July 2018 JD Supra
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Official Hope for the De-Risked? was published by JD Supra on 7/25/18.

Deficiencies in Anti-Money Laundering (AML) frameworks and policies have triggered a significant number of Financial Institutions (FIs) to de-risk.   The FIs that de-risk as a solution to AML deficiencies are exiting client relationships and removing or restricting banking products from their overall platform offering.  Rising compliance costs, hard to understand complex corporate client structures, fines and penalties, a shift from corporate responsibility to individual liability, and reputational concerns have lead many FI to de-risk or end customer relationships or the offering of certain banking products.   Consequently, account closures result in “bank-less” customers, suffering economies and movement towards a “non-transparent cash economy”. 

FI’s De-risking Thumbprint

⦁    Closing or refusing to open a bank account for an Individual or an Entity
⦁    Restricting the Individual or the Entity from  access to financial services
⦁    Withdrawing or restricting banking services with money transfer organizations
⦁    Cutting off correspondent banking relationships to other FIs which in turn will not be able to access the international payments clearing system 

Latin America and the Caribbean are hit hard

Small countries that depend on correspondent banking relationships and remittance payments have been primarily identified as de-risking targets.  FI’s perceive the Latin America and Caribbean regions as areas of “great risk” for non-AML and Combating Financing of Terrorism (CFT) compliance.  In addition, the low volumes of transactions that are generated do not compensate the FI’s for the low margin/profitability that is associated with these relationships.  As a result, small FI’s, Individuals and Entities in the region have been pushed to a less regulated or “shadow banking” system where regulatory oversight is non-existent. 

Is there help on the Way?

Banking services for FIs, charities, Correspondent Banks, Money Service Business, Individuals and Entities have been withdrawn or closed without explanation.   On March 6, 2018, the Financial Action Task Force (FATF),      the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), and the Financial Stability Board (FSB) introduced a Correspondent Banking Due Diligence Questionnaire as an industry initiative to help address the decline in the number of correspondent banking relationships by facilitating due diligence processes.  Its goal is the development of KYC “common” utilities that could reduce the costs of correspondent banking relationships and maintain the effective application of KYC requirements. In turn, a standardization of KYC utilities in the industry will help minimize costs and achieve greater efficiencies. 

De-risking is Complex

The FATF encourages FIs to identify, assess and understand their AML and CTF risks, and mitigate them on a case-by-case basis.  The introduction of the Correspondent Banking Due Diligence Questionnaire is viewed as a first step towards the standardization of core information through KYC utilities.  At the end, perhaps a  reduction of  costs of maintaining correspondent banking relationships while implementing technical solutions to improve  efficiency of due diligence processes can help normalize banking relationships (or lack thereof) of all affected by de-risking.