First part of my interview with the head of the world’s anti-money laundering task force on de-risking, and the fraught relationship between disruptive fintech companies and the banks which handle their accounts.
Wholesale de-risking or de-banking,
which involves denying accounts to customers deemed high risk, is rapidly becoming a major sector issue and even a “crisis” in areas in vital need of cross-border transfers.
David Lewis, executive secretary of the Financial Action Task Force (FATF), said the agency would continue to rail against a practice it believes fuels black markets, following two statements issued last year.
Troubled areas served by charities, or those such as the Caribbean whose economies are heavily dependent on remittance flows, are directing anger at the US.
Lewis said an FATF report into correspondent banking relationships and the impact of cutting money remitters, payment services providers and other sectors, is nearing completion.
“It’s a concern to us, as it undermines transparency within the financial sector and law enforcements ability to follow the money,” he said.
Wholesale de-risking is considered a blanket decision by banks, without due regard to the risk of individual customers within that decision-making process.
“We see it impacting mostly on customer segments that have a risk of money laundering and terrorist financing and where the profits for the bank are relatively small,” Lewis said, adding that it was a major concern for several other international finance organisations.
“We are working with the Financial Stability Board (FSB) to look at implications of banks cutting off correspondent relationships.
“This is affecting particularly areas such as the Caribbean and Africa.”
The FSB echoed claims it would merely push honest remitters underground in an attempt to stay in business.
Lewis said there are two main drivers which affect correspondent banks, money service business, charities or a host of other sectors including fintechs.
“Banks are seeing the costs of compliance rise, largely because they have been found wanting by regulators and law enforcement agencies and are finally putting in place the necessary controls,” he said.
“Sometimes I see in the press talk of stronger or revised regulations causing this, while what we are actually seeing is just the regulators starting to enforce the rules that have always been there.
“Banks are getting caught out, they are responding by investing a lot more heavily in compliance.
“This is squeezing their margin, and ultimately that is changing the risk-reward relationship to a point where the profits are so small that it’s not worth the potential reputational damage for the bank, let alone the profit, to engage in that relationship.”
US authorities are preparing guidance on the matter, with the Office of the Comptroller of the Currency stating banks’ fear of breaching AML laws is often misguided.
“Aggressive” enforcement of the Bank Secrecy Act is seen as the number one problem.
Recently Barclays announced it was selling its Africa banking arm, having decided the reward was too low given the risks of serving a volatile jurisdiction.
As legal experts have pointed out banks will consider several factors prior to making a decision, but it is often a perfectly legal business choice despite claims of competition malpractice.
Lewis said: “We are seeing them [banks] assess their relationships not just on the basis of AML/CFT risk, but on broader legal and regulatory risk and reputational risk and the commercial appetite along with the geographic appetite.”
“We have seen correspondent banks, money service business, charities and other sectors including fintechs particularly hit by de-risking.
“Secondly, we have to clarify regulatory expectations.
“The nub of that is the question of whether a bank is required to know their customer’s customer (KYCC).”
Despite the FATF insisting this is only the case “in exceptional circumstances”, many are taking no chances.
“There is a growing perception within the banking sector that they are,” Lewis said.
“However, whether they are required to know it or not, it increasingly seems that they are not comfortable maintaining the relationship if they do know it.
“There is such a fear of regulatory action that if they don’t have confidence in their customer’s customer they are pulling back.
He described it as a “big issue”.
“If they have any doubt at all on circumstances where they are required to KYCC or in situations where customers don’t offer a great profit, they are cutting them off,” Lewis said.
“We are concerned about that as it reduces transparency in financial transactions.
“It increases the ML/TF risks we are trying to address.”
In the forthcoming report, Lewis said the guidance on correspondent banking clarifies what FATF thinks regulators should be doing.
Everyone in the industry is advised to pay attention to the paper, and Lewis admits the outcome is not always easy.
“It’s a different question then about whether regulators go away and do that,” he added.
“Implementation is the big challenge here.”
Lewis echoes the fears of those who have witnessed the problems that can come with de-risking, and why cutting off a payment processor will not stop a crime from occurring.
“We recognize sometimes banks have to profile customers and look at risk from a number of different angles, we want to promote a common sense risk-based approach that doesn’t exclude a large number of customers and essentially increase risk.
“The nub of this issue for us is how to get banks to properly assess the risks and take a proper risk-based approach rather than make these blanket decisions,” he said.
“Of course if you are like a HSBC and have 55m customers, you have to be realistic about what is possible.
“What happens is if you are a big bank you get rid of the customer but not the risk, is that they move to become a customer of one of your customers.
“Ultimately, if you are a big bank you’re a clearing bank, and the customer you’ve exited will become a customer of another bank and that will probably be using you as a clearing bank.
“So you’re still exposed to the risk, you’ve just less sight of it and less ability to manage it,” Lewis concluded.
News Editor, PaymentsCompliance