Is Treasury Starting to Pay Attention?

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November 24, 2015
Andrea Hall

It seems that Treasury is starting to pay attention. Is it because the Financial Action Task Force (FATF) will be in the US in a few short months to evaluate the effectiveness of our counter-terrorist financing laws? Are they stepping up their game temporarily? Will all of this “concern” disappear as soon as FATF packs their bags and heads home to Europe?

While recent statements by the agency indicate a desire to combat the de-risking problem by encouraging financial institutions to manage risk appropriately, on a case-by-case basis, the sheer cost of compliance coupled with Treasury enforcement data has these same organizations reacting with fear, closing accounts rather than looking for mutually beneficial solutions.

Recent remarks by two top Treasury officials indicate that the agency is starting to send a message to financial institutions that this isn’t an all-or-nothing proposition. Until now, Treasury’s response to the issue has been, “We can’t tell banks who to keep as customers.” Now it’s “The United States has never advocated a standard of perfection.”

In his November 12 remarks at the Center for Global Development, Treasury’s Under Secretary for International Affairs Nathan Sheets said, “This does not imply a zero failure approach, and our standard is not zero tolerance.” His remarks were echoed by Acting Under Secretary for Terrorism & Financial Intelligence Adam Szubin (clearly they share the same speechwriter) speaking to the American Bankers Association on November 16 when he said, “none of this means zero tolerance, zero failure, or zero risk.”

At the same time, however, Treasury has made it easy for banks to fall in line because they’ve defined de-risking as “indiscriminately terminating, restricting, or denying services to a broad class of clients, without case-by-case analysis or consideration of mitigation options.” Because not ALL humanitarian aid organizations have had their financial services terminated, banks can argue that they are looking at charity clients on a case-by-case basis.

But banks don’t seem to be holding up to the second part of Treasury’s definition, what Sheets described as a “careful assessment of the risks and the tools available to manage and mitigate those risks.” In fact, banks aren’t even telling charities why they’re being dropped, which of course makes it extremely difficult to fix a perceived problem.

Correspondent Banking

Both Sheets and Szubin pointed to a decline in correspondent banking relationships as a crucial piece in the de-risking puzzle. Sheets even acknowledged that maintaining these relationships is essential to charitable activities, along with facilitating international trade, conducting cross-border business, providing US dollar financing and fostering global economic growth (wonder which of these he considers most important?).

Large banks have reassessed the risks associated with correspondent clients. New surveys by the World Bank support this conclusion—three quarters of large banks said they’d reduced the number of the correspondent accounts in recent years. Fewer correspondent banking relationships means reduced ability to retain clients utilizing these services regularly. High-risk countries are impacted the most. This, of course, is where humanitarian aid organizations are doing their life-saving work.

What’s Driving the Account Closures?

Sheets and Szubin cited a number of factors at play in when financial institutions decide to close accounts, including low interest rates, more rigorous capital and liquidity requirements, and, most frequently, AML/CFT compliance. The latter involves the cost of complying with regulations, uncertainty about appropriate due diligence, and the nature of enforcement actions. Banks are concerned that involvement with certain high-risk clients could increase the length, frequency or intensity of regulatory examinations, Sheets said.

The Treasury officials played the enforcement angle as a response to “egregious cases involving banks that repeatedly broke the law, in some cases for more than a decade.” As in, ‘nothing to worry about if your due diligence is reasonable.’ However, a new report by the Center for Global Development shows that both the number and value of AML-related fines imposed by US regulators “has been following a sharp upward trend over the past fifteen years.” The value of fines “has soared over the same period,” the report states. Perceptions within the industry match these findings. No wonder. Treasury can reassure the regulated community all it wants, but when financial institutions see data like this, they’re certain to react with increased caution, which unfortunately means more de-risking.

Treasury will need to continue to convey to banks what risk-based really means, long after FATF has concluded their mutual evaluation of the US. Banks will need to re-evaluate the level of risk they’re willing to accept. And all stakeholders will need to look for ways to make that feasible.