Bank De-risking Represents Market Failure, Report Says

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Date: 
December 10, 2015

Bank de-risking represents a market failure. In such instances, either government or the public sector must intervene to re-align market factors, either through incentive programs or through enhanced regulatory guidance, concludes a new report from the Global Center on Cooperative Security and Oxfam America, Understanding Bank De-risking and its Effects on Financial Inclusion.

According to the report, the goals of financial inclusion and anti-money laundering and countering the financing of terrorism (AML/CFT) are not inherently in conflict, although tensions emerge in practice. Overly restrictive AML/CFT measures “may negatively affect access to financial services and lead to adverse humanitarian and security implications,” the report states. It adds that de-risking actually contributes to increased vulnerability by “pushing high-risk clients into smaller financial institutions that may lack adequate AML/CFT capacity, or even out of the formal financial sector all together.” 

Regulatory authorities have been unable to keep up with market trends in this area, the report explains. At the same time, a lack of accountability and leadership to address de-risking, together with ambiguous regulatory frameworks and a lack of data means that no one has taken responsibility for addressing the problem. Bank de-risking also has public relations repercussions, the report notes, as “banks are seen as cutting off crucial funds to vulnerable populations.”

Many financial institutions have opted to exit relationships deemed “high risk,” including money service businesses, foreign embassies, international charities and correspondent banks. Closures of these clients’ accounts also affect the populations these sectors serve. “Charities operating in conflict and other sensitive environments rely on all of these channels to move much needed resources internationally,” the report states. Part of the problem, the report explains is that regulatory schemes designed to offer flexibility are also ambiguous and subjective. The fact that large fines have been imposed for noncompliance only adds to the risk aversion.

The report recommends that regulatory authorities gather data on de-risking, produce guidance to provide clarity on AML/CFT requirements, and assume a leadership role in stakeholder convenings, among other items. Financial institutions should review and revise their Know Your Customer policies and procedures to better mitigate and manage risk. Banking customers, including nonprofits, should identify core vulnerabilities, provide continued staff trainings on AML/CT standards, including the flagging of suspicious transactions, and focus on front-end de-risking by conducting enhanced assessment prior to client onboarding.

Read the full report here