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As actions such as Operation Choke Point continue, the government should acknowledge the tension institutions face between serving a community and facing increased regulatory scrutiny.
April 7 -
Comptroller of the Currency Thomas Curry's unexpected announcement this week that his agency may craft new guidelines to deal with de-risking is generating concerns from bankers instead of putting them at ease.
March 11 -
Banks are facing enhanced scrutiny from examiners, causing them to sever ties with businesses they view as high-risk, but regulators are also pressuring them not to close those accounts, fearing financial disenfranchisement.
November 17
The de-risking trend in global correspondent banking has exposed the need for more cost-effective, sustainable approaches for managing risk in the international financial system. Regulators generally agree that changes to guidance dealing with correspondent banking should be considered, but for any changes to be effective they must address the profitability equation of correspondent banking. Solutions that increase the compliance burden on industry or sacrifice the effectiveness of controls will miss the mark.
When it comes to de-risking, policymakers are trying to navigate competing interests. Those responsible for disrupting illicit activity — such as terrorism, drug trafficking and evading sanctions — hold that banks should exit certain markets where they cannot effectively manage the customer, business line and jurisdictional risks. However, policymakers responsible for promoting global development, trade and investment are alarmed by the prospect of walking back decades of economic progress attributable to financial inclusion and global finance.
At the center of this debate are individuals, businesses and foreign financial institutions losing access to services as a result of the de-risking phenomenon, not to mention the global banks whose correspondent banking services are expected to set the standard for financial crime controls.
The use of economic sanctions and anti-money-laundering regulations to combat criminal activity is not likely to recede, nor is the expectation that financial institutions play a leading role in detecting and reporting suspected illicit financial activity. As a result, responsible banks will continue to terminate customers, lines of business and jurisdictions where the commercial opportunities are not sufficiently compelling to justify the increasing costs of compliance.
It is useful to recognize that all parties — policymakers, regulators, banks and bank customers — are acting rationally, given the distinct pressures and responsibilities they face. The threats addressed by AML and sanctions regulations are real, but so are the consequences of enforcement for banks and those seeking correspondent services. The cost of losing access to banking services can be severe.
Yet the de-risking trend can still be curbed, if not reversed. The goal must be to find ways to lower the costs of compliance without sacrificing the effectiveness of controls. To this end, regulators and the financial services industry should encourage new tools, services and utilities that enhance the efficiency of banks' efforts to catch suspicious behavior, that will in turn limit the added AML costs associated with being a financial intermediary.
In 2014, the Society for Worldwide Interbank Financial Telecommunication, known as Swift, released its
The value proposition of Compliance Analytics is to assist subscribing banks in more efficiently identifying unusual flows, hidden relationships and activity in high-risk areas. These capabilities, used effectively over time, should provide a boost for institutions striving to maintain an effective controls framework at a sustainable cost.
It will take time for Swift's tool to bring more balance to the de-risking equation. Indeed, the near-term consequence may be more, not less, disruption. This is because the enhanced monitoring could increase the pressure on — and in some cases reveal cause for concern about — some correspondent banks that up to now have still been able to access clearing services through intermediating institutions or "nested accounts."
But over time, the improved transparency in the Swift system will help banks take a more nuanced approach in providing correspondent services. The aim is to distinguish between banks that may warrant losing all access to the U.S. financial system and those that have suffered de-risking but where risks can be managed with proper resourcing and controls. Banks with tainted ownership, materially inadequate controls, or significant ties to illicit activity would fall into the first category. Banks in high-risk jurisdictions or banks that offer only limited commercial opportunity would fall into the latter.
The outcome will be greater integrity in the global system of moving money, more sustainable compliance cost and increased financial inclusion.
Matthew Epstein is CEO and Howard Mendelsohn is a managing director of The Camstoll Group, a strategic advisory firm focused on illicit finance, regulatory and national security issues. Mendelsohn previously served as the deputy assistant secretary for the Treasury Department's Office of Intelligence and Analysis. Epstein served as the Treasury's financial attaché in Saudi Arabia and the United Arab Emirates. Follow The Camstoll Group on Twitter
