> Posted by Center Staff

Number of AML-related fines by U.S. regulators 2000–2014. (click to enlarge)

This post is part of a series examining the global phenomenon of de-risking and its impact on financial inclusion. To investigate this issue, CFI staff partnered with Credit Suisse Global Citizen Rissa Ofilada, a compliance lawyer based in the Philippines, to undertake a literature review and conduct interviews with key players in the conversation on de-risking.

The root causes of de-risking have been surprisingly hard to pin down. In our previous post in this series, we looked at the role that the Financial Action Task Force (FATF) and global standards have played. Today we’ll examine the role of the U.S. government.

It is no wonder that decisions by the U.S. government—at both federal and state-levels—have a significant ripple effect. Most international settlement systems—the way that banks move money across borders—are pegged to the U.S. dollar. Furthermore, the U.S. plays a strong role in setting international global norms. Added to this is the massive size of the U.S. financial system and the power that the U.S. government has to govern the system. Finally, banks located in emerging markets, even if they are largely domestically oriented, need to be able to do business with U.S. businesses and banks, and therefore must remain in good standing with American authorities.

One of the early examples of termination of correspondent banking relationships in the United States, as detailed by the Center for Global Development in their report “Unintended Consequences of Anti–Money Laundering Policies for Poor Countries”, occured in 2011 when Sunrise Community Bank, which was used for remittances in Somalia, closed all their related accounts to comply with U.S. anti-money laundering and counter-terrorism financing (AML/CTF) regulations. Along with avoiding sanctions, the bank shut down its correspondence banking relationships in order to continue to maintain relationships with other U.S. banks, which were beginning to cut ties with banks perceived to bring AML/CTF risks. At this time, a few other prominent banks in several countries followed suit in closing accounts assessed to be high risk. This was early days for AML/CTF regulation and guidance.

Then came the de-risking domino effect. Given strict standards for knowing exactly who customers are and exactly where their funds are coming from, banks in developing markets could not expect to work with the more tightly-controlled banks in the U.S. and other high-income countries. Recently in Australia, for example, Westpac terminated all accounts held by remittance firms in Australia to comply with AML/CTF laws. In Australia, annual remittances amount to US$30 billion and are sent to 157 countries. Given the large remittance-sending populations in many high-income countries, the effect of similar closures across the globe is cutting off access to vital funds to an enormous number of low income families – and not just in terrorist-prone countries.

Value of AML-related fines by U.S. regulators 2008–2014. (click to enlarge)

Where specifically does the U.S. have culpability? In the U.S., enforcing a set of relatively new laws, regulators cracked down on violators of anti-money laundering and terrorist financing rules and imposed unprecedented fines. In 2012, several U.S. regulatory authorities – the Financial Crimes Enforcement Network, the Comptroller of the Currency, and the Office of Foreign Assets Control – cooperated in a settlement that resulted in a $1.9 billion fine on HSBC for having poor anti-money laundering controls. Standard Chartered Bank was hit by several fines, first in 2012 with a fine of $340 million imposed by the New York State Department of Financial Services for allegedly hiding $250 billion of transactions with Iran, and again in 2014 when US$300 million was imposed for failure to improve its money laundering controls. In 2015, a U.S. New York judge imposed a record $8.9 billion settlement against BNP Paribas for violations of sanctions pertaining to Sudan, Cuba, and Iran. (See charts for an aggregate picture of fines imposed by U.S. agencies.)

The effect of these judgments goes far beyond individual banks, as emerging market countries observe the effect of being perceived as risky by the U.S., and accordingly introduce tighter controls. In our last post, we discussed the FATF guidelines, which provide recommendations for governments, and we noted that the standards call for a proportional, risk-based approach, without defining what is perceived as risky. As a result, countries are not confident about what standards should guide AML/CTF rules and compliance. There is the possibility of peer evaluation from different international bodies, which tends to have the effect of pushing national measures further toward more conservative standards. No country wants to be perceived as the one with the highest appetite for risk. National regulators pass on the burden of assessing risk to financial institutions. Banks are left with assessing the risk profiles of their customers and business lines and they tend to make decisions that are as low-risk as possible.

Faced with increasing compliance costs due to unclear regulatory expectations coupled with the threat of disproportionate fines, can one blame banks for wholesale closing down accounts for groups or locations considered to be risky? From a cost-profit analysis perspective, the decision to terminate correspondent banking relationships makes perfect sense. Faced with the question of whether to work with the most powerful banks in the world or whether to work with customers at the base of the pyramid, it’s no surprise how banks choose. However, with banks avoiding risk and the U.S. protecting its territories, the losers are the families living on or below the poverty line that are cut-off from their remittances.

In defense of the U.S. action, we note that they have been prompted by significant security concerns both among national security experts and the general American public. Indeed, it is possible that these actions have helped close pathways for criminals and terrorists to use formal financial services, though the risk is that such transactions are driven underground where they are harder to trace.

These concerns are shared by Gloria Grandolini, Senior Director of Finance and Markets Global Practice of the World Bank Group: “Now that we have evidence that large banks are reducing services to correspondent banks and remittance providers, the private and public sectors need to come together to find practical and fact-based solutions. There is a real risk that turning away customers could actually reduce transparency in the system by forcing transactions through unregulated channels.”

We will explore possible solutions to the de-risking problem from a financial inclusion perspective in future posts. Stay tuned.  

Charts 1 & 2 source: 2015 Center for Global Development Working Group Report on AML. Charts’ data compiled from ACAMS reports of enforcement actions.

Have you read?

Does Global De-Risking Create “Financial Abandonment”? The Background You Need to Know

De-Risking: Why You Should Care?

Somalia: Facing Drought with Fewer Remittance Lifelines