Overly formulaic AML compliance is bad for immigrants, and for banks

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Immigration policy is perhaps the most obvious and at the same time controversial issue on the American business agenda. On the one hand, immigrants have played a decisive role in shaping the modern face of the United States, making significant contributions to the economy, culture and society. On the other hand, opening your first U.S. bank account as an immigrant in 2024 is a surprisingly difficult task, since most immigrants formally meet the criteria for a high anti-money-laundering, or AML, risk. Citizens and immigrants, a priori, cannot have the same AML profile, so their compliance risks should be assessed differently.

The foreign-born population of the U.S. is 49.5 million, representing more than 17% of the workforce and over 22% of entrepreneurs, according to the data. Immigrants' contribution to the modern U.S. economy is around $2 trillion and they pay $525 billion in taxes annually.

This data indicates significant business potential to serve customers with immigrant status, but in banking practice the situation is in most cases somewhat different. Most banks approach the assessment of a client's AML risk formally and therefore often refuse to open an account for immigrants. Immigrants new to the U.S. do not have a credit history, making it difficult for banks to assess their risk profile and complete know-your-customer procedures.

During know-your-customer compliance checks, migrants inevitably encounter differences in documentation standards between countries, unfamiliarity with the types of documents accepted by U.S. banks or challenges in obtaining specific documents such as government-issued IDs or proof of address, but this doesn't always mean the presence of real AML risks. Moreover, immigrants are half as likely to commit crimes as native-born citizens. However, the formal coincidence of migrant profiles with high-risk AML criteria in practice is the reason for the refusal to open an account.

It would be a dangerous mistake to assume that banks' formal approach to assessing AML risks is an institution-specific decision. It's clear that banks that cannot correctly assess know-your-customer risks and make informed decisions regarding immigrants are losing their competitive position in the market due to loss of potential income. But this is just the tip of the iceberg. Banks' formal approach to assessing AML risks undermines several key U.S. government policy objectives by driving financial activity out of the regulated financial system, hampering remittances and preventing low- and middle-income segments of the population from efficiently accessing the financial system. That's why the administration places a high priority on addressing de-risking, as it does not only hurt certain communities but can pose a national security risk by driving financial activity outside of regulated channels.

Banking professionals know that strict adherence to government know-your-customer standards is mandatory but insufficient and doesn't remove all risks. Today, know your customer is not only about compliance. It's also a proactive business approach and independent competitive business advantage.

In banking practice, this manifests itself through "de-risking" know-your-customer processes. This term does not have an official legislative definition, so each bank understands it differently. The topic of know-your-customer "de-risking" is directly related to the problems of errors in the compliance decision-making system. Its methodology is designed to ensure that banks' protective measures are proportional to the level of customers' real AML risks and to minimize errors in compliance decision-making.

In other words, the formal know-your-customer approach is the result of a weak compliance system and does not correspond to the Financial Action Task Force concept of a risk-based approach. That's why compliance professionals know that in 2024, the term "know your customer" doesn't mean know your customer but rather "kill your career."

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The topic of "de-risking" is very relevant in the U.S., as many banks try to avoid AML risk by prohibiting work with a client on formal grounds, rather than assessing the reality of know-your-customer risks and managing them based on a deep understanding of their customers. The Fed notes that 13% of adults in the U.S. are underbanked, meaning they have a bank account but use alternative financial services, and 5% are unbanked, meaning they have no bank account.

In this context, the concept of de-risking moves from the category of methodological compliance conditions to a practical level. A correct understanding of the know-your-customer risks of immigrants and the ability to respond proportionately to them will allow financial companies to gain a competitive advantage in 2024 and will be the key to balanced development.

In 2024, in the context of increased competition in the financial market, the issue of validity, timeliness and proportionality of the bank's response to identified risks and threats acquires new importance.

Despite the formal criteria, the vast majority of immigrants do not have a serious risk of AML, and the specifics of their finances are easy to understand through in-depth know-your-customer analysis. As Deputy Secretary Wally Adeyemo said, "Broad access to well-regulated financial services is in the interest of the United States."

In other words, managing real AML risks, rather than banning customers based on formal criteria, is the highest level of compliance in 2024.