In a January 9 Senate Banking committee hearing, both legislators and witnesses touched on the importance of a risk-based approach (RBA) in the federal anti-money laundering and counter-terrorist financing regime.
While the hearing, Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement, mostly focused on information sharing and beneficial ownership, there was much discussion of getting regulators to support the RBA, particularly in regard to bank examinations. The Charity & Security Network has consistently promoted the need for a RBA in combating terror financing, and cited lack of adherence to it as a factor in the global bank derisking crisis that has adversely impacted nonprofit organizations (NPOs).
In a discussion of greater information sharing as a tool to enhance ALM/CFT programming, Heather Lowe, legal counsel and director of government affairs for Global Financial Integrity, noted that it "needs to be done with some appropriate safeguards, especially where it may result in somebody being delayed banking services." She argued that anyone in such a situation needs "an opportunity to disprove whatever information has been collected on them and give them access if they do have legitimate business." Reliance on misinformation in determining risk has also been cited as a factor in bank derisking of NPOs, and those impacted by this trend have asserted the need to correct any perceived problems or deficiencies.
Greg Baer, president of the Clearing House Association, introduced discussion of the RBA in his opening remarks: "An effective approach should be risk-based," he said. "Unfortunately, banks have been pushed away from risk-based approaches because their performance is graded not by law enforcement .... but by bank examiners, who do not track how the intelligence is actually used," Baer explained. He noted that this has lead to bank derisking, dropping clients perceived as high risk rather than managing the risks, which undermines development and financial inclusion goals.
Lowe noted that financial institutions are generally attempting to implement the RBA, but have been stymied by bank examiners who are "not open to the risk-based approach that financial institutions have put in place. They're checking the boxes." Dennis Lormel, president and CEO of DML Associates and the former chief of the FBI's financial crimes program, echoed this assertion when he said, "Regulators now put an emphasis on check boxes. Getting important information from banks to law enforcement has gotten contorted because of perceived concerns of regulators Targeted monitoring is better."
Lowe surmised that bank examiners are reluctant to endorse a RBA because it is more work "when you have a totally risk-based system and can't use one-size-fits-all," adding," That shift needs to happen, and it will be a big one."