Transparency, safe harbors and regulatory clarity were the buzzwords of the day at a hearing on derisking, "International and Domestic Implications of De-risking," held June 26 by the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee.
The impact of derisking on the delivery of humanitarian aid was one of the drivers of this hearing, according to subcommittee staff, and one of the witnesses, Sue Eckert, the lead author on Charity & Security Network's 2017 report on Financial Access for U.S. Nonprofits, focused her remarks on that report, its findings and recommendations. "The U.S. has a unique role to play in addressing derisking globally," Eckert said at the outset. She added that in all of her years in working on public policy, including as a Hill staffer and a former regulator, "no issue has had more serious and dire consequences" than bank derisking of nonprofit organizations. She added that the issue also extends to U.S. security and foreign policy concerns, noting that funds must be able to move in a timely and predictable manner, and the inability to do so "literally means life and death."
“The overly-punitive supervisory and examination tactics employed by federal financial regulators that came in the wake of the financial crisis have had dramatic implications on the availability of financial products and services in all of our communities,” said subcommittee chairman Blaine Luetkemeyer (R-MO). “Banking relationships with so-called 'high risk’ clients have become cost-prohibitive for financial institutions, due in large part to heightened compliance expectations. As a result, many institutions have opted to terminate relationships. This decision has resulted in the elimination of consumer and small business access to financial products and services, a decrease in the availability of money remittances, and reduced flow of humanitarian aid globally.”
Eckert's recommendation that U.S. regulators provide guidance and clarity for banks in what is expected, including promotion of the risk-based approach, was echoed by almost all of the hearing's witnesses. All agreed that record-high enforcement penalties and the ongoing fear of regulatory fines is a primary driver of derisking. This fear causes banks to reassess their risk appetite and consequently drop certain clients. Banks are pressured by federal bank examiners to limit services to clients they deem risky, explained John Lewis, senior vice president of corporate affairs and general counsel, United Nations Federal Credit Union. On top of that, he explained, law enforcement is issuing "unreasonably broad subpoenas" which take significant time and resources to respond to. Lewis also noted that banks are expected to act as the long-arm of the law. "Do not make the financial institution the de-facto regulator," he said and urged Congress to work with both regulators and law enforcement to decrease the pressure on financial institutions.
All of the witnesses touched on the risk of derisking itself, that the inability to utilize regulated banking mechanisms moves money into less transparent and more dangerous channels, including unregulated money transfer operators and carrying cash across borders. These channels are the same used by money launderers and terrorists, said Gabrielle Haddad, chief operating officer of Sigma Ratings Inc.
Sally Yearwood, executive director of Caribbean-Central American Action, said that the decline in correspondent bank relationships across the Caribbean is already having dire consequences, including on tourism, trade and migration. "Mass migrations is just one risk" when we cannot keep small economies viable, she said. Financial institutions in the region have reported a 39% increase in fees and a 60% increase in the cost of compliance. She noted that it is difficult to know the real extent of derisking because "the first rule of derisking is that you do not talk about being derisked."
There was also much talk of creating safe harbors for banks that conduct adequate due diligence and take on clients often perceived as "high-risk" in good faith. What such a safe harbor might look like, however, was unclear. Eckert noted that all stakeholders need to recognize the importance of humanitarian and development assistance, to countering violent extremism and promoting values. There should be incentives to get banks to facilitate this work, she said.
Most witnesses agreed that the problem is worsening and that Congress must act to prevent the severe unintended consequences of anti-money laundering and counter-terrorist financing laws and policies. What form that will take remains to be seen.