> Posted by Tess Johnson, Project Associate, CFI
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.
NGOs, both large and small, are often on the front lines of humanitarian efforts, assisting people who are affected by conflict and terrorism. It is troubling that so many of these organizations’ efforts are hampered by de-risking. The funding and other forms of non-monetary aid that NGOs provide are directed towards addressing seemingly intractable problems – such as humanitarian conflict, forced displacement, natural disaster, and violent extremism – and yet, the de-risking behavior of banks, brought on in response to anti-money laundering and combatting the financing of terrorism (AML/CFT) regulation, often makes it difficult for these organizations to function and serve those who are most in need.
Given the focus on disaster- and conflict-afflicted countries, whose populations are some of the most vulnerable in the world, it is perhaps not surprising that in designing comprehensive AML/CFT risk guidelines for NGOs, governments, financial service providers (FSPs), and regulating authorities have struggled to find the ideal balance between exercising rigorous due diligence and affording more flexibility in the treatment of organizations to reflect their individual capacity.
De-risking affects NGOs when: a) banks refuse to serve them; b) donors cut off funds to broad groups of organizations; and c) NGOs de-risk themselves by getting out of certain lines of operation. A 2014 survey conducted by the U.K.-based Charity Finance Group (CFG) highlighted the obstacles that many charities and NGOs operating in “risky” environments face, and the specific financial products and services that are most adversely impacted as a result of de-risking. The most common problems cited by charities in the CFG survey included: international transfers delayed or denied by banks or correspondent banks; requests for further information before proceeding with transactions; problems getting funds transferred to a partner or own bank account in a high risk country; funds frozen due to a bank’s due diligence process; delays in opening bank accounts; accounts closed; and donations blocked.
The CFG also identified a number of characteristics of such “problem locations” that seem to increase the difficultly of accessing financial services for the charities surveyed:
- Area where there is no formal banking structure (e.g., Somalia);
- Country where regulation is hyper-vigilant (e.g., the U.S.);
- Country on a sanctions list (e.g., Iran, North Korea);
- Country in a state of conflict (e.g., Syria, Ukraine);
- Country where proscribed or terrorist groups are known to operate (e.g., Afghanistan);
- Country in close proximity to, and typically serving as an access corridor to a region of instability (e.g., Jordan, by providing access to Syria).
Some observers worry that the lack of clarification from regulating bodies on the interpretation of AML/CFT legislation with respect to NGOs has created a two-tiered system whereby larger and more capable organizations easily navigate the labyrinth of governmental and financial actors and regulations, while smaller organizations with fewer resources face a more existential crisis as they have great difficulty implementing compliance controls that are both vague and burdensome. Conversely, a top AML official at Wells Fargo expressed a similar sentiment on a perverse impact of de-risking on smaller FSPs which might not have enough capacity to adequately implement AML/CFT regulations, and which might not be as proactive in de-risking, closing their doors to certain client types: “[t]he ironic result of de-risking is re-risking … you are sending [higher-risk customers] to banks that probably can’t handle it.”
In the current policy environment, it is understandable if AML/CFT compliance specialists convince their clients to de-risk by exiting certain business segments or ceasing operations in “risky” countries. However, as one executive from a charitable organization put it bleakly, “[t]he impact of de-risking is real and strong. In trying to prevent money laundering and terrorism finance, restrictions on sending money are resulting in the death of persons, particularly victims of terrorism.”
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