## Introduction ## Source details **Canonical URL:** [Introduction](https://www.imf.org/-/media/files/publications/dp/2019/english/rpraacbrpea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2019/english/rpraacbrpea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2019/english/rpraacbrpea.pdf.json) --- ### Overview and importance - Remittances account for 27 and 21 percent of GDP for Tonga and Samoa, respectively. - Australia, New Zealand, and the United States each account for approximately one-third of the remittances to the region. - Reliance on foreign exchange inflows makes access to low-cost financial services and correspondent banking for cross-border flows critical. - The cost of sending and receiving remittances to and from the Pacific is high; access to financial services became more difficult after the global financial crisis. ### Correspondent banking: function and channels - Correspondent banking relationship (CBR): a financial institution (the correspondent) provides a deposit account or other services to another bank (the respondent) for currency exchange, trade, and cross-border money transfers. - Supported services: execution of third-party payments, trade financing, cash clearing, liquidity management, short-term borrowing, and funding investment needs in a particular currency. - Traditional links: regional banks in Australia, New Zealand, and Papua New Guinea maintain relationships with global correspondent banks and act as correspondents for smaller domestic Pacific island banks. - Remittances and MTOs: MTOs hold accounts with Australian/New Zealand banks; they net transactions and transfer between Australian and Pacific island bank accounts in Australian dollars through correspondent banking relationships; larger transactions often route via US correspondent banking relationships. - Cross-border payments concentrate in large financial centers and currencies such as the US dollar, euro, British pound, yen, and renminbi; US dollars account for about 50 percent of transactions. Australian and New Zealand dollars are important for Pacific transactions. ### Global developments (setting and update) - Pressure on correspondent banking relationships built up following the global financial crisis due to profitability considerations, tighter postcrisis regulation, global banks’ changing business models, higher compliance costs, and risk assessment including respondent bank compliance and KYC concerns for MTOs. - In 2017 some countries were able to restore correspondent banking links and the overall situation improved slightly in eastern Europe, North America, and Oceania. - At the global level, the concentration of active correspondent banking links declined from a peak in late 2015, but pressure remains in some countries, particularly those reliant on one or two correspondent banking links. ### Pacific developments and trends - Remittance costs in the Pacific remain among the highest in the world; costs peaked in 2011 but drifted up a little in 2017. - For 2015–17 remittance costs were stable for most Pacific countries; Vanuatu experienced an upward trend in costs. - In August 2015 the APG membership referred Vanuatu to the FATF for further action and scrutiny; in June 2018 the FATF removed Vanuatu from its public listing after progress in strengthening its AML/CFT framework. - Fiji’s remittance costs, among the lowest in the region, have seen a modest decline. - AUSTRAC noted the number and value of remitters from Australia to the Pacific increased in 2017, although some Australian banks continued to withdraw from correspondent banking relationships. ### IMF staff survey of Pacific island regulators (January 2018) - CBRs: broadly intact, but local banks are having trouble establishing new relationships in five Pacific island countries. - Some local banks cannot generate sufficient transaction volume, placing pressure on correspondent banks to withdraw. - Noncompliance with the Foreign Account Tax Compliance Act (FATCA) was reported as a problem in some jurisdictions. - Examples of concentration and strain: - Marshall Islands has access to only two correspondent banking relationships for US dollars through two banks and one MTO. - Solomon Islands had one bank facing difficulty maintaining a CBR. - Samoa lost but then reestablished some CBRs. - Compliance costs of retaining a correspondent banking relationship have increased for some banks. ### Closures and remittance channel disruptions - Since 2013 four Pacific islands have reported bank account closures for MTOs. - Reported bank actions include closures of foreign exchange dealers’ accounts over risk management concerns; a bank exiting all cross-border relationships; refusals of accounts to charities and church groups. - Operational adjustments by MTOs: use of business or personal accounts for transfers; physically carrying cash across borders; independent audits that nonetheless did not prevent account closures. - Some MTOs established correspondent banking relationships in currencies other than US dollars (e.g., euros and renminbi). ### AUSTRAC remittance-corridor assessment (Australia to Pacific islands) — key findings - Scope: focused on flows from Australia to the Pacific islands through MTOs. - Overall money laundering and terrorism financing risk rating of the corridor is low. - Criminal threat environment: low risk. - Customer profile: largely individuals with a low number of politically exposed persons—low risk. - Purpose of flows: low risk, mainly supporting families and community; peak flows around significant life events and natural disasters. - Transaction values: 75 percent of transactions below US$330. - Cash use: prevalent use of cash yields a medium risk. - Detection and mitigation by remittance businesses: medium risk. - The report fills an information gap and could help relieve correspondent banks’ risk concerns about the Australia-to-Pacific remittance channel. ### Tailored solutions and examples - Tonga Development Bank ’Ave Pa’anga Pau voucher system (launched February 2017 with IFC assistance): - Vouchers purchasable online only in New Zealand; redeemable or remittable to a bank account in Tonga. - Purchase limits: $NZ 1,000 a day and $NZ 10,000 a year. - New Zealand dollar funds deposited to TDB account with Kiwibank; vouchers cashed at TDB branches in Tonga. - System reduces frequency of international settlements between Tonga and New Zealand by concentrating flows. - Judged AML/CFT compliant by New Zealand authorities. - SendMoneyPacific estimates the remittance cost for an average transaction equivalent to US$200 at about 4.5 percent, with no transaction fees. - As of June 2018, transactions worth about US$2 million had taken place under this system. ### IMF Pacific Initiative and stakeholder engagement - In February 2018 the IMF launched the Pacific Initiative to Address the Pressures on Correspondent Banking Relationships and Remittance Channels to bring together correspondent banks, respondent banks, MTOs, and other stakeholders to discuss practical, concrete, and actionable measures. - IMF staff held three roundtables in Sydney, Auckland, and Suva in February and March 2018: - Sydney and Auckland roundtables: about 70 representatives from banks and MTOs based in Australia, New Zealand, and the Pacific islands. - Participants included representatives from the FSB, APG, FSVC, World Bank, ADB, and Australian and New Zealand authorities. - Suva roundtable: Pacific regulators from 11 jurisdictions attended. - The paper summarizes roundtable discussions and considers feasible concrete actions for correspondent and respondent banks, MTOs, Pacific authorities, Australian and New Zealand authorities, and international organizations. ### Next steps and IMF role - The report draws on IMF experience, FSB recommendations, and informal discussions with Australian, New Zealand, and Pacific island authorities. - The IMF can facilitate further dialogue and help financial institutions and countries adopt successful practices taken up elsewhere. --- ### Box 1. AUSTRAC Report—Remittance Corridors: Australia to Pacific Island Countries ### Setting and update - Roundtables were the first time banks and money transfer operators—including those from the Pacific—had gathered to discuss correspondent banking relationships. - 16 participants submitted written comments on the draft matrix, including 3 regulatory agencies, 6 banks, and 7 money transfer operators. - Reserve Bank of Australia hosted a stakeholder meeting in Sydney in August. - The IMF will organize a roundtable in May 2019 to follow up on technical assistance priorities. - Average remittance transaction size is about US$300. - AUSTRAC findings indicate the remittance channel from Australia to the Pacific is low risk, despite perceptions to the contrary. ### Challenges identified in Pacific roundtables - Banks in Australia and New Zealand: - Remittance sector limited profitability due to high fixed costs, small scale of transactions (about US$300 on average), and remitters’ habit of small but frequent transactions. - CBRs seen as low-margin and unattractive relative to potential AML/CFT fines. - Concerns over insufficient transparency of MTO ownership, aggregation and netting practices, and difficulty complying with AML/CFT and KYC standards. - Some banks seek information on customers’ customers, despite FSB and FATF noting this is neither necessary nor required by international standard. - Money transfer operators: - Business models vary from global networks to small family operations. - Smaller operators feel required to provide substantial information to open/maintain bank accounts and face high transaction costs. - Account closures have led some MTOs to use personal bank accounts or physically transport cash, potentially driving activity underground. - Global correspondent banks: - No global banks participated in the roundtables; inferred views suggest a high risk-versus-reward perception for Pacific remittance business. - Perception that global banks treat all remittances in the region as high risk, despite AUSTRAC findings. - Some participants felt withdrawals and closures were driven by pressure from US correspondent banks; a multilateral solution may be required if that is the case. - Regulators: - Need for greater clarity on regulatory expectations; coordination among Pacific island regulators and with Australian and New Zealand authorities is considered insufficient. - Responsibilities related to AML/CFT in New Zealand are spread across multiple agencies, causing perceived lack of clarity. - FSB identified weak industry supervision of MTOs globally. - Pacific islands need to improve AML/CFT frameworks, ensure compliance, and fully communicate regulatory and supervisory actions to stakeholders. - Regional communication: - Regulators meet regularly, but there is no similar forum among banks or MTOs. - More regular communication between banks and MTOs could help keep correspondent banking channels and MTO accounts open and facilitate fintech solutions. - Lack of regional harmonization may contribute to high costs for banks and MTOs operating across countries. ### Matrix of potential solutions and categories - Four categories: 1. Ensuring banks’ capacity to assess and manage CBR risks (communication and information sharing). 2. Addressing compliance costs and profitability (technological improvements and standardization). 3. Regional solutions (training, harmonization of regulations and supervision). 4. Public support (potential role of public sector in facilitating and financing solutions). - Broad agreement on limited measures: - Improve communication, coordination, and information sharing. - Enhance regulatory compliance, supervision, and cost control. - Strengthen knowledge and efficiency through training. - Explore fintech measures to lower compliance and remittance costs, noting skepticism that fintech alone can deliver solutions without trust and customer due diligence. ### Prioritized actions and areas for solutions (selected) - Communication, coordination, and information sharing: 1. Regular meetings among major stakeholders. - Responsibility: Major regulatory or other authorities could facilitate periodic meetings. - Progress/timeline: Reserve Bank of Australia hosted a meeting in Sydney in August; New Zealand could consider organizing a forum; IMF will organize a roundtable in May 2019; propose Pacific island regulators gather banks and MTOs once a year. (Short term) 2. Extend discussion to include US authorities and principal correspondent banks. - Responsibility: IMF with assistance of FSVC and FSB. - Progress/timeline: IMF and FSB will engage with US global banks and regulators; Central Bank of Samoa suggested inviting US regulators and global banks to the annual Pacific Central Bank Governors Meetings. (Short term) 3. Ensure ready access to information on AML/CFT supervisory priorities and outcomes, including national risk assessments. - Responsibility: Australian, New Zealand, Pacific island supervisory authorities with assistance of the ADB. - Progress/timeline: Several Pacific islands have developed national risk assessments with ADB assistance; these could be posted on FATF webpage and regional sites. (Medium term) 4. Complement AUSTRAC 2018 assessment with New Zealand–Pacific corridor assessments. - Responsibility: New Zealand and Pacific island regulatory authorities with IMF assistance. (Medium term) 5. Establish a Pacific island MTO association and code of conduct. - Responsibility: Pacific island MTOs, with assistance from ARCPA. - Progress/timeline: Steps being taken as a private sector initiative; IAMTN is developing a code of conduct. (Short term / Medium term) 6. MTO associations could clarify bank onboarding requirements for members. - Responsibility: ARCPA and other MTO associations, coordinating with banks. (Medium term) - Supervision, compliance, and cost control: 1. Clarify regulatory expectations in Australia and New Zealand, especially on implementing a risk-based approach, in line with FSB action plan. - Responsibility: Australian and New Zealand authorities. - Progress/timeline: FSB action plan includes publishing guidance on banking MTOs and implementing a risk-based approach. (Short term—FSB timeline later in 2019; some authorities have already implemented this recommendation.) 2. Develop and implement simple, standardized template utilities for MTO customer identification (including biometric data), due diligence, and transaction recording to be rolled out regionally. - Responsibility: Development overseen and funded by an international financial institution; ADB, with IMF technical advice, has developed project terms of reference and will fund development of a pilot for implementation in Samoa. (Short term) 3. Strengthen AML/CFT audits of larger MTOs and share key findings with banks and supervisors. - Responsibility: MTOs, with assistance from regulatory authorities and banks. - Progress/timeline: In New Zealand, MTO audits must be conducted by a suitably qualified independent auditor every two years. (Medium term) 4. Harmonize bank onboarding and due diligence information requirements. - Responsibility: Banks and bankers’ associations, with input from regulatory authorities and MTO associations. (Medium term) 5. Harmonize AML/CFT regulatory requirements across Pacific island countries and ensure consistency in implementation in accordance with international standards. - Responsibility: Pacific island regulatory authorities, with advice from APG. (Medium term) --- ### 6. Standardize cross-border payment ### Summary of proposal - Standardize cross-border payment messages, based on ISO20022. - Proposed by FSB. - Rationale: Standardization will lower transaction costs and facilitate information sharing. - Time horizon: (Medium term) ### Remittance architecture and technology (high-level models) - Use specialized banks to handle payments with risks in particular payments’ corridors. - Example: The Tonga Development Bank currently provides such a service; the World Bank is looking into replicating this model for other corridors. - Use a specialized, regulated financial payments firm as an intermediary between sending and receiving jurisdictions. - Expected benefits: reduces the number of correspondent banking relationships needed and lowers AML/CFT compliance costs. - Use fintech solutions to lower the cost of international transfers or to facilitate AML/CFT compliance at low cost. - Considered a longer-term approach. ### Actions — Training and capacity building (extracts) - 1. Training and capacity building for authorities to improve AML/CFT supervision of banks and MTOs and strengthen financial intelligence units’ capacity to develop guidance and promote information sharing. - Responsibility: APG, IMF, ADB and some supervisory authorities within the region. - Comments and progress: The IMF has planned training for Samoan authorities. Further regional training will be developed by the IMF. - Time horizon: Short term - 2. Training and capacity building in banks and MTOs. - Responsibility: Supervisory authorities, with support from the ADB, APG, and IMF. - Time horizon: Medium term - 3. Training of remittance senders and recipients. - Responsibility: Banks, MTOs, and authorities, perhaps with involvement of the Alliance for Financial Inclusion. - Time horizon: Medium term ### Actions — Remittance architecture and technology (specific proposals) - 1. Use specialized banks to handle remittances. - Responsibility: Private sector. - Comments and progress: Tonga Development Bank already functions this way in a limited form for the New Zealand–Tonga corridor. - Time horizon: Medium term - 2. Use a financial “hub and spoke” payments network to minimize the need for CBRs and lower due diligence costs. - Responsibility: Private sector. The IMF will explore feasibility. - Time horizon: (Medium term) - 3. Use fintech to lower the cost of remittances and meet AML/CFT compliance requirements. - Responsibility/Guidance: Regulators should encourage “safe development of fintech” in line with the Bali Fintech Agenda. - Comments and progress: Fintech and remittances will be discussed at the Joint Central Bank of Samoa–IMF-ADB regional seminar FinTech and Financial Inclusion in the Pacific Island Countries on November 13, 2018. - Time horizon: (Medium term) ### Priorities by agent (extracts) - Banks - Harmonize and share bank onboarding and due diligence information requirements. - Standardize cross-border payments messages. - Participate in training for remittance senders and recipients. - Money Transfer Operators - Establish a Pacific islands MTO association and code of conduct. - Implement simple, standardized template utilities for MTO customer identification (including biometric data), due diligence, and transaction recording. - AML/CFT audits of larger MTOs, with key findings shared with banks and supervisors. - Regulatory Authorities - Regular meetings among major stakeholders to promote clear communication and identify emerging issues. - Clarify and harmonize regulatory requirements and expectations, especially regarding a risk-based approach. - Training and capacity building in banks and MTOs. - International Financial Institutions - Training and capacity building for authorities to improve AML/CFT supervision and promote information sharing. - Extend discussion to include US authorities and principal correspondent banks; improve communication between Pacific regulators and Australian and New Zealand regulators. - Develop and implement simple, standardized template utilities for MTO customer identification, due diligence, and transaction recording. ### Implementation timeline and next steps - IMF expectation: Implementation of short-term recommendations could begin within one year; medium-term actions will take more time to develop and yield results. - IMF planned follow-up: IMF staff plans to follow up with a Pacific roundtable in May 2019 focused on key technical assistance priorities. - Ongoing IMF activities and monitoring: - Following up on a pilot customer due diligence tool in Samoa. - Following up on possible formation of an association of MTOs in the Pacific. - Facilitating discussion on fintech and financial inclusion to identify ways to reduce fragility of CBR links and remittance flows. - Monitoring pressure on remittances and CBRs in the context of bilateral surveillance in the Pacific islands and capacity development. *Source: Introduction; Box 1. AUSTRAC Report—Remittance Corridors: Australia to Pacific Island Countries; and 6. Standardize cross-border payment (rpraacbrpea).* ### Introduction ����������������������������������������������������������������������������������������������������������� ### Introduction ### Overview and importance - Pacific island economies depend heavily on remittances; remittances account for 27 and 21 percent of GDP for Tonga and Samoa, respectively. - Australia, New Zealand, and the United States each account for approximately one-third of the remittances to the region. - Reliance on foreign exchange inflows makes access to low-cost financial services and correspondent banking for cross-border flows critical. - The cost of sending and receiving remittances to and from the Pacific is high; access to financial services became more difficult after the global financial crisis. ### Correspondent banking: function and channels - Correspondent banking relationship (CBR): a financial institution (the correspondent) provides a deposit account or other services to another bank (the respondent) for currency exchange, trade, and cross-border money transfers. - Services supported: execution of third-party payments, trade financing, cash clearing, liquidity management, short-term borrowing, and funding investment needs in a particular currency. - Traditional correspondent banking links: regional banks in Australia, New Zealand, and Papua New Guinea maintain relationships with global correspondent banks and act as correspondents for smaller domestic Pacific island banks. - Remittances and money transfer operators (MTOs): MTOs hold accounts with Australian/New Zealand banks; they net transactions and transfer between Australian and Pacific island bank accounts in Australian dollars through correspondent banking relationships; larger transactions often route via US correspondent banking relationships. - Cross-border payments concentrate in large financial centers and in currencies such as the US dollar, euro, British pound, yen, and renminbi; US dollars account for about 50 percent of transactions. Australian and New Zealand dollars are important for Pacific transactions. ### Global developments (setting and update) - Pressure on correspondent banking relationships built up following the global financial crisis; factors included profitability considerations, tighter postcrisis regulation, global banks’ changing business models, higher compliance costs, and risk assessment including effectiveness of respondent bank compliance and KYC concerns for MTOs. - In 2017 some countries were able to restore correspondent banking links and the overall situation improved slightly in eastern Europe, North America, and Oceania. - At the global level, the concentration of active correspondent banking links declined from a peak in late 2015, but pressure remains in some countries, particularly those reliant on one or two correspondent banking links. ### Pacific developments and trends - Remittance costs in the Pacific remain among the highest in the world; costs peaked in 2011 but drifted up a little in 2017. - For 2015–17 remittance costs were stable for most Pacific countries; Vanuatu experienced an upward trend in costs. - In August 2015 the APG membership referred Vanuatu to the FATF for further action and scrutiny; in June 2018 the FATF removed Vanuatu from its public listing after progress in strengthening its AML/CFT framework. - Fiji’s remittance costs, among the lowest in the region, have seen a modest decline. - AUSTRAC noted the number and value of remitters from Australia to the Pacific increased in 2017, although some Australian banks continued to withdraw from correspondent banking relationships. ### IMF staff survey of Pacific island regulators (January 2018) - Correspondent banking links: broadly intact, but local banks are having trouble establishing new relationships in five Pacific island countries. - Some local banks cannot generate sufficient transaction volume, placing pressure on correspondent banks to withdraw. - Noncompliance with the Foreign Account Tax Compliance Act (FATCA) was reported as a problem in some jurisdictions. - Concentration examples: Marshall Islands has access to only two correspondent banking relationships for US dollars through two banks and one MTO; Solomon Islands had one bank facing difficulty maintaining a CBR; Samoa lost but then reestablished some CBRs. - Compliance costs of retaining a correspondent banking relationship have increased for some banks. ### Closures and remittance channel disruptions - Since 2013 four Pacific islands have reported bank account closures for MTOs. - Reported bank actions: closures of foreign exchange dealers’ accounts over risk management concerns; a bank exiting all cross-border relationships; refusals of accounts to charities and church groups. - Operational adjustments by MTOs: use of business or personal accounts for transfers; physically carrying cash across borders; independent audits that nonetheless did not prevent account closures. - Some MTOs established correspondent banking relationships in currencies other than US dollars (e.g., euros and renminbi). ### AUSTRAC remittance-corridor assessment (Australia to Pacific islands) - Scope: focused on flows from Australia to the Pacific islands through MTOs. - Key findings: - Overall money laundering and terrorism financing risk rating of the corridor is low. - Criminal threat environment: low risk. - Customer profile: largely individuals with a low number of politically exposed persons—low risk. - Purpose of flows: low risk, mainly supporting families and community; peak flows around significant life events and natural disasters. - Transaction values: 75 percent of transactions below US$330. - Cash use: prevalent use of cash yields a medium risk. - Detection and mitigation by remittance businesses: medium risk. - The report fills an information gap and could help relieve correspondent banks’ risk concerns about the Australia-to-Pacific remittance channel. ### Tailored solutions and examples - Tonga Development Bank ’Ave Pa’anga Pau voucher system (launched February 2017 with IFC assistance): - Vouchers purchasable online only in New Zealand; redeemable or remittable to a bank account in Tonga. - Purchase limits: $NZ 1,000 a day and $NZ 10,000 a year. - New Zealand dollar funds deposited to TDB account with Kiwibank; vouchers cashed at TDB branches in Tonga. - System reduces frequency of international settlements between Tonga and New Zealand by concentrating flows. - Judged AML/CFT compliant by New Zealand authorities. - SendMoneyPacific estimates the remittance cost for an average transaction equivalent to US$200 at about 4.5 percent, with no transaction fees. - As of June 2018, transactions worth about US$2 million had taken place under this system. ### IMF Pacific Initiative and stakeholder engagement - In February 2018 the IMF launched the Pacific Initiative to Address the Pressures on Correspondent Banking Relationships and Remittance Channels to bring together correspondent banks, respondent banks, MTOs, and other stakeholders to discuss practical, concrete, and actionable measures. - IMF staff held three roundtables in Sydney, Auckland, and Suva in February and March 2018: - Sydney and Auckland roundtables: about 70 representatives from banks and MTOs based in Australia, New Zealand, and the Pacific islands. - Participants included representatives from the FSB, APG, FSVC, World Bank, ADB, and Australian and New Zealand authorities. - Suva roundtable: Pacific regulators from 11 jurisdictions attended. - The paper summarizes roundtable discussions and considers feasible concrete actions for correspondent and respondent banks, MTOs, Pacific authorities, Australian and New Zealand authorities, and international organizations. ### Next steps and IMF role - The report draws on IMF experience, FSB recommendations, and informal discussions with Australian, New Zealand, and Pacific island authorities. - The IMF can facilitate further dialogue and help financial institutions and countries adopt successful practices taken up elsewhere. *Source: Introduction (rpraacbrpea), IMF staff summary of the PDF chapter.* ### Box 1. AUSTRAC Report—Remittance Corridors: Australia to Pacific Island Countries ### Box 1. AUSTRAC Report—Remittance Corridors: Australia to Pacific Island Countries ### Setting and update - Roundtables were the first time banks and money transfer operators—including those from the Pacific—had gathered to discuss correspondent banking relationships. - Time was relatively limited; discussions drew out common themes but did not fully resolve all differences. - IMF staff used a matrix of possible solutions (based on experience in other regions) to generate discussion and seek consensus. The draft matrix was discussed during roundtables and distributed to participants for further views. - Follow-up engagements and inputs: - 16 participants submitted written comments on the draft matrix, including 3 regulatory agencies, 6 banks, and 7 money transfer operators. - Meeting with Pacific island regulators in Suva in March 2018 provided views on priorities. - Reserve Bank of Australia hosted a stakeholder meeting in Sydney in August. - The IMF will organize a roundtable in May 2019 to follow up on technical assistance priorities. - Key analytic points: - Average remittance transaction size is about US$300. - AUSTRAC findings indicate the remittance channel from Australia to the Pacific is low risk, despite perceptions to the contrary. ### Challenges identified in Pacific roundtables - Banks based in Australia and New Zealand: - Remittance sector limited profitability due to high fixed costs, small scale of transactions (about US$300 on average), and remitters’ habit of small but frequent transactions. - Correspondent banking relationships seen as low-margin and unattractive relative to potential AML/CFT fines (although none specifically related to MTO transactions have occurred). - Concerns over insufficient transparency of MTO ownership, aggregation and netting practices, and difficulty complying with AML/CFT and KYC standards. - Banks aim for the highest standards due to regulatory uncertainty and tighter global regulatory standards since the global financial crisis. - In some instances banks seek information on customers’ customers, despite FSB and FATF noting this is neither necessary nor required by international standard. - Money transfer operators (MTOs): - Business models vary from global networks (e.g., Western Union, MoneyGram) to small family operations specializing in particular corridors and communities. - Smaller operators feel required to provide substantial information to open/maintain bank accounts and face high transaction costs. - Perception that sector is regarded as risky by global correspondent banks; some reported bank accounts closed without explanation. - Account closures have led some MTOs to use personal bank accounts or physically transport cash, potentially driving activity underground and raising financial stability risks. - Global correspondent banks: - No global banks participated in the roundtables; views inferred from other regions suggest a perception of a high risk-versus-reward ratio for Pacific remittance business. - Perception that global banks treat all remittances in the region as high risk, despite AUSTRAC findings to the contrary. - Some participants felt withdrawals and closures were driven by pressure from US correspondent banks; if problems stem from US global correspondent banks, a multilateral solution is required. - Regulators: - Need for greater clarity on regulatory expectations despite US authorities’ and FSB efforts; coordination among Pacific island regulators and with Australian and New Zealand authorities is considered insufficient. - Responsibilities related to AML/CFT in New Zealand are spread across multiple agencies, causing perceived lack of clarity. - FSB identified weak industry supervision of MTOs globally. Challenges include diversity of MTO scale, small amounts, small entities, and in some cases unlicensed/unregistered MTOs. - Pacific islands need to improve AML/CFT frameworks, ensure compliance, and fully communicate regulatory and supervisory actions to stakeholders. - Regional communication: - Regulators meet regularly, but there is no similar forum among banks or MTOs. - More regular communication between banks and MTOs could help keep correspondent banking channels and MTO accounts open and facilitate fintech solutions. - Lack of regional harmonization in the Pacific may contribute to high costs for banks and MTOs operating across countries. - Greater coordination among Pacific island regulators could be promoted by the Pacific Island Regional Initiative of the Alliance for Financial Inclusion (PIRI) with AFSPC support; strengthening payment systems with World Bank assistance could promote better communication. - Further dialog: - Continued discussions among all parties can build understanding and consensus. - Increased engagement with major global banks that have correspondent relationships in the region is especially important. - Dialog could identify gaps in technical assistance and help participants keep up-to-date with fintech and other potential solutions. ### Matrix of potential solutions and categories - The matrix grouped possible measures into four categories: 1. Ensuring banks’ capacity to assess and manage correspondent banking relationship risks (focus on communication and information sharing). 2. Addressing compliance costs and profitability (technological improvements and standardization to lower AML/CFT compliance and remittance costs). 3. Regional solutions (training, harmonization of regulations and supervision). 4. Public support (potential role of public sector in facilitating and financing solutions). - Broad agreement emerged on a limited set of measures: - Improve communication, coordination, and information sharing. - Enhance regulatory compliance, supervision, and cost control. - Strengthen knowledge and efficiency through training. - Explore fintech measures to lower compliance and remittance costs, noting skepticism that fintech alone can deliver solutions without trust and customer due diligence. ### Responses to the matrix — prioritized actions and areas for solutions - Communication, coordination, and information sharing: - Consensus on need for better communication among stakeholders to lower AML/CFT compliance costs and resolve issues more quickly. - Supervision, compliance, and cost control: - Need to meet higher AML/CFT standards while keeping costs low; emphasis on standardization and harmonization of regulation, supervision, bank requirements, and MTO practices to reduce fragmentation-driven costs. - Training and capacity building: - Implementation of recommendations requires training for MTOs, local banks, and supervisors. - Training can promote increased compliance, reduced risk, consistent implementation of standards, and lower compliance and monitoring costs. - Financial literacy education for remittance senders and recipients can make compliance less costly. ### Selected proposed actions (from Tables 1 and 2) with responsibilities, progress, and timelines - Communication, coordination, and information sharing (selected actions): 1. Regular meetings among major stakeholders (regulators, banks, MTOs). - Responsibility: Major regulatory or other authorities could facilitate periodic meetings. - Progress/timeline: Reserve Bank of Australia hosted a meeting in Sydney in August; New Zealand could consider organizing a forum; IMF will organize a roundtable in May 2019; propose Pacific island regulators gather banks and MTOs once a year. (Short term) 2. Extend discussion to include US authorities and principal correspondent banks. - Responsibility: IMF with assistance of FSVC and FSB. - Progress/timeline: IMF and FSB will engage with US global banks and regulators to sensitize them to Pacific circumstances and encourage participation; Central Bank of Samoa suggested inviting US regulators and global banks to the annual Pacific Central Bank Governors Meetings. (Short term) 3. Ensure ready access to information on AML/CFT supervisory priorities and outcomes, including national risk assessments. - Responsibility: Australian, New Zealand, Pacific island supervisory authorities with assistance of the ADB. - Progress/timeline: Several Pacific islands have developed national risk assessments with ADB assistance; these could be posted on FATF webpage and regional sites; APG and FATF can advise on additional documentation. (Medium term) 4. Complement AUSTRAC 2018 Pacific remittance corridors risk assessment with assessments for New Zealand–Pacific corridors. - Responsibility: New Zealand and Pacific island regulatory authorities with IMF assistance. - Progress/timeline: Data limitations may preclude replication of AUSTRAC analysis, but some quantitative assessment is likely feasible and could bolster the case for a risk-based approach. (Medium term) 5. Establish a Pacific island MTO association and code of conduct. - Responsibility: Pacific island MTOs, with assistance from ARCPA. - Progress/timeline: Steps being taken as a private sector initiative; IAMTN is developing a code of conduct. (Short term / Medium term) 6. MTO associations could clarify bank onboarding requirements for members. - Responsibility: ARCPA and other MTO associations, coordinating with banks. (Medium term) - Supervision, compliance, and cost control (selected actions): 1. Further clarify regulatory expectations in Australia and New Zealand, especially on implementing a risk-based approach, in line with FSB action plan. - Responsibility: Australian and New Zealand authorities. - Progress/timeline: FSB action plan includes publishing guidance on banking MTOs and implementing a risk-based approach. (Short term—FSB timeline later in 2019; some authorities have already implemented this recommendation.) 2. Develop and implement simple, standardized template utilities for MTO customer identification (including biometric data), due diligence, and transaction recording to be rolled out regionally. - Responsibility: Development overseen and funded by an international financial institution; implementation to benefit from MTO associations and possibly regulatory authorities and banks. - Progress/timeline: ADB, with IMF technical advice, has developed project terms of reference and will fund development of a pilot for implementation in Samoa. Use of a standardized template consistent with Australian and New Zealand AML/CFT monitoring and reporting requirements will lower compliance and transaction costs. (Short term) 3. Strengthen AML/CFT audits of larger MTOs and share key findings with banks and supervisors. - Responsibility: MTOs, with assistance from regulatory authorities and banks to determine audit standards and coverage. - Progress/timeline: Funding and quality of audits are key; standardized audits will lower compliance costs. In New Zealand, MTO audits must be conducted by a suitably qualified independent auditor every two years (audit reports submitted to regulator only if requested) and could serve as a model. (Medium term) 4. Harmonize bank onboarding and due diligence information requirements. - Responsibility: Banks and bankers’ associations, with input from regulatory authorities and MTO associations. - Progress/timeline: Harmonization will lower compliance challenges and costs for MTOs and facilitate associations’ guidance to members. (Medium term) 5. Harmonize AML/CFT regulatory requirements across Pacific island countries and ensure consistency in implementation in accordance with international standards. - Responsibility: Pacific island regulatory authorities, with advice from APG. - Progress/timeline: Harmonization would lower compliance and due diligence costs; APG evaluations and greater coordination and training can help. (Medium term) *Source: Box 1. AUSTRAC Report—Remittance Corridors: Australia to Pacific Island Countries (excerpt).* ### 6. Standardize cross-border payment ### 6. Standardize cross-border payment ### Summary of proposal - Standardize cross-border payment messages, based on ISO20022. - Proposed by FSB. - Rationale: Standardization will lower transaction costs and facilitate information sharing. - Time horizon: (Medium term) ### Remittance architecture and technology (high-level models) - Use specialized banks to handle payments with risks in particular payments’ corridors. - Example: The Tonga Development Bank currently provides such a service; the World Bank is looking into replicating this model for other corridors. - Use a specialized, regulated financial payments firm as an intermediary between sending and receiving jurisdictions. - Expected benefits: reduces the number of correspondent banking relationships needed and lowers AML/CFT compliance costs. - Use fintech solutions to lower the cost of international transfers or to facilitate AML/CFT compliance at low cost. - Considered a longer-term approach. ### Actions from Table 3 — Training and capacity building - 1. Training and capacity building for authorities to improve AML/CFT supervision of banks and money transfer operators and strengthen financial intelligence units’ capacity to develop guidance and promote information sharing. - Responsibility: APG, IMF, ADB and some supervisory authorities within the region. - Comments and progress: The IMF has planned training for Samoan authorities. Further regional training will be developed by the IMF. Additional discussion and coordination among training providers is essential, given limited resources. This could be a major focus of a roundtable follow-up in early 2019. - Time horizon: Short term - 2. Training and capacity building in banks and money transfer operators. - Responsibility: Supervisory authorities, with support from the ADB, APG, and IMF, some supervisory authorities within the region. - Comments and progress: The APG and the IMF cannot provide training directly to private sector institutions. Support can be provided through train-the-trainer assistance to supervisory authorities. This could also be included in countries’ financial inclusion strategies. - Time horizon: Medium term - 3. Training of remittance senders and recipients. - Responsibility: Banks, money transfer operators, and authorities, perhaps with involvement of the Alliance for Financial Inclusion. - Comments and progress: Some banks in Pacific island countries already have financial literacy programs. These could be the basis for specific training on sending and receiving remittances. In New Zealand, training can be linked to the recognized seasonal employer labor mobility program. - Time horizon: Medium term ### Actions from Table 4 — Remittance architecture and technology (specific proposals) - 1. Use specialized banks to handle remittances. - Responsibility: Private sector. - Comments and progress: The Tonga Development Bank already functions this way in a limited form for the New Zealand–Tonga corridor. Consideration is being given to expanding this solution across other remittance corridors. A second-tier commercial bank is examining feasibility for certain remittance corridors in the Pacific. - Time horizon: Medium term. - 2. Use a financial “hub and spoke” payments network to minimize the need for correspondent banking relationships and lower the cost of due diligence. - Responsibility: Private sector. The IMF will explore feasibility. - Time horizon: (Medium term) - 3. Use fintech to lower the cost of remittances and meet AML/CFT compliance requirements. - Responsibility/Guidance: Regulators should encourage “safe development of fintech” in line with the Bali Fintech Agenda. - Comments and progress: Fintech and remittances will be discussed at the Joint Central Bank of Samoa–IMF-ADB regional seminar FinTech and Financial Inclusion in the Pacific Island Countries on November 13, 2018. - Time horizon: (Medium term) ### Priorities by agent (extracts from Table 5) - Banks - Harmonize and share bank onboarding and due diligence information requirements. (Partners: Money transfer operators, regulatory authorities, international financial institutions) — Table 2 - Standardize cross-border payments messages. — Table 2 - Participate in training for remittance senders and recipients. — Table 3 - Money Transfer Operators - Establish a Pacific islands money transfer association and code of conduct to promote coordination and high standards of AML/CFT compliance among members, strengthen communication, and report on admission of agents in the money transfer operator sector. (Partners: International financial institutions and regulatory authorities) — Table 1 - Implement simple, standardized template utilities for money transfer operator customer identification (including biometric data), due diligence, and transaction recording. — Tables 2 and 4 - AML/CFT audits of larger money transfer operators, with key findings shared with banks and supervisors. — Table 2 - Regulatory Authorities - Regular meetings among major stakeholders, including regulators, banks, and money transfer operators, to promote clear communication, take stock of new developments, progress in resolving previously identified issues, and identify emerging issues to be addressed. (Partners: International financial institutions and other regulatory authorities) — Table 1 - Clarify and harmonize regulatory requirements and expectations, especially with respect to implementation of a risk-based approach, in line with the FSB action plan. — Table 2 - Training and capacity building in banks and money transfer operators — Table 3 - International Financial Institutions - Training and capacity building for authorities to improve AML/CFT supervision of banks and money transfer operators and strengthen financial intelligence units’ capacity to develop guidance and promote information sharing. (Partners: Other international financial institutions and national regulatory authorities) — Tables 1 and 3 - Extend discussion of correspondent banking relationships in the Pacific to include US authorities and principal correspondent banks. Improve communication between the Pacific regulators and all involved Australian and New Zealand regulators. — Tables 1 and 2 - Develop and implement simple, standardized template utilities for money transfer operator customer identification (including biometric data), due diligence, and transaction recording—to be rolled out regionally. — Tables 2 and 4 ### Implementation timeline and next steps - IMF expectation: Implementation of short-term recommendations could begin within one year; medium-term actions will take more time to develop and yield results. - IMF planned follow-up: IMF staff plans to follow up with a Pacific roundtable in May 2019 focused on key technical assistance priorities for Pacific island regulators, banks, and money transfer operators. - Ongoing IMF activities and monitoring: - Following up on a pilot customer due diligence tool in Samoa. - Following up on possible formation of an association of money transfer operators in the Pacific. - Facilitating discussion on fintech and financial inclusion to identify ways to reduce fragility of correspondent banking relationship links and remittance flows. - Monitoring pressure on remittances and correspondent banking relationships in the context of bilateral surveillance in the Pacific islands and capacity development. *Source: rpraacbrpea - 6. Standardize cross-border payment (PDF chapter).* --- _Source: https://www.imf.org/-/media/files/publications/dp/2019/english/rpraacbrpea.pdf_