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WASHINGTON The Financial Action Task Force sounded an alarm Thursday that banks are overreacting in their response to recent anti-money-laundering enforcement actions by cutting off whole swaths of business.
October 23 -
Expatriates of Somalia threaten to close their accounts at U.S. Bancorp and Wells Fargo unless the banks wire their money to suffering family members back home. But the big banks, and others in the industry, say federal rules make it too hard to offer the service.
May 10 -
The ability of Somali-Americans to send cash home to their relatives is again in peril after a California bank decided to stop facilitating the money transfers, according to a foreign aid organization that has been monitoring the situation.
January 30
It wouldn't be easy for banks to walk away from the business of international remittances. But they may have no choice.
Banks last year reported for the first time, as required by the Dodd-Frank Act, the volume of international remittances that they provide for customers and intermediary firms. Institutions ranging from the largest banks to community banks are involved in the processing of billions of dollars in remittances, and those values are increasing rapidly in many cases.
Bank of America provided about 452,000 international remittances in the fourth quarter, with a total value of about $4.6 billion, according to its call report. That dollar figure rose 22% from the second quarter.
The $4 billion-asset Wilshire Bancorp in Los Angeles, a Korean-American institution, provided about 24,000 remittances in the fourth quarter worth about $814 million. Its dollar volume was 21% higher than in the second quarter.
Banks are only required to report remittance data twice a year, and they don't have to disclose fee income generated from remittances.
The market will likely expand again this year. Remittance flows are expected to grow at an average annual clip of 8.8% between 2013 and 2015, reaching a worldwide total of about $515 billion for the full-year 2015, according to the World Bank.
But a combination of factors intense regulatory scrutiny of anti-money-laundering rules, disruptive technology may force many institutions in the long run to voluntarily give up on the business, or scale back dramatically, several banking attorneys, consultants and industry executives said.
The move is well underway, illustrated by the recent situation with remittance providers to Somalia. The $88 million-asset Merchants Bank of California in Carson, the only remaining bank known to provide remittances to Somalia, on Feb. 6
Regulators have expressed concern that the remittances, while intended for needy individuals, are many times being diverted to fund terrorist groups in Somalia. However, humanitarian groups have called for the U.S. government to make some kind of accommodation, as foreign remittances provide one of the few sources of funds for the war-torn nation.
Although Somalia may be the most dire example, it won't be the last country where the tension between regulators and banks leads to a shutdown of remittances, said Richard Morris, a banking attorney at the Herrick law firmwho advises companies on the Bank Secrecy Act.
"A lot of banks are getting out of the remittance business," Morris said. "There is much more risk that banks would unwittingly be part of a scheme" to launder money.
The issue in Somalia has alerted humanitarian groups to monitor remittances to other parts of the world, said Scott Paul, a senior humanitarian policy adviser at Oxfam America.
"Truthfully, this is an area we are just starting to get into," Paul said. "The Somalia case has opened our eyes to the fact that this is a big deal."
Several other countries could be on the radar of regulators, according to Paul and to Liat Shetret, senior analyst at the Global Center on Cooperative Security, a New York think tank that studies ways to eliminate terrorism. Those include Afghanistan, Iraq, Syria and other countries in East Africa, like Ethiopia and Kenya.
"Kenya and Ethiopia both... have large refugee populations dependent on these funds and are at risk of being cut off," Shetret said.
Iraq and Syria are also both involved in civil wars and many U.S. residents with ties to those countries "are looking to support their families during the current crisis," Shetret said The implications there are similar to Somalia in that they may lead to a mix of humanitarian and security fallout.
It is difficult to ascertain which banks may be considering a pullout from these countries, Shetret said.
"There is an information gap on the specific details as to how many banks are derisking and whose accounts specifically are being shut down," Shetret said.
Some U.S. banks tout their involvement in the international-remittance business, including those countries that have struggled with terrorist groups,
"We know that remittances are important to families all over the
world," Daniel Ayala, Wells Fargo's head of global remittance services, said in a press release at the time.
Wells Fargo spokesman Kristopher Dahl declined to answer questions about the program last week.
Banks are connected to the remittance industry in several different ways. That is going to make it more difficult for them to fully extract themselves from the business, said David Landsman, executive director of the National Money Transmitters Association.
Banks offer multiple types of services, including the processing of the international remittance itself, through an Automated Clearing House transaction or wire transfer. Banks can also handle the clearing of remittances for outside money-transfer companies.
It is impossible to provide a specific account of banks' revenue and profit derived from remittances, because federal rules do not require them to outline the types of services they provide.
Banks also provide loans and checking accounts to large payments companies that do international transfers, like MoneyGram and Western Union, Paul said. Small banks that serve niche markets, like Merchants Bank of California's business in Somalia, also need larger banks to process transfers for them.
"Companies like Western Union provide a huge incentive for banks to remain in the remittance business," Paul said. "Western Union is a huge company that generates a lot of revenue for banks. And small banks still need the big banks to wire the money for them."
Finally, new payments technologies, from bitcoin and peer-to-peer lenders, may force banks to re-examine their exposure to the remittance business, Morris said.
"This is the type of business where technology will be very disruptive," Morris said. "Within a short period of time, I suspect the remittance market will be dramatically changed."
