Profit declines forcing money transfer operators' closure
Declines in profitability and concerns over reputational risk are promoting the closure of existing money transfer operator (MTO) accounts in Samoa, particularly U.S. dollar-based corresponding bank relations (C.B.Rs).
This is highlighted in a 71-page report on the 2018 article IV consultation on Samoa published by the International Monetary Fund in June 2018.
Remittances to Samoa account for more than 15 per cent of gross domestic product and are primarily channeled through MTOs. The risk of money laundering and financing of terrorism through remittance providers to the Pacific is generally considered low.
However, according to the report, the weaknesses in supervision and comparable shortcomings in the implementation of anti-money laundering and counter-financing of terrorism compliance prompt these global correspondent banks to heighten scrutiny or close the accounts of their MTO customers.
According to a recent survey sponsored by the Fund's Asia and Pacific Department, out of 12 licensed MTOs operating in Samoa, nine have lost at least lost one CBR since 2013, and four have also had transaction limits imposed on their accounts.
"Although Samoa is still far from a complete loss of CBRs in the main remittance currencies (Australian and New Zealand dollars), currently one MTO has access to CBRs in US dollars, compared for example to seven MTOs with current access to CBRs in New Zealand dollars," said the report.
"Consequently, the US dollar-denominated share of total remittances fell from a high of 21 per cent in 2012 to a low of 13 per cent by the third quarter of 2014, in part reflecting the withdrawal of US dollar-based CBRs.
"However, the overall volume of remittances being channeled through MTOs has remained resilient, reflecting the fact that a substantial share of remittances come from New Zealand and Australia, where access by MTOs to the CBRs remains stable."
The report highlighted that the loss of CBRs could prompt further MTO market consolidation, potentially increasing the cost to remit, and a number of small-sized MTOs are either partnering with or being absorbed by larger, more established MTOs with CBRs.
"Although the costs of sending remittances are significantly lower through an MTO than a bank, by global standards, the average cost to remit remains high in Samoa - far above the sustainable development goal target of 3 per cent.
"The cost of regulatory compliance not only raises the cost of sending money, but also makes entry of new MTOs in the local market difficult. Given that about 85 per cent of remittances are channeled through MTOs, the closure of MTOs' bank accounts and consolidation of the market could further raise the average cost of sending remittances.
"While MTO market consolidation could in principle entail some efficiency gains, the closure of smaller MTOs could also affect financial inclusion, given the financial reach of MTOs into the local community. There is a risk that an increasing share of remittances maybe sent through unregulated channels, such as hand carrying cash."
Overall, the report said, the risk of a complete and abrupt loss of CBRs is very low for Samoa, particularly given the mitigation measures being undertaken by the Samoan authorities. .However, Samoa does remain vulnerable to the further withdrawal of CBRs.