Increased regulatory pressures, high punitive fines seen ‘derisking’ banks

Increased regulation on anti-money laundering and accompanying swinging fines have made banks too risk-averse and left many genuine clients unserved, writes the London-based Economist in its July 6, 2017 edition.

The view contained in a banks-focused article titled, “The great unbanking1 – Swingeing fines have made banks
too risk-averse – It is time to rethink anti-money-laundering rules”, specifically notes that regulatory pressures, rise in compliance costs and most of all, de-risking, are becoming a survival issue for banks, that it was time to rethink anti-money-laundering rules, adding that though the crackdown on money laundering activities was merited, some of its results have been perverse.

It said a crackdown on financial crime means global banks are derisking with charities and poor migrants among the hardest hit.

“The crackdown was merited. But some of its results have been perverse. Banks have pulled away from clients they fear might commit financial crimes and, therefore, regard as too dangerous to serve. Many have done so indiscriminately. Money-transfer firms, especially those handling remittances to poor countries, and charities that work in conflict zones, have been hit hard by this ‘derisking’,” the report said.

Again regulators imposing swinging fines and stiff penalties has slowed banks’ role in intermediation, especially cross-border transfers, which has affected banks in Africa, Eastern Europe, Latin America and the Caribbean that have been dropped by their Western correspondent banks they relied on to clear dollar and euro transactions.

Financial analysts who spoke to businessamlive on the issue said regulators churning out policies on money laundering and corruption as the case may be, especially in Nigeria, are merely reactive as against proactive in their oversight functions.

“Look at the case of the Economic and Financial Crime Commission (EFCC) barging into banks all in the name of looking for stolen funds. The actions interfere with the role of banks, which include safe-keeping and intermediation,” a source said, adding that banks are now afraid to take deposits from some perceived corrupt persons, thereby increasing the money outside the banking system.

According to the article, the harm of stricter regulation goes wider than specific institutions, that apart from individual finance institutions getting rapped, there other are collateral damages, including legitimate clients who have dire need for money having their transfers delayed or their bank accounts closed.

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“A financial system that lets dirty money flow freely is a bad one. One that blocks clean money is even worse,” the report noted.

“Derisking chokes off financial flows that parts of the global economy depend on. It undermines development goals such as boosting financial inclusion and strengthening fragile states. And it drives some transactions into informal channels, meaning that regulators become less able to spot suspicious deals,” the report said.

Popular though it has become to bash banks, they have been acting rationally. The report however put the blame for the damage that derisking on policymakers and regulators, who overreacted to past money-laundering scandals.

“They issued dire warnings about the dangers of serving entire classes of client, such as money-transfer firms, and imposed swingeing penalties for infractions. No wonder banks dumped less-profitable clients tainted by the merest hint of risk.”

The article stressed that banks deserve a new approach to financial regulation—one that accepts mistakes can be made in good faith. Multilateral institutions such as the IMF should do more to help the countries worst affected by ‘derisking’ to improve their financial oversight.

“Regulators should create “white lists” of reputable charities, which banks can serve without fear. Most important, banks that can show they have strong anti-laundering controls and have done their due diligence should get credit for that if an occasional illicit payment slips through.”

It equally sees financial technology as offering the prospect of filtering suspicious transactions from legitimate ones.

“People are excited about the blockchain, a distributed-ledger technology that underpins bitcoin, a digital currency. The blockchain could turn out to be a cheap, clean way to verify customers and transactions. But it will not be widely used for some time, if ever,” it stressed.

It stated that the Financial Stability Board, an international group of policymakers, is aware of the problem, that it is coordinating efforts to reverse the trend, adding that it has so far done little except diagnose what is wrong.

“Persuading banks to “rerisk” will take more than toning down the warnings in regulatory guidelines,” it said.