October 31 2014

by Emily R. Adeleke

De-risking” is the word of the day in the AML/CFT community in recent months. At the same time, those who care about financial inclusion and value the critical importance of remittances in development are expressing legitimate concerns that banks are cutting off business relationships with entire classes of customers.

The Financial Action Task Force (FATF), the international standard-setting body for anti-money laundering and combating the financing of terrorism (AML/CFT), issued a statement on de-risking last week. FATF defined de-risking as the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk. FATF made clear that compliance with AML/CFT international standards is not the only reason for de-risking. We agree that many other drivers could influence financial institutions’ decisions about how they manage client risk. Some of those drivers include concerns about profitability, prudential requirements, anxiety after the global financial crisis, uncertainties regarding legal obligations and regulatory expectations on financial sanctions, and reputational risk more generally.

The truth is that the AML/CFT standards have become a scapegoat in the global conversation about de-risking. This is also why the statement that FATF issued matters, and for several substantive reasons.

First, a risk based approach should be the cornerstone of AML/CFT – at the global, country and institution levels.

Second, de-risking raises a threat to combating financial crime, with a classical “beggar thy neighbor” paradox. The restriction or termination of account relationships for certain clients, will likely push this business into or through unregulated channels. This shift ultimately makes the transaction more opaque and limits governments’ ability to track financial activity and combat money laundering and terrorist financing.

Third, recent significant regulatory and prosecutorial actions were not the result of erratic behavior by enforcement authorities, but sanctioning significant weaknesses and abuses. To put it another way, those regulated entities that have sound AML/CFT controls should not over-react.

At the World Bank Group, we are also very concerned that de-risking affects a fundamental policy objective such as financial inclusion. When remittance service providers cannot readily access banking services, their activity is likely to become more expensive over time for everyday people. We welcome FATF’s reaffirmed commitment to financial inclusion and financial integrity.

The FATF plenary agreed to do further work in the area of de-risking. This work includes gathering further evidence on drivers and scale, continuing to disseminate its various reports on risks/methods/trends, continuing to publish guidance to inform risk-based decision making, and considering the issue once again during the February 2015 Plenary meeting.

This is most welcome, and the World Bank Group will actively participate in these discussions. We will bring the combined expertise within our Finance and Markets Global Practice (FMGP) – on AML/CFT, payment systems, and financial inclusion. In addition to the work at the FATF, we will also mobilize our assistance to interested countries on ML/FT risk assessments, and we will continue to implement our work program on financial inclusion and financial integrity.

Beyond substance, what greatly matters is the very fact that FATF expressed itself in such a public manner – and we are very grateful to the FATF President for prioritizing this discussion. By taking a public stance, FATF helps dispel myths. It also sets out the expectations of the global AML/CFT community – notably the imperative to re-focus the conversation on understanding and managing risks (and we are not only talking about AML/CFT risk).

Emily R. Adeleke, Financial Sector Specialist, Financial Market Integrity

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