Susan Grossey: Near-o tolerance—the perils of de-risking
31 Aug 2017

Susan has been making her living from crime for over twenty years.  She provides anti-money laundering training and advice to the regulated community in the UK, Guernsey, Jersey, the Isle of Man and Gibraltar, and writes and talks on the subject at every opportunity.  As her hobby she writes historical novels—about financial crime.

recent article in the Economist made a very valid point about recent AML endeavours – that sometimes they can have unfortunate consequences.  I have blogged quite a bit about “de-risking”, or what the FATF calls “the wholesale cutting loose of entire classes of customer”.  In the past year, dire warning about the dangers of dealing with money service business and with charities have resulted in these businesses finding themselves unable to open bank accounts or send wire transfers.  As the Economist explains, echoing the FATF’s own concerns, what this does is send these businesses into the arms of the unregulated financial system, so that even legitimate transfers with no criminal undertones are now impossible to record and monitor.

The Economist is clear where it thinks the fault lies: “Popular though it has become to bash banks, they have been acting rationally.  The blame for the damage that de-risking causes lies mainly with policymakers and regulators, who overreacted to past money laundering scandals.”  However – and not that they need it, as they’re big enough to defend themselves – I feel that it’s important to point out that the FATF has always suggested that financial services firms should take informed decisions, not the wholesale approach.  Moreover – and crucially – they also accept that mistakes will occasionally be made, but that the application of the risk-based approach is so much the better way that occasional failures should be accepted.  In the statement they issued after their plenary meeting in October 2014, they were quite clear: “The risk-based approach should be the cornerstone of an effective AML/CFT system, and is essential to properly managing risks.  The FATF expects financial institutions to identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them.  This does not imply a ‘zero failure’ approach.”

Institutions have sometimes used AML as an excuse – a scapegoat – for doing things the way they want to, from demanding certain documents to refusing business.  And de-risking is simply the latest example of this.  The AML intention as viewed by regulators is always to make a reasoned, risk-based, individual response to a situation, but – as the Economist points out – profitability is thrown then into the mix: “No wonder banks dumped less-profitable clients tainted by the merest hint of risk.”  The article calls for “a new approach to financial regulation – one that accepts mistakes can be made in good faith”, and I would contend that this is what we have already.  What we need to balance it is a new approach to AML by institutions – one that accepts that all AML decisions must be made in good faith.

This piece first appeared on Susan’s blog, I hate money laundering.

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