De-Risking
Liabilities stemming from anti-financial crimes regulations, including sanctions enforcement, may induce banks and financial institutions to de-risk customers in broad swaths rather than risk regulatory enforcement exposure. The de-risked clients tend to be smaller in terms of the book of business they bring. So the revenue from such clients may pale in comparison to the additional resources required to vet such customers and transactions. Despite deploying such resources, the bank/financial institution still risks regulatory and reputational exposures. So banks opt to de-risk by closing accounts for people/companies that cannot be vetted under their guidelines.
Unintended consequences of De-Risking
- In absence of reliable intelligence banks depend on open source intelligence which is unreliable and sticky and can be punitive to innocent parties when they de-risk such innocent parties and bar them from accessing formal financial systems;
- Whole countries, such as Afghanistan and Somalia, have been de-risked as clients;
- De-risking adversely impacts severely needed charitable and humanitarian organizations working on such countries;
- When bared from formal financial channels, all activities of such de-risked countries, individuals and companies move to informal transfer systems such as Hawala and Hundi.
- CFT efforts are harder to track in such a scenario making the whole effort counter-productive.
- De-risking conflicts with the global development goal of financial inclusion which is aimed towards bringing more people in the world (especially developing and lesser developed countries) into the formal financial system. Participation in formal financial system, because such are regulated and are subjected to public scrutiny, helps curb exploitation and abuse of poor and underprivileged people. In informal financial systems there are no such checks and balances, as such operate in shadows and secrecy.
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, Office of the Comptroller of the Currency, Joint Statement 7/22/2019
- Banks that operate in compliance with applicable law, properly manage customer relationships and effectively mitigate risks by implementing controls commensurate with those risks are neither prohibited nor discouraged from providing banking services.
- ensure that decisions to terminate foreign correspondent accounts, which result from risk reevaluations, are based on analysis of the risks presented by individual foreign financial institutions and the bank's ability to manage those risks.
- The federal banking agencies have stated, banks are encouraged to manage customer relationships and mitigate risks based on customer relationships rather than declining to provide banking services to entire categories of customers.
This prompts the banks and financial institutions to take de-risking decisions more seriously as they could be asked to justify their de-risking decisions.
More Studies, Guidance and Resources on De-Risking and Financial Inclusion
De-Risking & Financial Inclusion Studies, Guidance & Resources
Study Reports
According to a review conducted by the Bank of International Settlements BIS quantitative review of correspondent banking data
- Total number of active correspondent banking relationships and active corridors continues to decline
- Over the last seven years, active relationships in the global correspondent banking network have declined by about 20% and the number of active corridors has fallen by roughly 10%.
- total message volumes have been rising over the same period, resulting in an increase of concentration in the network
According to the World Bank Report on de-risking:
- Once de-risked, the terms and conditions of new Correspondent Banking Relationships (CBRs) were likely to be significantly more unfavorable than under the previous relationships;
- The cost of establishing and maintaining new partnerships has increased for many institutions;
- Derisking has also had cross-border spillover effects, especially in the Southern African Development Community. Pan-African banks have been under pressure from their correspondents to stop doing certain business (for example, supplying foreign currencies) in neighboring countries to maintain their CBRs;
- Money Transfer Operators (MTOs) and remittance service providers (RSPs) have been particularly affected by derisking because their business is cash intensive;
- Non Profit Organizations are having problems opening bank accounts and, in particular, moving funds internationally due to Terrorism Financing risk scrutiny;
Guidance and other resources:
| FATF | FATF takes action to tackle de-risking |
| Revised Guidance on AML/CFT and Financial Inclusion | |
| World Bank | De-Risking Practices Survey Highlights |
| Financial Inclusion | |
| Center for Global Development | Unintended Consequences of Anti-Money Laundering Policies for Poor Countries |
| Charity Security Network | Financial Accessfor U.S. Nonprofits |
| Articles | De-Risking and non-profits |
| Derisking and Civil society |