De-Risking’s Impact on AML Compliance
As anti-money laundering (AML) requirements have increased in scale and intensity over the past several years, remaining compliant has become a daunting task, and one that has proven to be quite costly for financial institutions (FI’s) of all sizes. The global trend of “de-risking” has ensued as a result of the hesitance of these organizations to succumb to large monetary fines and other penalties stemming from non-compliance. De-Risking is defined as a situation where financial institutions terminate or restrict business relationships and accounts with certain categories of customer based on the risk involved in dealing with said individuals or groups. It has become a very common practice in 2017, specifically amongst larger financial institutions. Banks are now rejecting and shedding their clients located in “high risk” regions such as the Caribbean and South America at a higher rate than ever before, as well as account holders who are dealing in risky industries, such as the casino industry, due to the increasing pressures being placed on them by government regulators and private litigants. A World Bank report has found that approximately “89% of jurisdictions in the region have reported significant to moderate declines in their foreign CBRs” since 2014 (World Bank, 2015). While beneficial for banks in distancing themselves from potential risk and possible repercussions, this practice has had a monumental impact on the financial services sector as a whole.
With fewer large-scale banks keeping and accepting clients based on their supposed “risky” lines of business, geographic location, and other factors, the financial landscape has drastically changed for these now bank-less entities. The article “How ‘de-risking’ is changing the face of AML compliance programs”, cited in BSA News Now on Thursday April 20th, 2017, examines some of the changes seen as a result of this continuous trend. Writer Andrew Simpson states that although large FI’s do not necessarily suffer from cutting their losses in regards to no longer keeping their risky accounts, their smaller-scaled counterparts do not fair quite as well. Simpson writes that this trend has:
“Significant implications for the smaller respondent banks that rely on their correspondent banking relationships (CBRs) to access international financial systems. Being denied this access further isolates some of the world’s most vulnerable areas, including developing nations, and drives many to smaller, potentially non-compliant financial institutions or illegal “shadow markets” of cash transactions to get the services they need” (Simpson, 2017).
De-risking has effectively led to greater re-evaluation of compliance programs altogether by respondent banks in attempts to avoid losing their relationship with correspondent banks. This has been made evident by the increased efforts shown by respondent banks towards the implementation of new, thorough, and more advanced ways to neutralize risk. Once such method is the use of the latest technologies available today. The implementation of data-driven technology has been introduced to the financial services sector in order to aid in the tracking of data and transactions. This helps compliance officers to detect criminal activity based off of irregular patterns, missing data, or other trends found within a transaction log.
Financial institutions are turning to regulatory technologies to ease the burden that is manual compliance, which not only creates greater operational efficiency, but also addresses risk across numerous compliance-related areas. Simpson has found that in order to appear less risky to larger FI’s, “respondent banks are working with solutions that monitor their information and transactions to generate alerts that can be remediated before they impact correspondent accounts” (Simpson, 2017). In addition, the article explains that respondent banks have also tried to keep their correspondent banking relationships by far-exceeding the minimum regulatory requirements that govern them. Whether this is done through the implementation of recommendations offered by the World Bank, or anticipating and finding new ways to fight the latest tactics used by financial criminals, respondent banks are becoming well equipped to limit risk – ultimately showing correspondent banks that they are doing all they can to remain compliant and risk-free. Furthermore, respondent banks are realizing the importance of adjusting their AML programs to be in line with those of the correspondent banks. This includes increases in staff training, and making staff changes to ensure that the compliance staff is held accountable for their duties. This is due in large part to the fact that respondent banks “have realized that if its risk appetite is misaligned with that of the correspondent bank, there is an increased chance of de-risking” (Simpson, 2017).
Although de-risking is an unfortunate byproduct of the rugged regulatory landscape of the 2010’s, the trend of cutting clients deemed as “risky” is unlikely to end any time soon. It is up to respondent banks to continue to advance their respective AML programs in order to stay above the curb and ensure their access to the lifeblood of correspondent banking relationships.
For more information on de-risking, please watch Global RADAR’s Webinar, De-Risking 101, by following this link: https://zjede.beeweb-blue.io/webinars/de-resking-101-webinar/
Pay Up: Odebrecht Fined for Corruption
Earlier this week, the infamous Brazilian construction company Odebrecht was ordered by a federal judge to pay a fine in excess of $2.6 billion for their role in a large-scale corruption case. It has been reported that between 2004 and 2014 Odebrecht “paid approximately $788 million in bribes in 12 countries, including Brazil, where it has been under investigation for more than two years within the framework of the far-reaching corruption case involving the state-run petroleum company, Petrobras” (EFE, 2017). The bribes were reportedly related to over 100 individual construction projects in numerous countries in South and Central America, as well as Africa.
Odebrecht agreed to pay the fine in a cooperation agreement made with the U.S. Justice Department, as well as Brazilian and Swiss authorities, after acknowledging their wrongdoing. The fine payments break down as follows: “$2.39 billion in Brazil, $116 million in Switzerland, and $93 million in the United States” (EFE, 2017). The agreement also called for testimony to be offered by numerous Odebrecht executives to aid authorities in the ongoing investigation into this case.
Compliance Officers and Technology
With Anti-Money Laundering (AML) regulations continuing to evolve to meet
the world’s current financial state, the responsibilities of Compliance Officers have also grown exponentially in recent years. The growing role of technology has undoubtedly had a positive impact on compliance, essentially forcing today’s Compliance Officers to be proficient in the use of regulatory technologies (RegTech) that have become crucial to the increased efficiency and effectiveness of AML programs in 2017. The FinExtra article “Evolving the AML Compliance Officer into a Technology Expert” discusses a trend in the financial services sector that has seen less value being placed on manpower within a compliance department, and greater value being placed on analytics and the use of artificial intelligence. These are not only vital to increasing efficiency, but also to assessing the right fit in terms of how a software solution will work for the organization employing it.
The article also suggests another reason why understanding how regulatory technologies work is important for compliance officers: new technology means new ways for criminals to launder money. Writer Thomas Hook states “Understanding how these technologies work is essential for AML Compliance Officers and their teams to figure out how they can be used for criminal activity and how they can best be monitored for red flags” (Hook, 2017). By understanding the products being used, compliance officers can have a larger role in the final decision making process for a respective solution, thus allowing them to identify and prepare for any AML risks that may be detected. Overall, as RegTech continues to grow in use and importance for financial service providers, compliance officers will be asked to take on even greater responsibility in the near future.
Importance of Accountants in Anti-Corruption
A recently published study by the International Federation of Accountants (IFAC) has discovered just how vital the role that professional accountants play in the global battle against corruption truly is. The study, “The Accountancy Profession – Playing a Positive Role in Tackling Corruption”, showed “a strong link between the percentage of professional accountants in the workforce, and more favorable scores on the main global measures of corruption” (Yahoo Finance, 2017). Many of the traits needed in the accountancy profession have also been identified as essential in the fight against corruption, including professional ethics, integrity, and oversight. IFAC CEO Fayez Choudhury adds, “The accountancy profession is a crucial part of strong national governance architectures that confront corruption, in partnership with good government and strong businesses” (Yahoo Finance, 2017).
EFE. “Brazil’s Odebrecht to Pay $2.6bn Fine for Corruption.” AL DÍA News. 18 Apr.
Hook, Thomas. “Evolving the AML Compliance Officer into a Technology
Expert.” Finextra Research. Finextra, 17 Apr. 2017. Web.
PR Newswire. “Professional Accountants, Strong Governance Vital to Reducing
Corruption.” Yahoo! News. Yahoo! 18 Apr. 2017. Web.
Simpson, Andrew. “How “de-risking” Is Changing the Face of AML Compliance
Programs.” Bobsguide. 19 Apr. 2017. Web.
“Withdrawal From Correspondent Banking Where, Why, And What To
Do About It.” The World Bank (2015): The World Bank Group. Web.