, Heritage Bank, Scotia Bank, Choice Bank, Caye International, Atlantic International, and Heritage International Bank and Trust.
  - Significance codes: ***p<0.01; **p<0.05; *p<0.10
- Quantified implication:
  - A $1 increase in inbound flows is associated with $0.17 percentage point increase in bank loans, based on Model 1.
- Interpretation:
  - Higher inbound flows are positively associated with credit growth; INBOUND^2 negative coefficient indicates diminishing marginal returns and adverse effects of excessive inflows, but the negative coefficient is small relative to the positive coefficient on INBOUND.
  - Results support the view that recovery in CBRs in Belize will support credit growth and economic activity; conversely, pressure on CBRs is a growth risk.

### How Belize has responded to loss of CBRs (actions and progress)
- Legislative and regulatory changes:
  - Money Laundering and Terrorist (Prevention) Amendment Act 2013: provisions on customer due diligence, record keeping and retention, reporting and internal AML/CFT control systems.
  - Further amending statutes in 2014 and 2015.
  - July 2017: amendments to the International Business Corporations (IBCs) Act prohibiting issuance of bearer shares in an IBC and providing for a Register of Directors and a Register of Beneficial Owners.
  - August 2017: Money Laundering and Terrorism (Prevention) Act lowered requirements for proceeds of crime from a qualified ‘serious crime’ to an ‘offence’ against any Belizean or foreign criminal law; required termination of relationships when ongoing monitoring is not possible.
- National Risk Assessment (NRA):
  - An ML/TF NRA is under way (first in Belize), led by the National Anti–Money Laundering Committee and coordinated by the FIU.
  - Support from IADB and World Bank, with an expert from FIU of Trinidad and Tobago for 6 months; technical support from US Treasury to improve FIU capacity.
  - NRA report—part of preparation for the CFATF Fourth Round Mutual Evaluation—is expected to be completed in early 2019.
- Supervision and inspections:
  - IFSC internal restructuring and some inspections of financial institutions and TCSPs, but licensing, AML/CFT supervision, and enforcement remain weak.
  - Some financial institutions could be providing crypto currency services abroad, increasing sector risk.
  - CBB conducted AML/CFT inspections of one domestic bank, three international banks, and two credit unions in 2018; compliance with preventive measures is slightly improving but not yet effective.

### Policy implications and prioritized actions to support CBR recovery
- Overarching approach:
  - Strengthen AML/CFT framework and prudential and AML/CFT supervision of banks to reduce transactions-related risks and the cost of due diligence for correspondent banks.
  - Share NRA results with private sector; ensure accurate and up-to-date beneficial ownership (BO) information for entities established in Belize.
  - Enhance communication by authorities and Belizean banks; improve reporting of suspicious transactions to the FIU.
- IFSC and offshore sector measures:
  - Stricter licensing and proper oversight of the offshore sector; conduct a cost-benefit analysis of the sector.
  - IFSC financial institutions and TCSPs should be subject to proper licensing requirements, including physical presence in Belize.
  - Higher licensing and capital requirements for IFSC licensed entities and higher fees for registration of legal persons and arrangements to increase IFSC revenue, independence, and supervisory capacity.
  - Consider introducing taxation for registered entities.
  - Ensure effective implementation of dissuasive and proportionate sanctions; withdraw licenses for IFSC entities providing high-risk services (e.g., crypto-currency services) if IFSC lacks capacity to manage associated risks.
- Beneficial ownership transparency:
  - Expedite amendment of necessary legislation and effectively implement them to allow timely access without impediments to adequate, accurate, and current information on beneficial ownership of all types of entities.
  - Amend LLC, trust and non-profit organization acts to align with international standards.
  - Ensure legal persons and arrangements are registered through registered agents and trust providers licensed in Belize; effectively monitor these agents to ensure client and BO identification and ongoing CDD to keep BO information up-to-date.
  - Impose dissuasive sanctions on registered agents and trust providers in breach of the upgraded legal framework.
  - CBB should focus supervision on banks’ verification of BO information and proper CDD; more rigorous CDD by banks to ensure availability of BO information that can be shared with correspondent banks in a timely manner.
  - Consider establishing a register for beneficial ownership information of legal persons and arrangements that contain accurate information; operationalizing a public BO register would allow correspondent banks to access BO information when needed and reduce their cost of compliance.
- CBB AML/CFT supervision enhancements:
  - Continue building capacity to implement a risk-based approach to AML/CFT supervision and impose strict and prompt sanctions when necessary.
  - Offsite monitoring and onsite inspections should ensure banks properly identify and verify clients and have BO information available, especially for IFSC offshore sector entities.
  - Where Belizean banks lack capacity to manage risks associated with certain high-risk offshore businesses (including crypto-currency services), consider terminating such business applying a risk-based approach to maintain CBRs.
- Private sector engagement and capacity building:
  - Communicate with and educate the private sector on the importance of transparency and CBR-related disclosures to sustain recovery of CBRs; address SME unwillingness to disclose information that satisfies CBR requirements.
  - Enhance Belizean banks’ capacity to manage risks; foster enhanced communication between correspondent banks and Belizean banks to clarify global banks’ risk tolerance policies and reasons for terminating CBRs.
  - Encourage correspondent banks to issue policy statements on high-risk transactions and provide technical support where necessary.
  - Belizean banks encouraged to take advantage of planned capacity building by the Caribbean Development Bank (CDB) to address increasing requirements for customer due diligence and transaction monitoring.
- Technology and long-term considerations:
  - Consider technological innovations (blockchain and Fintech) as longer-term alternatives to CBRs for cross-border transactions; bring these technologies under the regulatory and supervisory perimeter of the authorities.

### IFSC TCSPs, sector composition, and beneficial ownership weaknesses
- IFSC TCSP activities and weaknesses:
  - IFSC TCSPs establish a relatively high number of legal persons and arrangements without holding their beneficial ownership information to prevent their misuse.
  - Data show a decrease of companies, foundations and trusts registered in the last two years; possible drivers include:
    - Recent legislative amendments to the IBC Act (prohibition of bearer shares; requirement for registered agents to hold beneficial ownership information on their premises).
    - Reluctance of foreign banks to open accounts for Belizean companies.
  - TCSPs involved in the creation of companies, foundations, and trusts are not properly monitored by the IFSC to ensure that they hold the beneficial owners’ information they are involved in creating.

- IFSC capital requirements and license statistics (as of August 2018):
  - Registered Agents:
    - Number of Licenses 2016: 99; 2017: 91; Mid 2018: 85.
    - Capital Requirement ('000): 2016: 5; 2017: 5; Mid 2018: 10.
    - Amount Deposited ('000): 2016: 495; 2017: 455; August 2018: 850.
  - Trust Service:
    - Number of Licenses 2016: 92; 2017: 47; Mid 2018: 45.
    - Capital Requirement ('000): 2016: 10; 2017: 10; Mid 2018: 15.
    - Amount Deposited ('000): 2016: 920; 2017: 470; August 2018: 675.
  - Trading in Securities:
    - Number of Licenses 2016: 108; 2017: 92; Mid 2018: 65.
    - Capital Requirement ('000): 2016: 100; 2017: 100; Mid 2018: 500.
    - Amount Deposited ('000): 2016: 10,800; 2017: 9,200; August 2018: 32,500.
  - Trading in Foreign Exchange:
    - Number of Licenses 2016: 8; 2017: 7; Mid 2018: 7.
    - Capital Requirement ('000): 2016: 100; 2017: 100; Mid 2018: 500.
    - Amount Deposited ('000): 2016: 800; 2017: 700; August 2018: 3,500.
  - Total Amount Deposited ('000): 2016: 14,615; 2017: 12,125; August 2018: 39,200.
  - Source: Belize International Financial Services Commission.

- Number of legal persons and arrangements registered in the offshore sector:
  - International Business Companies:
    - Incorporations: 2015: 7,747; 2016: 5,970; 2017: 4,543; End August, 2018: 2,609.
    - Total: 2015: 63,478; 2016: 55,867; 2017: 49,157; End August, 2018: 42,392.
  - International Limited Liability Companies:
    - Incorporations: 2015: 80; 2016: 64; 2017: 86; End August, 2018: 86.
    - Total: 2015: 272; 2016: 316; 2017: 324; End August, 2018: 234.
  - International Foundations:
    - Registrations: 2015: 47; 2016: 23; 2017: 30; End August, 2018: 14.
    - Total: 2015: 197; 2016: 220; 2017: 233; End August, 2018: 235.
  - Trusts:
    - Registrations: 2015: 152; 2016: 129; 2017: 130; End August, 2018: 74.
    - Total: 2015: 1,829; 2016: 1,712; 2017: 1,833; End August, 2018: 2,064 (note: 157 trusts were registered before 2018 but not included in the register).
  - Source: Belize International Financial Services Commission.

### Prioritized AML/CFT reform actions (selected)
- Assessing and understanding ML/TF risks:
  - i. Improve the assessment and understanding of ML/TF risks, particularly those related to the offshore sector (for example, IFSC licensed entities, cryptocurrency, legal persons and arrangements) — Medium Term.
  - ii. Communicate and share the key results of the NRA with relevant stakeholders and the private sector — Medium Term.
- IFSC Supervision of licensed financial institutions and TCSPs:
  - i. Require physical presence, and enhance licensing controls (fit and proper tests) — Short term.
  - ii. Improve IFSC capacity to properly supervise entities; monitoring of TCSPs should focus on availability and timely access to beneficial ownership information — Short term.
  - iii. Ensure effective implementation of a broad range of sanctions against IFSC licensed entities that are dissuasive and proportionate — Short term.
- CBB supervision of banks:
  - i. Improve CBB identification and understanding of ML/TF risks and develop risk-based approach tools for offsite and onsite supervision (focus on international banks, BO, and high-risk requirements) — Medium term.
  - ii. Ensure effective implementation of a broad range of sanctions against banks that are dissuasive and proportionate — Medium term.
- Entity transparency and availability of beneficial ownership information:
  - i. Amend the LLC, foundation, and trust Acts to require BO info — Short term.
  - ii. Create an open register for beneficial ownership information — Long term.
  - iii. Ensure robust implementation of sanctions against persons who do not comply with (basic and BO) information requirements — Medium term.

*International Monetary Fund — Belize: Selected Issues (Chapter 17) and BELIZE'S CORRESPONDENT BANKING RELATIONSHIPS: RECOVERY AND THE WAY FORWARD (October 18, 2018).*

### References ______________________________________________________________________________ 18

### BELIZE'S CORRESPONDENT BANKING RELATIONSHIPS: RECOVERY AND THE WAY FORWARD

### Introduction — scale and initial impacts
- Belize lost 83 percent of its correspondent banking relationships (CBRs) during 2013-16.
- Correspondent banks terminated over two-thirds of their CBR accounts with domestic banks from mid-2015 to early 2016.
- The Central Bank of Belize (CBB) lost two of its five CBRs.
- Out of the ten licensed banks, only one (Canadian) bank did not lose CBRs; the largest, indigenous bank lost all its CBRs.
- Offshore banking sector was particularly hit.
- McLean and others (2017) estimate potential output loss of about 1 to 4.5 percentage points of GDP, on average, from 2017 to 2021 under a low CBR-stress scenario.
- The cost to strengthen AML-CFT compliance since mid-2015 ranged from US$0.5 million to US$2 million.
- The total value of CBR transactions fell from 260 percent of GDP in 2015 to below 240 percent in 2016.
- Effects documented: cost pressures on banks; difficulties executing US dollar transactions including check-clearing; longer processing times and significant decline in value of wire transfers; income losses for exporters/importers; suspension of US dollar check clearing; shift in deposits away from domestic banks.

### How have CBRs and payment flows evolved in recent years?
- System-level payment flows:
  - Total value of payment flows rose to US$4.5 billion in 2017 from US$4.3 billion in 2016.
  - Volume of total flows increased 29 percent (Y/Y) in 2017.
  - Inbound flows rose 10 percent (Y/Y) in 2017.
- Fees and maintenance:
  - Reported wire transfer fees at one domestic bank: about US$100 per transfer in 2015; US$300 per transfer in 2016; declined to around US$30-40 currently.
  - Maintenance fees with correspondent banks reportedly increased from about US$140,000 per year in 2016 to US$145,000 per year in 2017.
- Shift toward domestic banks:
  - Total value of payment flows handled by domestic banks increased to 40 percent of total flows by Q4 2017, from 30 percent in Q2 2015.
  - Domestic banks were able to maintain their Global Active Correspondent Banks (ACs) throughout 2015-2017.
  - For international banks, number of CBR accounts and Global ACs declined and value/volume transacted weakened; in late 2017 one international bank lost its largest CBR.
- Currency composition:
  - US dollar transactions accounted for 88 percent of total CBR flows in 2017, down from 95 percent in 2015.
  - Euro transactions rose to 10 percent of total flows in 2017 (more than threefold since 2015).
  - Since 2015, Global ACs providing US dollar and Euro settlement have declined and been replaced by smaller correspondent banks and nonbank payment service providers.

### Remaining risks to CBRs and potential economic effects
- Broad characterization:
  - CBR pressures appear to be easing but risks remain: CBR counterparty credit risk, withdrawal risk, and supervisory gaps that could re-intensify CBR pressures.
- CBR counterparty credit risk:
  - Number of non-Global ACs increased from 10 in Q2 2015 to 17 in Q4 2017; number of Global ACs declined from 5 to 2 in the same period.
  - Some replacement ACs have capital ratios below Belizean banks.
  - Nonbank payment service providers are not subject to prudential capital adequacy requirements, implying higher counterparty credit risk.
  - Services such as acceptance of US dollar checks remain restricted.
- Concentration and withdrawal risk:
  - High concentration on a few correspondent providers increases vulnerability to withdrawal:
    - Two non-Global ACs (NGAC1 and NGAC2) collectively accounted for around 50 percent of total USD settlement in 2017 after a U.S. global AC reduced services since 2016.
    - For Euro payments, NGAC2 and a nonbank payment service company (NGAC3) collectively accounted for around 90 percent of total settlement in 2017 after withdrawal of some global ACs in 2016.
  - Reliance on a small set of ACs raises operational and financial stability risks.
- Supervisory and ML/TF risks:
  - Belize’s implementation of the AML/CFT legal and regulatory framework needs enhancement.
  - The CBB lacks sound and effective systems and tools for conducting AML/CFT risk-based supervision of domestic and international banks.
  - The IFSC does not properly license, regulate and supervise non-bank financial institutions (“IFSC financial institutions”) and trust and company service providers (“TCSPs”).
  - Beneficial ownership information for legal persons and arrangements is not always available and up-to-date.
  - The Financial Intelligence Unit (FIU) is upgrading systems but overall effectiveness in producing financial intelligence can improve; system not yet resulting in effective prosecutions and convictions of money laundering and confiscation of illegal assets.
  - Belize will undergo an assessment by Fourth Round of the Caribbean Financial Action Task Force (CFATF) in 2022; weak assessment results could lead to listing and significant reputational risks.
- Offshore sector and cryptocurrencies:
  - IFSC offers, via a high number of registered agents and intermediaries abroad, establishment of complex entities without mechanisms to ensure beneficial ownership information is available, accessible, and timely.
  - The IFSC licenses financial institutions (for example, foreign exchange, insurance, and trading service providers) without requirement to have a presence in Belize; many lack physical presence in Belize.
  - Some IFSC entities might be offering cryptocurrency services; Belize does not provide regulations for cryptocurrency services and does not sufficiently supervise the sector.
  - Cryptocurrency features cited as vulnerabilities: pseudo-anonymity, potential for peer-to-peer transactions avoiding intermediaries, cross-border reach—making them susceptible to criminal misuse.
- Recent crime context:
  - Recent cases of drug trafficking activities in Belize raise risks that proceeds could be laundered through the banking sector.

### Supervision, IFSC changes, and sector composition
- IFSC measures and sector changes:
  - In 2017 the IFSC introduced higher annual license fees for some IFSC financial institutions.
  - Higher capital requirements (example: capital requirement for trading in securities increased from USD 100,000 to 500,000) reduced the number of some institutions while increasing overall capital requirements.
  - Total number of financial institutions decreased from 275 to 236.
  - Most financial institutions and TCSPs do not have a physical presence in Belize.
- System concentration and counterparty capital profiles:
  - Some newer correspondent providers are UK intermediaries between Belizean banks and a major US bank, providing AML assurance to major US banks, including onsite inspections.
  - Capital-to-asset ratios vary: some correspondent banks have capital ratios below Belizean banks; nonbank providers lack prudential capital requirements.

### Policy implications and direction emphasized in the note
- Reduce ML/TF and reputational risks to support CBR recovery by:
  - Enhancing the AML/CFT framework to reduce the cost of due diligence by correspondent banks.
  - Revisiting business models in the offshore sector, particularly licensed entities with no physical presence and offshore companies with complex structures.
  - Enhancing supervision by the Central Bank of Belize (CBB) and the International Financial Services Commission (IFSC) of banks, financial service providers, and trust and company service providers to improve compliance with prudential and AML/CFT requirements.
  - Intensifying efforts to enhance availability of beneficial owner information and timely access without impediments.
- Address supervisory capacity gaps and FIU effectiveness to improve financial intelligence, prosecution, and asset confiscation outcomes.
- Monitor concentration on a few correspondent providers to mitigate operational, counterparty, and withdrawal risks.

*International Monetary Fund — BELIZE: BELIZE'S CORRESPONDENT BANKING RELATIONSHIPS: RECOVERY AND THE WAY FORWARD (October 18, 2018).*

### 17.      IFSC TCSPs establish a relatively high number of legal persons and arrangements

### 17.      IFSC TCSPs establish a relatively high number of legal persons and arrangements

### IFSC TCSPs and beneficial ownership weaknesses
- IFSC TCSPs establish a relatively high number of legal persons and arrangements without holding their beneficial ownership information to prevent their misuse.
- Data show a decrease of companies, foundations and trusts registered in the last two years; possible drivers include:
  - Recent legislative amendments to the IBC Act (prohibition of bearer shares; requirement for registered agents to hold beneficial ownership information on their premises).
  - Reluctance of foreign banks to open accounts for Belizean companies.
- TCSPs involved in the creation of companies, foundations, and trusts are not properly monitored by the IFSC to ensure that they hold the beneficial owners’ information they are involved in creating.

### Capital requirements and IFSC-licensed operators (as of August 2018)
- Table 1 highlights numbers of licenses, capital requirements ('000), and amounts deposited ('000) by license type (selected rows shown as reported):
  - Registered Agents: Number of Licenses 2016: 99; 2017: 91; Mid 2018: 85. Capital Requirement ('000): 2016: 5; 2017: 5; Mid 2018: 10. Amount Deposited ('000): 2016: 495; 2017: 455; August 2018: 850.
  - Trust Service: Number of Licenses 2016: 92; 2017: 47; Mid 2018: 45. Capital Requirement ('000): 2016: 10; 2017: 10; Mid 2018: 15. Amount Deposited ('000): 2016: 920; 2017: 470; August 2018: 675.
  - Trading in Securities: Number of Licenses 2016: 108; 2017: 92; Mid 2018: 65. Capital Requirement ('000): 2016: 100; 2017: 100; Mid 2018: 500. Amount Deposited ('000): 2016: 10,800; 2017: 9,200; August 2018: 32,500.
  - Trading in Foreign Exchange: Number of Licenses 2016: 8; 2017: 7; Mid 2018: 7. Capital Requirement ('000): 2016: 100; 2017: 100; Mid 2018: 500. Amount Deposited ('000): 2016: 800; 2017: 700; August 2018: 3,500.
  - Total Amount Deposited ('000): 2016: 14,615; 2017: 12,125; August 2018: 39,200.
- Source: Belize International Financial Services Commission.

### Number of legal persons and arrangements registered in the offshore sector
- International Business Companies:
  - Incorporations: 2015: 7,747; 2016: 5,970; 2017: 4,543; End August, 2018: 2,609.
  - Total: 2015: 63,478; 2016: 55,867; 2017: 49,157; End August, 2018: 42,392.
- International Limited Liability Companies:
  - Incorporations: 2015: 80; 2016: 64; 2017: 86; End August, 2018: 86.
  - Total: 2015: 272; 2016: 316; 2017: 324; End August, 2018: 234.
- International Foundations:
  - Registrations: 2015: 47; 2016: 23; 2017: 30; End August, 2018: 14.
  - Total: 2015: 197; 2016: 220; 2017: 233; End August, 2018: 235.
- Trusts:
  - Registrations: 2015: 152; 2016: 129; 2017: 130; End August, 2018: 74.
  - Total: 2015: 1,829; 2016: 1,712; 2017: 1,833; End August, 2018: 2,064 (note: 157 trusts were registered before 2018 but not included in the register).
- Source: Belize International Financial Services Commission.

### Relation between correspondent banking relationship (CBR) flows and economic activity
- Literature context:
  - Correspondent banking supports domestic and cross-border payments, international trade, cross-border financial activity, and remittances.
  - Studies suggest a positive relationship between capital inflows and credit supply in some contexts.
- Empirical analysis for Belize (Q1 2013 to Q4 2017; sample: four domestic banks and four international banks):
  - Preliminary scatter plots suggest a positive and nonlinear relationship: as inbound flows increase, loans increase up to a turning point, then taper off.
- Two econometric models used:
  - Model 1: LOAN_{i,t} = β1 NPL Ratio_{i,t} + β2 INBOUND_{i,t} + μ_t + ν_i + ε_{i,t}
  - Model 2: LOAN_{i,t} = β1 NPL Ratio_{i,t} + β2 INBOUND_{i,t} + β3 INBOUND^2_{i,t} + μ_t + ν_i + ε_{i,t}
  - Definitions:
    - LOAN_{i,t} = Total loan in each bank
    - NPL Ratio_{i,t} = The ratio of gross NPL to total loan in each bank
    - INBOUND_{i,t} = Value of inbound flow in each bank
    - INBOUND^2_{i,t} = Square of value of inbound flow in each bank
    - ν_i = Period specific effect
    - μ_t = Country specific effect
  - Note: INBOUND^2 captures nonlinearities and effects of large inflows.

### Estimation results (panel regression Q1 2013-Q4 2017; N=136)
- Main findings:
  - Higher inbound flows are positively associated with credit growth.
  - Coefficient of NPL Ratio is negative (consistent with negative effects of rising NPLs on loan growth).
  - Coefficient of INBOUND is positive (consistent with inflows being intermediated into loans).
  - Coefficient of INBOUND^2 is negative (reflecting diminishing marginal returns and adverse effects of excessive inflows).
  - The negative coefficient on INBOUND^2 is small relative to the positive coefficient on INBOUND, suggesting minimal offsetting effects of large inflows.
- Exact reported coefficients and statistics:
  - Model 1 (Dependent Variable LOAN):
    - NPL Ratio: -0.9294** (standard error (0.4594))
    - INBOUND: 0.1746* (standard error (0.0959))
    - Constant: 225.47*** (standard error (11.8175))
    - Bank Fixed Effects: Significant***
    - Period Fixed Effects: Significant***
    - Sample period: Q1 2013-Q4 2017
    - R^2: 0.9799
    - N: 136
  - Model 2 (Dependent Variable LOAN):
    - NPL Ratio: -0.7750*** (standard error 0.335088)
    - INBOUND: 1.1660*** (standard error 0.139783)
    - INBOUND^2: -0.0026*** (standard error 0.000301)
    - Constant: 181.9103*** (standard error 11.25862)
    - Bank Fixed Effects: Significant***
    - Period Fixed Effects: Significant***
    - Sample period: Q1 2013-Q4 2017
    - R^2: 0.9876
    - N: 136
  - Note: Standard errors are clustered by bank and period. Sample consists of Atlantic Bank, Belize Bank, Heritage Bank, Scotia Bank, Choice Bank, Caye International, Atlantic International, and Heritage International Bank and Trust.
  - Significance codes: ***p<0.01; **p<0.05; *p<0.10
- Quantified implication:
  - A $1 increase in inbound flows is associated with $0.17 percentage point increase in bank loans, based on Model 1.

### Interpretation and macro linkages
- There is a positive association between bank credit and economic growth; empirical studies report sensitivities of real GDP growth to bank credit growth ranging from 0 to about 0.4 (a 1 percentage point reduction in credit growth leads to 0-0.4 percentage points decline in real GDP growth).
- Results are consistent with the view that recovery in CBRs in Belize will support credit growth and economic activity; conversely, pressure on CBRs is a growth risk.

### How Belize has responded to loss of CBRs (actions and progress)
- Legislative and regulatory changes:
  - Money Laundering and Terrorist (Prevention) Amendment Act 2013: provisions on customer due diligence, record keeping and retention, reporting and internal AML/CFT control systems.
  - Further amending statutes in 2014 and 2015.
  - July 2017: amendments to the International Business Corporations (IBCs) Act prohibiting issuance of bearer shares in an IBC and providing for a Register of Directors and a Register of Beneficial Owners.
  - August 2017: Money Laundering and Terrorism (Prevention) Act lowered requirements for proceeds of crime from a qualified ‘serious crime’ to an ‘offence’ against any Belizean or foreign criminal law; required termination of relationships when ongoing monitoring is not possible.
- National Risk Assessment (NRA):
  - An ML/TF NRA is under way (first in Belize), led by the National Anti–Money Laundering Committee and coordinated by the FIU.
  - Support from IADB and World Bank, with an expert from FIU of Trinidad and Tobago for 6 months; technical support from US Treasury to improve FIU capacity.
  - NRA report—part of preparation for the CFATF Fourth Round Mutual Evaluation—is expected to be completed in early 2019.
- Supervision and inspections:
  - IFSC internal restructuring and some inspections of financial institutions and TCSPs, but licensing, AML/CFT supervision, and enforcement remain weak.
  - Some financial institutions could be providing crypto currency services abroad, increasing sector risk.
  - Central Bank (CBB) conducted AML/CFT inspections of one domestic bank, three international banks, and two credit unions in 2018; compliance with preventive measures is slightly improving but not yet effective.

### Policy recommendations and prioritized actions to address remaining risks and support CBRs
- Overarching approach:
  - Strengthen AML/CFT framework and prudential and AML/CFT supervision of banks to reduce transactions-related risks and the cost of due diligence for correspondent banks.
  - Share NRA results with private sector; ensure accurate and up-to-date beneficial ownership (BO) information for entities established in Belize.
  - Enhance communication by authorities and Belizean banks; improve reporting of suspicious transactions to the FIU.
- IFSC and offshore sector measures:
  - Stricter licensing and proper oversight of the offshore sector; conduct a cost-benefit analysis of the sector.
  - IFSC financial institutions and TCSPs should be subject to proper licensing requirements, including physical presence in Belize.
  - Higher licensing and capital requirements for IFSC licensed entities and higher fees for registration of legal persons and arrangements to increase IFSC revenue, independence, and supervisory capacity.
  - Consider introducing taxation for registered entities.
  - Ensure effective implementation of dissuasive and proportionate sanctions; withdraw licenses for IFSC entities providing high-risk services (e.g., crypto-currency services) if IFSC lacks capacity to manage associated risks.
- Beneficial ownership transparency:
  - Expedite amendment of necessary legislation and effectively implement them to allow timely access without impediments to adequate, accurate, and current information on beneficial ownership of all types of entities.
  - Amend LLC, trust and non-profit organization acts to align with international standards.
  - Ensure legal persons and arrangements are registered through registered agents and trust providers licensed in Belize; effectively monitor these agents to ensure client and BO identification and ongoing CDD to keep BO information up-to-date.
  - Impose dissuasive sanctions on registered agents and trust providers in breach of the upgraded legal framework.
  - CBB should focus supervision on banks’ verification of BO information and proper CDD; more rigorous CDD by banks to ensure availability of BO information that can be shared with correspondent banks in a timely manner.
  - Consider establishing a register for beneficial ownership information of legal persons and arrangements that contain accurate information; operationalizing a public BO register would allow correspondent banks to access BO information when needed and reduce their cost of compliance.
- CBB AML/CFT supervision enhancements:
  - Continue building capacity to implement a risk-based approach to AML/CFT supervision and impose strict and prompt sanctions when necessary.
  - Offsite monitoring and onsite inspections should ensure banks properly identify and verify clients and have BO information available, especially for IFSC offshore sector entities.
  - Where Belizean banks lack capacity to manage risks associated with certain high-risk offshore businesses (including crypto-currency services), consider terminating such business applying a risk-based approach to maintain CBRs.
- Private sector engagement and capacity building:
  - Communicate with and educate the private sector on the importance of transparency and CBR-related disclosures to sustain recovery of CBRs; address SME unwillingness to disclose information that satisfies CBR requirements.
  - Enhance Belizean banks’ capacity to manage risks; foster enhanced communication between correspondent banks and Belizean banks to clarify global banks’ risk tolerance policies and reasons for terminating CBRs.
  - Encourage correspondent banks to issue policy statements on high-risk transactions and provide technical support where necessary.
  - Belizean banks encouraged to take advantage of planned capacity building by the Caribbean Development Bank (CDB) to address increasing requirements for customer due diligence and transaction monitoring.
- Technology and long-term considerations:
  - Consider technological innovations (blockchain and Fintech) as longer-term alternatives to CBRs for cross-border transactions; bring these technologies under the regulatory and supervisory perimeter of the authorities.

### Annex I — Prioritized AML/CFT Reform Actions (selected from annex)
- Assessing and understanding ML/TF risks:
  - i. Improve the assessment and understanding of ML/TF risks, particularly those related to the offshore sector (for example, IFSC licensed entities, cryptocurrency, legal persons and arrangements) — Medium Term.
  - ii. Communicate and share the key results of the NRA with relevant stakeholders and the private sector — Medium Term.
- IFSC Supervision of licensed financial institutions and TCSPs:
  - i. Require physical presence, and enhance licensing controls (fit and proper tests) — Short term.
  - ii. Improve IFSC capacity to properly supervise entities; monitoring of TCSPs should focus on availability and timely access to beneficial ownership information — Short term.
  - iii. Ensure effective implementation of a broad range of sanctions against IFSC licensed entities that are dissuasive and proportionate — Short term.
- CBB supervision of banks:
  - i. Improve CBB identification and understanding of ML/TF risks and develop risk-based approach tools for offsite and onsite supervision (focus on international banks, BO, and high-risk requirements) — Medium term.
  - ii. Ensure effective implementation of a broad range of sanctions against banks that are dissuasive and proportionate — Medium term.
- Entity transparency and availability of beneficial ownership information:
  - i. Amend the LLC, foundation, and trust Acts to require BO info — Short term.
  - ii. Create an open register for beneficial ownership information — Long term.
  - iii. Ensure robust implementation of sanctions against persons who do not comply with (basic and BO) information requirements — Medium term.

*International Monetary Fund — Belize: Selected Issues (Chapter 17).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18328-belizeselectedissues.pdf_