AML AND THE DANGERS OF DE-RISKING

AML and the dangers of de-risking

Overview

Anti-money laundering (and ‘CFT’ – counter financing of terrorism) has become both a political and an enforcement priority around the globe in recent years. Regulators and prosecutors have publicised the risks posed to the integrity of global financial

The new environment: recent changes in the law, the regulatory picture, and an increase in levels of global co-operation

The Financial Action Task Force (‘FATF’) - an inter-governmental body established to set standards and promote measures to combat money laundering – is growing in stature and credibility and setting the tone for global co-operation in this area. With 36 current members (and ‘observer status’ held by the IMF, ECB, EBRD, World Bank and the UN), its approach is to publish ‘Recommendations’ for legislation combined with ‘Assessments’ of a country’s progress in implementing Recommendations. FATF’s expansion into Asia is marked: Singapore, Hong Kong are joining; Japan has been criticised while South Korea has been commended.

Announcements by European heads of state in the autumn of 2014 have given rise to the new Fourth EU Anti-Money Laundering Directive, which came into force in June 2015. It’s aim is to strengthen EU defences against money laundering and terrorist financing, and to enact FATF Recommendations.

The key changes are: 

The Directive requires corporates to obtain and hold adequate and current information on beneficial ownership, including details of the beneficial interests held;

That information will be available to a wide range of people: regulators, financial investigators; even the press (those with a ‘legitimate interest’) will be able to obtain certain details of a corporate’s ownership;

Less serious offences – including tax offences - are now predicate offences for money laundering;

There are additional precautions for PEPs (politically exposed persons), and due diligence and traceability requirements are increased; and

Whistle-blowing is encouraged and there are hugely increased fines.

by those seeking to launder the proceeds of crime or to finance terrorism.

In response banks have embarked upon programmes of de-risking. Now regulators and policy-makers are warning that broad de-risking is unfair, anti-competitive and disproportionate. The approach should be the management rather than the avoidance of risk. How does a firm navigate recent legislative changes, and the regulators’ AML focus, while managing risk in an effective and proportionate way?

De-risking - the dilemma and the dangers

The terms of settlements and DPAs, combined with an attempt to respond to the new regulatory environment, have caused banks to de-risk their books, shedding categories of customers and business in sectors and countries considered to pose a high-risk of AML. However, firms are now facing criticism from regulators for their approach to de-risking: 

Effective money-laundering risk management need not result in wholesale de-risking;

De-risking adversely affects particular sectors (including charities, NGOs, Fin Tech companies and money service businesses) and particular business activity, notably correspondent banking;

It forces customers towards smaller or more marginalised financial institutions with less resources available to combat money laundering; and

It undermines the principles of access to banking by precluding whole groups.

It seems likely that ‘appropriate procedures’ will be interpreted as requiring a firm to take an effective, judgment-based approach to accepting or maintaining individual business relationships. 

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