In Customer Due Diligence

De-Risking is defined as a situation where financial institutions terminate or restrict business relationships with certain categories of customer. The concept of “De-Risking” as it pertains to the financial services landscape of the United States is not a new development by any means. However, this controversial practice is becoming increasingly employed by a significantly greater number of large financial institutions for various reasons, including profitability concerns and the reputational risks involved.

On Thursday, September 29th 2016, Global RADAR ‘s BSA News Now held a web seminar to discuss the impact that de-risking can play on respective financial institutions, as well as the repercussions it can have on the global financial market altogether. Stanley Foodman, CEO of Foodman CPA’s & Advisors, one of the top accounting firms in South Florida, led the seminar, which was titled “De-Risking 101.” Mr. Foodman fit the bill for this presentation perfectly, as he has an extensive background in both law enforcement, forensic accounting, and in representation of a diverse range of clients in regards to taxation, wealth planning, and regulatory compliance.

The seminar began with a brief history of anti-money laundering, counter terrorism financing, and BSA legislation which would set the precedent for de-risking practices, specifically the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, and the USA Patriot Act. According to Foodman, “These statutes formed a three-legged stool which created the pressure that has led to greater de-risking practices.” Each of these acts and the amendments that accompany them have led to distinct regulations and responsibilities for the detection, reporting, and prevention of illegal financial activity within financial institutions, both domestically and internationally. Foodman stated that each of these respective pieces of legislation have led directly to the intense financial climate seen today, and certain developments that have taken place within the past 10 years have led to an expansion of the scope of these acts, particularly the 2008 financial crisis and its implications on the relationship between regulatory authorities and financial institutions.

Foodman went on to explain that many of the “large banks that are de-risking are not signaling to their customers why they are being de-risked, or what they can do to avoid de-risking” with part of the reason for this being due to the costs involved, as well as the possibility of certain reputational risks involved. Banks are now rejecting and shedding their clients located in “high risk” regions such as the Caribbean and South America, and those dealing in risky industries, such as the casino industry, at an unprecedented rate due to the increasing pressures being placed on them by government regulators and private litigants. According to the Wall Street Journal, “Throughout 2014 J.P. Morgan Chase dropped more than 100,000 accounts because they were considered risky for money laundering. Between 2013 and 2014, Standard Chartered closed 70,000 small and medium-size business accounts, and ended hundreds of relationships with banks in Latin America and Central Europe (Saperstein & Sant, 2015).

Foodman explained that the latest trend among these large financial institutions is to shed these high-risk accounts that they hold if they cannot offset the costs and risks involved, and this has caused entire regional economies to suffer as a result. Many clients/relationships are now bank-less due to the creation of what Foodman called a “parallel economy”, which has seen the number of “underbanked” individuals worldwide rise to 2.5 billion according to the World Bank Data which was provided in Foodman’s presentation. Additionally, de-risking has the potential to affect major economic staples in certain countries, such as the tourism industry in the Caribbean, which may see credit card transactions be rendered impotent except with respect to local credit cards and local banks. This will force travelers to have to carry sufficient amounts of cash or checks with them, which leaves these individuals more susceptible to local crime and personal risk. Foodman regarded these implications as “turning back the clock 50 years” on the state of financial relations in the United States.

Another point brought up by Foodman was how different industry benchmarks such as the size of the bank, and the profitability of the account(s) can lead to the termination and closure of bank relationships. He expressed that, “If a bank is using a U.S. correspondent for the processing of payments, and the U.S. correspondent cannot participate in any of the treasury activities or investment banking activities that are going through other types of institutions, there’s a high likelihood of de-risking, because the U.S. bank cannot make enough money to offset its compliance costs.” This renders banking sectors such as money services businesses, foreign embassies, PEP’s, international charities, and correspondent banks severely affected by de-risking.

The concept of de-risking is considered highly controversial for several reasons. It has led to the stretching of the law enforcement resources available, setting the U.S. banks back a number of years in our ability to control terrorist financing and “crime-created money laundering.” It has also been perceived to lead the high-risk clients that are being shunned by the larger financial institutions to banking with smaller financial institutions that may not have adequate AML/CTF processes in place, leaving these institutions more receptive to the risk of financial crime, as well as possible sanctions and fines as a result of improper practices.

The Financial Action Task Force (FATF) has stated that de-risking has brought significant risk and a lack of transparency to the global financial system, and has implied that de-risking has been used as an excuse for banks to avoid implementation of a risk-based approach that is in line with FATF standards, when a risk-based approach should “be the cornerstone of an effective AML/CFT system.” Foodman agreed with the statement made by the FATF, but countered with the fact that once a bank, a for-profit institution in the private sector, performs a “cost-benefit analysis” and sees that it can no longer make a profit on certain accounts, it will no longer continue to maintain these accounts and instead will shed them because it is in their best interest to do so. Foodman then gave the examples of a U.S. bank that recently de-risked an entire Caribbean area, and the countries of Belize and Bolivia being de-risked by several U.S. banks altogether because they were too expensive to monitor.

Foodman expressed that part of the reason that this development has come about is due to the fact that there is a lack of collaboration and coordination between regulatory agencies with respect to end-to-end customer due diligence.

FATCA has added to this issue by telling U.S. banks that they are responsible for the monitoring of banks overseas to determine whether or not they are registered and properly operating within the FATCA realm, and if not to withhold, and since they do not want to withhold, they are shedding those banks. He then stated that “Regulatory supervision not being uniform is creating a large part of this problem, because financial institutions don’t know what to expect from one regulator visit to the other due to the fact that they often do not have the same regulator each time, and compliance quality is in the eyes of the regulator”, thus it differs from regulator to regulator. Foodman also indicated that regulatory education and supervision is also not uniform throughout the regulatory system, which has lead to inconsistent regulatory supervision. But perhaps most importantly, Foodman noted, “the regulatory environment does not fully encourage end to end KYC and CDD standards”, specifically in regards to trust accounts and the need for these entities to be treated as financial institutions.

The comprehensive seminar concluded with a question and answer segment, which included several quality questions from attendees of the seminar. The greatest question posed to Stanley Foodman was if he could provide those in attendance with his thoughts with respect to the key elements of finding a solution to the “De-Risking puzzle.” Foodman responded with his personal findings on de-risked banks looking to smaller U.S. banks that are attempting to enter the space of correspondent banking, and in order to do so the de-risked banks have to be willing to demonstrate “clearly and convincingly to the U.S. correspondent that they are actively engaged in the type of AML and CDD activities that the U.S. correspondent is going to want.” This includes being in compliance with the OECD ultimate beneficial ownership requirements, due to their more rigorous requirements than those of the U.S. He then spoke of his recent conversations with some relatively large banks, which told him that if they cannot know who the ultimate beneficial natural owners of these accounts are in the correspondent offshore banks, as well as the owners of the banks themselves, they are not going to provide accounts. They must be assured that the business of the banks offshore are not high-risk and that they will not provide excessive monitoring risks, and if that is the case then they are willing to provide correspondent accounts.

Although de-risking practices have grown exponentially in recent years, efforts are being made to correct the major issues that were illustrated throughout the seminar. However, it will take a significant amount of work to combat this very serious issue before its implications on the global economy and the level of deterioration it has brought upon international relations extend any further.




Mr. Dominic Suszek is an experienced and successful executive with broad experience in bank operations, audit, information technology, and regulatory compliance. As a senior executive involved in all aspects of regulatory compliance, with more than 25 years of banking expertise in operations, technology, security, fraud and compliance, he has acquired extensive knowledge of the requirements from many regulatory agencies in the US, the Caribbean, along with Central and South America.
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