De-risking and the U.S. effect

Written by Jason Morris on Tuesday April 25, 2017

In a recent ICA article, we addressed the issue of de-risking and in particular the effect this is having in the Caribbean. The article referred to the fact that the United States are mostly responsible for the de-risking drive, and I want to highlight some of the indicators of this and also to look at why the U.S. are taking this approach.

In recent years there has been a trend toward de-risking of sectors, including money service businesses (MSBs), foreign embassies, non-profit organisations (NPOs), and correspondent banks. The closures have had a ripple effect on financial access for the individuals and populations served by those businesses. Regulatory authorities continue to emphasize that de-risking is not in line with international guidelines, and in fact is a misapplication of the risk-based approach.

Yet in the absence of clear instructions or an incentive to bank these clients, account closures continue across regions of the world who have the most to lose, including significant humanitarian, economic, political, and security implications.  

To further complicate matters, the U.S. Government is sending conflicting signals to the banking sector. Some regulatory officials and transnational bodies have roundly criticized banks for de-risking. Senior officials from the U.S. Treasury Department and the Financial Action Task Force (FATF) have expressed concerns that higher-risk clients, if not banked by larger, more sophisticated banks, will seek out banking relationships with smaller, less-well-governed financial services firms or go underground altogether. Indeed, FATF guidance for a risk-based approach (money or value transfer services) states the following:

 All supervisors should sufficiently and consistently clarify their MVTS related supervisory expectations over the RBA as part of their day-to day supervision and when wholesale de-risking occurs as a result of misinterpreting the RBA. Supervisors may take the opportunity to clarify that the intention of a RBA is not to eliminate risk by refusing services to any particular sector, but to manage risk effectively. Supervisors should provide meaningful and actionable guidance on the effective implementation of the RBA to both the banking sector and supervisory staff. With appropriate systems and controls in place, banks should be able to manage and mitigate the potential ML/TF risks posed by some MVTS providers. Other relevant FATF guidance on the supervision of banks can be found in the FATF RBA Guidance for the banking sector and the FATF Guidance on the Risk-Based Approach for Effective Supervision and Enforcement.

Despite these conflicts, the United States continue to lead the way in de-risking across numerous jurisdictions. A recent report shows that 67% of local/regional US banks terminated correspondent banking relationships between 2012 and mid-2015. This is more than twice that of the second highest, the UK with 30%. Given regulatory authorities openly discouraging this activity, why are U.S. banks doing this?

Bank Secrecy Act Advisory Group (BSAAG) members have begun to discuss and identify the factors that lead U.S. banks to terminate relationships. De-risking is one of four strategic priorities that they identified and adopted in May 2015 to guide their areas of primary focus over the coming years. One area of focus has been the ability of money services businesses (MSBs) to obtain and retain banking relationships. And one initial question has been the level of anti money laundering (AML) supervision experienced by the MSB sector and the extent to which banks can rely on that supervision. 

Countries outside the U.S. are bearing the costs of de-risking. Nations like Somalia have large populations that are dependent on remittance payments from friends and family living and working abroad. Now reliable and cost-effective remittance payment providers are shrinking in number, with potentially disastrous results. This situation is absurd in an era when technology can facilitate payments in seconds.

There’s an irony in that the U.S. themselves are also affected as a result of their own aggressive de-risking policy. Businesses will not declare the true nature of their activity if they feel they might be caught in the crosshairs, there is absolutely no incentive for them to do so. This means that banks may not fully understand their customers' businesses, making it difficult for them to detect potentially criminal activity. As a result, banks are likely to see an upsurge in ‘false positives’ for criminal activity, skewing the data they then report to financial intelligence units. All this makes it harder for law enforcement and other national security agencies to rely on banks' data to perform their roles effectively.  

Ultimately, U.S. authorities must now take the lead in crafting a balanced and coordinated approach to the issues that prompt de-risking. A recent World Bank report observed that de-risking is a ‘complex and manifold’ phenomenon and that addressing the issues underlying de-risking is a ‘joint public-private responsibility that needs to be dealt with in partnership.’ If we can’t fix the de-risking problem, criminals and money launderers will be laughing all the way to the bank.

Would you like to develop your knowledge on the subject?

The ICA Certificate in Money Laundering Risk in Correspondent Banking provides you with an opportunity to understand the fundamentals of correspondent banking. You will look at the inherent money laundering risks and develop skills that will help you recognise potentially dangerous situations in correspondent banking relationships before they escalate into what could become major events.