Warning on China financing in Pacific

Australia will embark on a major strategic push into the Pacific amid fears Western banks are in retreat over the regulatory risks of money laundering and terror financing in the region.

Treasurer Jim Chalmers. Picture: NewsWire / Martin Ollman

Australia will embark on a major strategic push into the Pacific amid fears Western banks are in retreat over the regulatory risks of money laundering and terror financing in the small island region, leaving a potential vacuum the US fears will be filled by China.

Treasurer Jim Chalmers, in a speech on Tuesday to the US/Australia Pacific banking forum in Brisbane, warned of “confronting” challenges with the most rapid withdrawal of banking services of any region in the world on Australia’s doorstep.

The risk of Western banks pulling out of the region would leave many nations struggling to finance infrastructure projects, increasing the likelihood China could step in to fill the void.

While senior government sources said there was no evidence yet that this was occurring, the US had made it clear there was profound risk of a strategic gap should the West fail to address the problem.

The Solomon Islands security pact with China, which blindsided Australian and US officials, still lingers as an example of the strategic challenge in the region, now extending to the stability of the banking and finance sector.

Nauru also recently signed a deal with the state-owned Bank of China following the withdrawal of Australia’s Bendigo and Adelaide Bank, with the region’s reliance on a cash economy adding to the risk profile of Western banks.

“The challenges in front of us are clear, and confronting,” Dr Chalmers will say in his speech on Tuesday, after committing to increase Australian development aid to the Pacific Islands nations to $2bn next year.

“We know the Pacific has seen the fastest withdrawal of correspondent banking services of any region in the world.

“We know these vital services help communities to access foreign currencies and international payment systems. And we also know that without them, large parts of the Pacific risk being cut off from the global financial system.

“At stake here is the ability of the Pacific to engage with the world.”

While not naming China as the strategic threat in the face of the banking crisis, Prime Minister Anthony Albanese and US President Joe Biden last year pledged to ensure a more robust banking governance and regulatory regime across the region as a priority of the alliance.

ANZ and Westpac are maintaining a presence in the region but are seeking greater reassurances about regulatory and governance regimes to de-risk their exposure.

“We’re all here today because we refuse to let the decline in banking services in the Pacific continue,” Dr Chalmers said.

“Ensuring all Pacific countries have access to safe, secure and stable banking is one of Australia’s highest priorities in the region. You can bank on Australia to work with you to keep the Pacific connected to the global financial system.

“Our goals here are clear: we want to arrest and reverse the decline in services, alleviate the immediate pressure on local financial systems, and attract new private capital into Pacific markets.

“Our strategy is to build more resilient banking infrastructure, bolster its integrity and boost private sector investment.”

Money laundering and counter-terrorism remain the major risk factors for Western banks continuing to maintain a presence.

In a statement, the Albanese government said “helping to prevent the loss of banking services in the Pacific is vital to the safety, security and economic development of our region”.

“The Pacific has been acutely affected by the global trend of financial institutions reducing or withdrawing banking services, with the fastest withdrawal of correspondent banking relationships anywhere in the world.

“The decline of banking services affects the ability of Pacific banks and whole countries to access cross-border payment services, connect to the global financial system and fund projects vital for economic development and essential services.”

Dr Chalmers announced a further $6.3m in funding to the World Bank for digital security across Pacific Island countries and the Asian Development Bank to foster regional compliance with anti-money laundering and counter-terrorism financing requirements.

The Attorney-General’s Department would also assist with criminal justice and law enforcement capacity in the region.

“The funding announced today aligns with solutions discussed at the Forum, such as strengthening Pacific countries’ anti-money laundering and counter-terrorism financing frameworks, building up enabling infrastructure and institutional capacity, and exploring how digital financial innovations can support compliance and financial inclusion,” the government’s statement said.

“Economic security and national security are the Albanese government’s highest priorities.”