A United Kingdom financial services regulator has attempted to measure the scope of banks in the country “de-risking” out of certain customers, businesses and regions due to perceived anti-money laundering risk, a global problem that could make it harder for certain entities to get or keep banks accounts and get intelligence on international illicit financial flows.

The Financial Conduct Authority (FCA) tasked consultants to review the trend of de-risking and give their analysis to why it’s happening, what are the consequences and what are some of the solutions, if any, which could be at play. The full findings of the six-month investigation are published in the consultants’ report.

In short, the trend has been going on in some sectors, such as domestic and foreign money services businesses, for nearly a decade, but has picked up some after the economic downturn of the late 2000s and more recent historic penalties for anti-money laundering (AML) and sanctions violations soaring into the hundreds of millions and billions of dollars.

The report backed up that trend, but also warned banks not to play games with regulators on the issue, such as stating certain customers’ accounts were closed due to AML risk, when, in reality, the reason was that the banks simply didn’t believe the relationship was profitable enough to merit further services.

In recent years, the FCA has “become aware that banks are withdrawing or failing to offer banking facilities to customers in greater volumes than before. There is a perception that this is driven by banks’ concerns about the money laundering and terrorist financing (ML/TF) risks posed by certain types of customer. This is known as ‘de-risking.’”

Overall, the report finds that:

  • Since the global financial crisis, banks have been faced with higher capital requirements and higher liquidity thresholds as well as greater enforcement by regulators and prosecutors. This has caused banks to deleverage, and has also created a tougher environment in which to maintain profitable relationships. As a result, many banks have undertaken a strategic review of their business and functions, often choosing to focus on their “core” business.
  • Some Banks are closing accounts for money transmission services, pawnbrokers, fintech companies, and charities operating in geographical areas perceived to present greater ML/TF risks. De-risking seems to affect small businesses more than large ones.
  • Banks appear to weigh up a variety of benefits and costs of maintaining an account that are not always related to the financial crime risks the customer might pose. These include specific customer considerations such as the assessment of the credit risk presented by the potential customer and the prospective profitability of a relationship. There are also broader business considerations driven by strategic business decisions, increased capital requirements, or overall compliance costs.
  • While the impact of de-risking on individuals or businesses can be acute, numbers of de-risking decisions are small compared to the overall closure rates of bank accounts that the consultants report run to millions of personal accounts and hundreds of thousands of business accounts per year. For example, the report highlighted that:
    • in one bank, of the 2,500 charity bank accounts closed in 2014 only 59 were closed for reasons that might relate to compliance concerns, and
    • one large bank said that only 0.013 percent of all its overall small business accounts had been closed for ‘AML linked reasons’
  • The report talks about how consultants’ research found instances where closure of an account had an impact on the customer, creating stress and inconvenience in having to secure alternative arrangements or make changes to the way they do business. This was compounded when there was a lack of communication from banks when closing an account or rejecting an application for an account.

OCC also reviewing risk responses

The declarations by the FCA follow comments by the top regulator of the United States’ largest and most sophisticated banks.

In March, Comptroller Thomas Curry stated the agency is analyzing whether it needs to release guidance tied to the practice of “de-risking” out of certain industries, customer types and regions, a move by banks taken in some cases to lower exam scrutiny and penalty exposure.

The US Treasury’s Office of the Comptroller of the Currency (OCC) at that time was examining information on the issue, particularly bank policies around “risk re-evaluation” practices.

Banks in recent years have paid massive penalties tied to anti-money laundering (AML) compliance failures and have become more reticent to bank certain customers or operate in regions known for corruption or weak controls.

As a result, some institutions that have been penalized, suffered formal enforcement orders or simply want to endure less compliance risk and monitoring costs have dropped ties to risky businesses, such as money services operations and third-party payment processors, products and countries, such as Cyprus and Somalia.

“Nonetheless, both hard and anecdotal data show that many such relationships have been terminated, particularly those with foreign correspondent banks,” he said Monday at an industry conference.  “This data has compelled the OCC to take a deeper look at how banks conduct risk re-evaluation.”

“Our goal is to identify current practices and possible gaps in existing policies and procedures for conducting periodic client risk re-evaluations and for making account termination decisions,” Curry said.

“Through our supervisory process, we’ve been looking at whether banks have explicit policies on risk re-evaluation and who is involved in making the decision to terminate a relationship,” he said.

Examiners are also looking at whether banks use oversight committees to review these decisions, whether the decisions are reported to the Board of Directors or senior management, and whether correspondents have an opportunity to address concerns before the relationship is terminated.

Fintech to the rescue?

In response to the issue of de-risking, the FCA stated it is also analyzing the situation and working with regional and international bodies, such as the Paris-based Financial Action Task Force (FATF), which sets global AML policies, to see what statements or guidance should be issued.

The authority is also looking at how it can better share information with the sector on certain financial crime and compliance risks, trends and vulnerabilities.

The regulator is also seeing how certain digital solutions, such as in the case of customer due diligence, could help banks be more precise in customer risk-ranking and monitoring, while not falling afoul of European Union or United Kingdom AML standards and requirements.

Technology innovations could be a potential future panacea to broad de-risking by improving, speeding up and reducing the cost of AML compliance, according to the FCA.