Between late 2016 and early 2017, Global RADAR ran several spotlight features on a trend now infamously known as “de-risking”, where financial institutions generally based in well-developed countries (i.e. the United States and United Kingdom) began to terminate or restrict their business accounts with certain categories of customer based on the perceived regulatory risks involved in dealing with said individuals. At the time of our initial reports, de-risking was in its initial stages of practice, shortly before the exercise began sweeping the financial realm at the international level. These moves began to severely limit the economic growth of lesser-developed countries in the Caribbean, Africa, and South America in particular, areas that rely heavily on their correspondent banking relationships (CBR’s) to uphold their respective economies, ultimately leaving a lasting impact on the financial realm that has carried over into 2018. Making matters worse is that de-risking by financial entities has in part augmented the growing prevalence of financial crime and “black market” trade in these areas, while also impacting their counterparts in the U.S. Other financial institutions of smaller scale, many of which who were already non-compliant with current regulation, have begun to openly accept the accounts shed by larger institutions, opening up an entirely new can of worms, while leaving themselves susceptible to even more risk as illicit funds now flow even more freely in these neglected countries.
As anti-money laundering (AML) and Bank Secrecy Act (BSA) requirements continue to impact the daily workflow processes seen at banks across the U.S., de-risking has become commonplace today, as the vast majority of institutions within our borders are doing everything in their power to avoid the risk of compliance breaches and the subsequent penalties and sanctions that will inevitably ensue. Although new solutions are developed frequently to hinder financial crime and risks posed to banks and their clientele, experts have opined that the implementation of data-driven technology and high-powered algorithms simply is not enough to stop the de-risking train from rolling through other potentially risk-filled countries across the globe. A prime example of this belief was illustrated just this week, as the U.S. Government Accountability Office (GAO) published the findings of a de-risking survey conducted on banks along the Southwest border of the United States in a report cited in BSA News Now on March 1st, 2018. The U.S.-Mexico border has always been an area of concern for the U.S. government, especially since the 2016 election. However, a light has now been shone on this territory for alternate reasons– primarily due to it ties into the AML/CTF movements, respectively.
While the high number of cross-border transactions and totals of cash that move across the border on an annual basis is not at all a novel discovery, banks in this zone (primarily those of Texas, Arizona, and New Mexico) have been faced with challenges unique to other regions of the United States, and the majority of the world for that matter, for the better part of the last decade. Yet while this trend has been pervasive in this specific area for some time now, the exponential increase in the ongoing de-risking phenomenon over the last 3 years has been unlike that of any other region of the world within that specific time frame. In its investigation, the GAO found that, “in 2016, bank branches in the Southwest border region filed 2-1/2 times as many reports identifying potential money laundering or other suspicious activity (Suspicious Activity Reports), on average, as bank branches in other high-risk counties outside the region” (GAO, 2018). The increased reporting has run the resources of many Southwest border banks thin, as they have had to invest heavily into stringent account monitoring technologies and Know Your Customer (KYC) protocols in recent years in order to avoid regulatory shortcomings. Many have failed to keep up with these relentless procedures however for reasons that include a lack of funds dedicated to compliance and/or lack of manpower, ultimately culminating in these banks evolving into the major proponents of the de-risking crusade that continues on in the U.S. today. The survey expands on the initial findings dating back to 2016, detailing that of the hundreds of financial institutions surveyed, “an estimated 80 percent (+/- 11 percent margin of error) of Southwest border banks terminated accounts for BSA/AML risk reasons” (GAO, 2018). In addition, it was discovered that the participants that engaged in de-risking did so due to their customers drawing heightened regulatory oversight.
The GAO also analyzed their results, comparing the demographics of the counties that were falling victim to the trend. They concluded that areas that were
“urban, younger, had higher income or had higher money laundering-related risk were more likely to lose branches”, with the laundering risks being the primary drivers of the relationship terminations. While this breakdown may ultimately prove helpful in some sense, the need for regulators to assess AML related factors that influence the final decision to de-risk is evident. It is clear that banks guide their decisions based at least partially on regulatory concerns, but until thorough reviews of all of the factors contributing to the trend are run by legislative bodies (including the Financial Crimes Enforcement Network and Congress), this economy-shattering practice, as well as the burden placed on financial institutions, will continue. The GAO shares this sentiment, concluding their report with recommendations for FinCEN and federal regulators. The GAO writes that these agencies should begin to “conduct a retrospective review of BSA regulations and their implementation for banks” and should “ focus on how banks’ regulatory concerns may be influencing their willingness to provide services” (GAO, 2018). We shall see if these parties eventually take part in this activity, which could potentially play a major role in the continuation of de-risking in this region, the country, and abroad.
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