Good morning and let me add my welcome to all of you as we begin our 13th Annual ACAMS European Conference.
At this time of turmoil and challenge, you should know that the global ACAMS community stands with all of you on the need to continue our vigilance toward those that use the financial sector to harm us. The only solace we have when innocent people are attacked is that our resolve only gets stronger and more committed as AML professionals.
Today, I want to cover a broad theme that, if left unaddressed, would continue to harm those least able to protect themselves and would not make us stronger:
The mislabeled and misunderstood area of so-called “de-risking.”
I have been fortunate to be part of ACAMS since it was created in 2002 and as part of the AML community for over 30 years. It is a vast understatement to note how much has changed in what we now refer to as the global AML community.
What was originally simply a compliance responsibility is now an essential part of national security in many jurisdictions and an integral asset in societal and economic challenges. To label compliance as a cost center misses the point of having professionals who can analyze products, delivery channels and customer bases to thwart a vast array of financial crime.
In 2017, AML staff is a major part of the effort to address financial abuse of the elderly, human trafficking and identity theft to name a few disparate crimes. What do all of these have in common?
The need for comprehensive risk management through rankings, assessments and post-analytic strategies, as well as an educated supervisory force that can manage oversight in a sensible manner.
Financial institutions are now charged with determining risk and the potential vulnerabilities to financial crime with their customers, products and geographies. While risk assessments are not new to an industry that has had to make credit and operational risk decisions since the beginning of banking, money laundering and sanctions risk assessments need to both rely on trusted sources and a hope that supervisors will accept the results of a strong AML program.
This is not as simple as it sounds.
It is hard to place an accurate timeline on when policy leaders first responded to the common bank practice of either exiting an account relationship or deciding to pass on starting that same relationship.
In the United States (U.S.), we experienced rampant “de-risking” after the fall of Riggs Bank in Washington, D.C. As you may recall, the bank received fines and penalties based on the abuse of “embassy accounts” and the market reaction was immediate. While embassy accounts are fairly benign and set up mainly for common transactions such as payroll and utilities, the banking community decided to eliminate their embassy accounts. This forced regulators and the State Department to ensure that it was safe to have those account relationships.
Around the same time, U.S. regulators made broad statements regarding money services businesses (MSBs) as high-risk entities and that categorization reverberates even today as well-managed MSBs still struggle to gain access to the traditional banking sector.
The point is that words have meaning, even in today’s chaotic policy environment, and without context or nuance they can lead to economic harm.
As AML professionals, we need to manage our risk, which I believe also includes understanding the impact of our decisions on the broader global strategy of deterrence and prevention. For example, exiting or failing to onboard a customer has intelligence gathering implications that are often not considered.
The AML community has three broad stakeholder categories: the financial sector, regulatory and law enforcement. Our partners in law enforcement are obvious parts of the community, but maybe not for the reasons you may suspect. If a large financial institution decides it cannot or will not manage a named high-risk entity, that company may go to a smaller institution incapable of dedicating the needed resources to properly monitor the company or worse, the entity ends up outside of the formal banking sector. If either of these occur, law enforcement may lose critical intelligence. That potential outcome needs to be considered and the real harm that legitimate entities face from losing access to any part of the global economy.
What has been done to address financial exclusion thus far?
Just last month, the G7 Finance Ministers and Central Bank Governors issued a communiqué that said, in part:
“We recall the need to both promote financial inclusion and mitigate terrorism financing and money laundering risks within the Money and Value Transfer Services (MVTS) sector. To safeguard the legitimate behaviour of relevant stakeholders, and protect the international financial system from abuse, including by terrorists and terrorist groups, we should continue to improve the effective supervision and monitoring of the MVTS sector including their agents, on a risk-based approach.”
This is a clear call for balance.
We have also witnessed strong leadership from the Financial Action Task Force (FATF), starting back in 2014 when former President Roger Wilkins pointed out:
“Applying FATF’s standards to combat money laundering and countering the financing of terrorism, requires financial institutions to carry out a process of customer due diligence. The standards do not require a rigid, blanket application of that requirement, but specifically call for a proper risk analysis: the risk-based approach. When it comes to innovation, regulators need to be flexible, focusing on dealing with threats and dangers but not at the expense of killing off innovation.”
Flexibility is key.
In the U.S., former Treasury Secretary Jacob Lew made it clear that “efforts to curb the flow of illicit funds worldwide and to promote financial inclusion should not be antithetical.” He added, “This is not a conflict of interest, it is a need to bring together two parallel interests.”
In addition, at ACAMS’ 15th Annual AML and Financial Crime Conference, former U.S. Comptroller of the Currency Thomas Curry said:
“The concern we all share is to protect our financial system from being misused by criminals and terrorists, but we must be sensitive to the fact that, when a large number of banks withdraw from foreign correspondent banking relationships, it can lead to entire regions being cut off from the positive effects of modern financial systems and broader financial inclusion. This is not the solution. The global financial system cannot be paralyzed by risk. Rather, the system must function to serve the needs of the world’s consumers, markets, and economies.”
The AML community does and should agree, but collaboration among stakeholders is imperative for the balance to occur.
Fortunately, there is starting to be some recognition that access improvements do not all fall at the feet of banks that simply want to avoid risk and whose cost-benefit analysis prevents inclusion strategies. In March, the International Monetary Fund (IMF) confirmed the theme of regulatory confusion when they reviewed the access issue with correspondent banking and concluded:
“Some of these banks still found regulatory expectations to be unclear, inconsistently communicated, unevenly implemented by individual examiners, or not well understood. They noted that uncertainty as to whether regulatory expectations have been met could result in an overcautious use of enhanced due diligence by banks to shield from potential supervisory or enforcement actions. This has also had an impact on banks’ risk tolerance and in some instances, led to the banks’ decisions to terminate certain types of CBRs. In this context, some banks appear to be looking for regulatory certainty (rather than clarity).”
The IMF drove home the issue by adding that “it remains critical for home regulators to continue to clearly communicate that they do not follow a ‘zero-tolerance’ approach, and to ensure consistent implementation of regulatory expectations by all relevant regulators within a country.”
A Consensus for Immediate Focus on Improved Access
When ACAMS and the World Bank collaborated in 2016 on the first “stakeholder dialogue” regarding de-risking, it became abundantly clear that the scope of impacted entities was massive. I have already mentioned MSBs and correspondent banks, but the list of noted high-risk entities goes much further. The participants heard from many organizations struggling to stay in the traditional global economy, but the representatives from charities and other humanitarian organizations resonated with everyone. While it is well known in the AML community that there are a number of examples of charities being used as fronts to commit or facilitate terrorism, it is equally clear that so many innocent people are harmed when donations do not get to their intended destination. The stakeholders agreed to focus on this part of inclusion and de-risking, and we are currently engaged in a number of workstreams to improve this environment. When some questioned facts to support the scope of the problem, it was easy to point to a growing list of studies and surveys.
For example, the Charity and Security Network released a report in February titled “Financial Access for U.S. Nonprofits,” which showed:
- Two-thirds of all U.S. nonprofits that work abroad are having financial access difficulties;
- Delays in wire transfers, which can last up to several months, are the most common problem, affecting 37 percent of nonprofits;
- 15 percent of nonprofits report having these problems constantly or regularly;
- One-third of non-profit organizations (NPOs) have experienced fee increases, and 26 percent have faced additional, unusual documentation requests;
- Transfers to all parts of the globe are impacted. The problem is not limited to conflict zones or fragile and failing states; and
- NPOs, categorically treated as high-risk, are sometimes forced to move money through less transparent, traceable and safe channels, as a result of delays in wire transfers and requests for additional documentation. When money cannot be transmitted in a timely manner, 42 percent of nonprofits report that they carry cash.
What we learned from this report and the dialogues is that delays in funding, for whatever reason, can result in loss of life. One representative of a humanitarian organization in a conflict zone said that delays to pay for water and utilities and operation of clinics mean that people may die. The report summed up the state of AML compliance in this area as follows:
“For many FIs, decisions to withdraw or decline to provide financial services involve custom¬ers perceived to be higher-risk, such as NPOs, and higher-risk jurisdictions (often the coun¬tries where humanitarian assistance and development NPOs work). Routine second-guess¬ing of FIs’ decisions and treatment of certain clients as categorically high risk by bank examiners require FIs to undertake extensive and expensive steps to mitigate those risks, tip¬ping the risk-reward scale toward exiting such relationships. Despite reassuring statements from government officials, FIs perceive a clear disconnect between what policy officials say and what happens at the individual bank examination level.”
What is next and what can we do?
Resolution needs a comprehensive strategy. Charities and all other impacted groups need to be transparent on their due diligence, source of funds and other controls. Banks must remain diligent regarding detection and monitoring and they must offer solutions to affected accountholders. Law enforcement must be more vocal in their investigative needs. Finally, regulators must fully understand the need for balance and why financial crime laws exist in order to get data and intelligence to those best equipped to utilize that information. ACAMS and World Bank will continue the mission of improving the global environment so that all can be protected. We will keep you apprised of all progress.
The words of Thomas Curry bear repeating:
“The global financial system cannot be paralyzed by risk. Rather, the system must function to serve the needs of the world’s consumers, markets, and economies.”
I look forward to the next two days of this important gathering and thank you for all you do.
*Keynote address “Global AML Issues in 2017: Managing Risk to Avoid Regulatory Action While Enabling Financial Access for Those in Need,” given by John Byrne during the ACAMS 13th Annual AML & Financial Crime European Conference.