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DE-RISKING HAS A DISPROPORTINATE negative effect on smaller banks (including offshore banks), customers (including international business companies) and places greater scrutiny and pressure on correspondent banks.
The large fines imposed by the regulatory agencies have caused the international banks to institute de-risking on a large scale with a rather broad brush approach.
In the United States (US), regulatory crackdowns and fines have led banks to sever relationships with cash based as well as faith based businesses which usually have large cash deposits. Churches have had their accounts closed without recourse to negotiation.
It is not just in the developing world that the phenomenon of de-risking is causing fissures in the banking landscape. In Britain students from Iran, Sudan and Syria cannot open bank accounts. In America, foreign diplomats and embassies complain that they too are being denied access to banking services.
Even when they obtain explicit approval from US regulators, Charities such as Save the Children, the Red Cross and Christian Aid have found it difficult to convince banks to transfer funds to places like Syria due to sanctions.
The consequences of de-risking open up another area of concern for countries like Barbados where the flow of remittances constitute significant inflows of foreign exchange and family support. Somalia is scrambling to find substitute conduits for life sustaining remittances cut off when the international banks shut down business with Somalia’s money transfer operators. Barclays has defused a legal row with Africa’s biggest remittances provider by agreeing to keep its account open for a period of time that allows the company to find a replacement bank. Dahabshiil, which remits hundreds of millions of dollars back to Somalia each year, said it had agreed on a settlement of its injunction against Barclays on “mutually acceptable terms”.
In most cases, banks are not ending relationships because they have evidence of wrongdoing. They estimate that the costs of checking on their correspondents outweigh the profits they generate from this area of business. In this scenario, foreign correspondent accounts are considered at higher risk because it can be difficult for a bank to see who is doing business through these customers.
Senior bankers are unsure of where the goalposts will be in the near future as new regulations and sanctions come down the pipe almost daily and there is some lack of cohesion between regulators. For instance, it is felt that US fines reflect an aggression which is more than what Financial Action Task Force regulations would indicate.
The exact size of the retreat in correspondent banking relationships is difficult to gauge because of a paucity of recent global data, but executives at major banks say they are dropping as many as a third of their correspondent relationships.
An unintended consequence of de-risking is that business is being driven to smaller players who lack the resources to properly undertake due diligence and more transactions are being driven underground. A growing lack of transparency between some businesses and their banking service providers now directly threatens the ability of banks to effectively manage money laundering and terrorist financing risk.
There is an emerging consensus that de-risking is a threat to global trade.
• Louis Parris is a certified compliance professional, consultant and publisher of the Caribbean Banking Intelligence AML Compliance Newsletter. Email: firstname.lastname@example.org. This article is the second of a four-part series, which continues next week.