Banks – between a rock and a hard place?

Written by Dawn Fisher on Wednesday April 29, 2015

Yesterday the Financial Conduct Authority in the UK released a statement of their expectations of Banks’ management of money laundering risk:

Where a bank does not believe that it can manage the money laundering risk associated with a business relationship effectively, it should not enter into, or maintain, that business relationship. But the risk-based approach does not require banks to deal generically with whole categories of customers or potential customers: instead, we expect banks to recognise that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately.

While the decision to accept or maintain a business relationship is ultimately a commercial one for the bank, we think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements. As a result, we now consider during our AML work whether firms’ de-risking strategies give rise to consumer protection and/or competition issues.

As someone who started her AML career in an MSB (a sector that is feeling the effects of banks’ de-risking efforts) I fully sympathise with businesses that are being de-risked out of banking relationships – you cannot tar all within an industry with the same brush.  Certainly the MSB I worked for had very stringent AML policies and procedures in place (arguably over and above what I have seen in some banking institutions) which would have been evident to anyone undertaking a due diligence visit; but the fact remains that higher risk sectors fall outside of banks’ risk appetite for a number of reasons including:

• The perceived AML/terrorist financing risk.  If they get it wrong, a bank faces substantial costs in terms of enforcement action and reputational damage to name a few; and
• The cost of compliance.  In some instances a bank may determine that maintaining relationships with certain types of business are cost-prohibitive in terms of the compliance effort required to maintain the account.

Following the FCA statement of expectation, it seems that banks must now consider even wider implications of the implementation of their risk-based approach, anticipating consideration by the regulator whether their actions give rise to consumer protection and/or competition issues.

From a consumer protection angle there is certainly an argument that offloading customers where the AML/TF risk is perceived to be unacceptable is part of protecting those customers that do not pose such a risk but can the regulator really have it both ways?  On one hand financial institutions are told that they need to understand the AML/TF risks posed to their operations and to put in place, using the risk-based approach, a mitigation framework proportionate to the nature, scale and complexity of their operations. Yet it appears that if they decide that certain business is outside of their risk appetite, they face being taken to task by the regulator over consumer protection and/or competition issues.  Surely it is up to the institutions themselves to decide what level of AML/TF risk they are prepared to assume and can effectively mitigate?  If they thought they could effectively mitigate the risks, why would any institution want to turn away business?

I suggest that it is fear of the regulator that is driving these decisions, with many firms also having to balance expectation from foreign regulators – particularly those with a US nexus to their operations.  Taking action against a firm for egregious wrong-doing is one thing, but is de-risking on the scale we are seeing it a conscious reaction to a lack of trust in the regulator to deal with firms in a fair manner?  I would suggest that sneaky tactics like the super-secret country risk list used by the UK regulator to assess firms’ country risk assessments does nothing to foster trust or good relations and firms are running scared and perhaps being over-zealous in their efforts..

What is required is more dialogue with industry, more transparency from the regulator and no more veiled threats as this latest statement from the regulator, quite frankly, reads as though if they cannot get you for an AML/TF issue they will beat you with the consumer protection/competition stick. 

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