Financial inclusion is critical to economic freedom and mobility, especially for the millions of Americans who are unbanked or underbanked. But in the world of correspondent banking, that's exactly who is being cut off from economic growth opportunities.
Correspondent banking makes converting foreign currency into local currency possible, from Mexican Americans sending money to family members in Mexico to a tourist tipping a Caribbean resort employee with American currency. Those dollars ultimately need to be converted and returned to the U.S., which is where the correspondent banking relationship begins. A Mexican or Caribbean bank needs a partner, or correspondent bank, in the U.S. to accomplish those transactions, but due to antiquated regulatory risk assumptions, it has become increasingly restrictive.
The current anti-money-laundering and combating financial terror de-risking regulations in place are outdated. It has effectively blocked community banks and minority depository institutions from entering the cross-border cash-transfer business, forcing a mass exodus of U.S. banks — approximately 90% in the past six years. The reduction in cross-border correspondent banking relationships associated with AML/CFT efforts has, according to new research sponsored by the Texas Association of Business (TAB), resulted in slower foreign direct investment and trade growth.
The recent analysis sponsored by TAB and authored by Dr. Robert J. Shapiro, former under secretary of commerce for Economic Affairs, made some surprising discoveries about correspondent banking, a historically overlooked area of the financial system. According to Dr. Shapiro's analysis, cross-border banking regulations cost nearly $40 billion in GDP and over 240,000 jobs due to the adverse and unintended economic effects of current U.S. AML/CFT regulations.
Regulators must be reminded that while updating AML/CFT policy may not make for splashy headlines, even the most minor reforms make an impact. This is especially true for historically disadvantaged communities which have faced a shortage of traditional financial services. The current landscape for U.S. policy on de-risking contributes to a lack of upward mobility for those with limited access to financial institutions, such as being able to open a checking account and send remittances to family members overseas.
Without a larger number of market participants, rural and typically lower-income U.S. border populations, Mexican day laborers, migrants, smaller Caribbean Island economies and other vulnerable populations are left to bear the burden of higher-cost options and fewer or no basic banking services to choose from, which leads to reduced access to capital and a stagnant position on the economic ladder.
Members of the U.S. Congress recently brought the issue into the spotlight, raising the need for comprehensive policy solutions. Chaired by Congresswoman Maxine Waters, D-Calif., the House Financial Services Committee held a historic hearing in September 2022 that focused on the impacts of de-risking in the Caribbean and the importance of ensuring access to financial services at home and among our important regional partners. Chairwoman Waters' hearing explored the possibility of establishing an Examiners Academy to focus on Bank Secrecy Act issues, the underlying statute in the United States that directs financial institutions to help detect and deter money laundering.
The Bank Secrecy Act's regulatory focus on AML/CFT has impacted correspondent banking because it requires banks, under the Patriot Act, to apply special due diligence to foreign banks, particularly those in what have been identified as high-risk markets and grants the Department of the Treasury authority to demand the records of any correspondent account. Treasury can also designate a foreign bank as a "money laundering concern" to signal to U.S. banks to stop dealing with that financial institution. The BSA's impact on correspondent banking has led to many banks curtailing their cross-border correspondent banking operations out of fear of unknowingly facilitating money laundering activities.
At the hearing, Barbados Prime Minister Mia Amor Mottley explained the importance of correspondent banking to the Barbadian economy and the impacts of diminished access on the entire region. She and other witnesses detailed the adverse effects that the lack of correspondent banks has on vital economic sectors, including tourism, remittance flows, trade and credit.
As part of her testimony, Ms. Mottley called on Congress to act. She warned that countries could be forced to find other means of moving money, raising transaction costs and driving payments underground into under- and unregulated markets.
Of course, the financial market needs to be regulated. In the past, criminals and criminal enterprises relied on the traditional banking market, including correspondent banking, to launder money and process illicit payments. The good news is that this is no longer the case, because AML/CFT regulations and reforms that have been put in place have crushed the ability of criminals to exploit traditional banking channels, causing money laundering to migrate to other mechanisms, like nonbanking internet transactions and cryptocurrency markets.
As Dr. Shapiro accurately concluded, today's de-risking policies tend to impact those who are "least able to bear those associated burdens and costs, including lower-income individuals and those with marginal access to financial institutions." This challenge demands the attention of the Biden-Harris administration. America's de-risking policies should tackle the challenges as they exist today. Instead, they continue to marginalize communities that already face barriers to entry in banking.
My organization, the National Bankers Association, works to help close the racial wealth gap by providing access to financial services to communities historically underserved by traditional banks.
Given its mission, the interest of the National Bankers Association in the correspondent banking issue is unmistakable. We are calling on regulators in Washington to take action. One good step would be to see the Financial Crimes Enforcement Network make inclusion one of its priorities in addressing de-risking and correspondent banking, an enhancement that can help advance financial inclusion and equity for all.
