Top U.S. government officials and agencies this week attempted to make a statement on the “de-risking” of correspondent banking relationships to certain regions of the world deemed to be at a higher risk for financial crime, in short saying it’s incorrect to think that “zero tolerance” enforcement policies were pushing the practice.
In the short, less than four-page “Fact Sheet” and a related blog posting, the U.S. Treasury Department and federal regulators stated they wanted to clarify expectations and potential consequences related to anti-money laundering (AML) rules that some governments say are so draconian, U.S. financial institutions are dropping correspondent ties to certain regions of the world to lower perceived compliance risks and related penalty exposure.
Overall the Fact Sheet “dispels certain myths about U.S. supervisory expectations. Notably, it confirms that there is no general expectation for banks to conduct due diligence on the individual customers of foreign financial institutions,” according to the Blog Posting.
The message may not be enough to sway compliance officers’ trepidation, said one expert.
“There is nothing new,” in the fact sheet, beyond current interagency guidance, said Kim Manchester, Managing Director of Toronto-based ManchesterCF, a financial crime advisory and training firm. It’s a “statement of the patently obvious. Why do they have to restate the patently obvious? Because everyone is getting themselves all worked into a frenzy and retracting from all corners of the planet.”
The statement is likely more in response to outcries by governments around the globe, including the Caribbean and other regions deemed to be at a higher risk for money laundering, that they are losing their correspondent accounts with U.S. and other banks, and consequently, losing the ability to transact in U.S. dollars, he said.
The very short statement is just a basic “primer,” in comparison to what the banking industry needs, which is an “intelligent discussion of the risks involved and ways to mitigate those risks so banks can have an international correspondent banking strategy to reach into all of these higher risk areas” around the world, Manchester said. “Or show banks what an intelligent risk assessment is supposed to look like.”
The blog is meant to send a unified message and is authored by Nathan Sheets, Under Secretary for International Affairs, Adam Szubin, the Acting Under Secretary for Terrorism and Financial Intelligence, and Amias Gerety, the Acting Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury. The two documents focus on the importance of correspondent connections to the U.S. and other countries, and vice versa.
“Correspondent banking relationships help improve livelihoods and foster global economic growth by enabling banks to facilitate international trade, conduct cross-border business and charitable activities, and provide U.S. dollar financing,” according to the agencies.
Correspondent relationships important to U.S., other countries
They also tacitly noted that they realize a country losing access to the United States and being able to transact in dollars would be a hardship, but that more global connections to this country must happen in tandem with stronger financial crime controls.
“The U.S. financial system is a critical part of the global economy, and the U.S. government believes that expanding access to that system and protecting it from illicit activity are mutually reinforcing goals that can and must be addressed simultaneously.”
Thus far, that has been a challenge.
The Federal Banking Agencies are “thinking squarely inside the box, and add nothing new with this most recent guidance,” said David Landsman, executive director of the National Money Transmitters Association.
“I cannot believe they really think it will have any effect on the disastrous situation unfolding slowly before our eyes,” he said. “The only thing that would help would be for the FBAs [federal banking agencies] to create systems and policies, that do not yet exist, that would allow banks to lay off these risks, onto the shoulders of government where they properly belong.”
In fact, some of the “hundreds of billions of dollars in bank fines that have been collected over the past few years could easily fund the governmental structures that are missing today,” Landsman said.
The Fact Sheet tried to address a feeling that U.S. regulators will penalize harshly any AML mistake that doesn’t perfectly calculate risk to the third decimal point and mitigate the higher risk areas adequately with staffing, systems, transaction monitoring and suspicious activity reporting.
While the Treasury and the federal banking agencies (FBAs) “do not utilize a zero tolerance philosophy that mandates the strict imposition of formal enforcement action regardless of the facts and circumstances of the situation, Treasury and the FBAs take the threats posed by criminals, money-launderers, and terrorist financiers very seriously,” according to the sheet.
And any related penalties that could result for missteps are doled out in a “proportionate and appropriate manner,” with the end goal to safeguard our financial system against abuse.
The sheet, however, does not trumpet the fact that in recent years, penalties in the areas financial crime compliance have hit in the billions of dollars. Neither does the sheet give validation to the fact that those mammoth enforcement actions are actually a perceived driver of de-risking.
U.S. government message won’t mean more correspondent openings
But some banks clearly feel the response to lower risk as much as possible is out of proportion with their risk to the U.S. financial system.
“While this news is meant to encourage some of the larger U.S. respondent banks that have decided to exit relationships with various foreign correspondent banks – I doubt that it will bring the desired result,” said Sarah Beth Whetzel, a financial crime consultant at Palmera Banking Solutions.
Any solution would have to involve the administration adjusting its foreign policy goals and those messages making it down to examiners on the ground.
“The tier one banks, responsible for providing access to the U.S. financial system for most of the Caribbean banks, are exiting relationships by blaming the U.S. regulators as pressuring them to exit,” Whetzel said. “In my opinion, the U.S. banks are exiting these foreign correspondent relationships due to risk being greater than the reward.”
The cornerstone question the U.S. government has to ask itself in the de-risking debacle is this: “Is it worth the time and effort in order to support our ally countries’ financial interests?” she said. In her mind, that would be, “a resounding yes.”
In fact, the sheet notes that enforcement actions, and in particular large monetary penalties, are only handed down in very rare, extreme cases of non-compliance, in many instances that have gone on for several years and even after examiners have brought the deficiencies to the bank’s attention.
The vast majority, or about 95 percent of AML and sanctions compliance deficiencies identified by the FBAs, the U.S. Treasury’s Financial Crimes Enforcement Network and Office of Foreign Assets Control are “corrected by the institution’s management without the need for any enforcement action or penalty,” according to the Fact Sheet.
Even so, in a recent compliance conference he attended in Antigua, Manchester said the number one issue on everyone’s minds was how to deal with de-risking happening in the region because it can have “crippling economic effects, down to the local populace.”
At the same time, losing connections to foreign countries and banks means critical information streams that could help U.S. investigators dry up.
“The more you turn off correspondent banking, the less financial intelligence flows through competent companies,” Manchester said. “That means the less you know about what does and doesn’t happen first hand. You are voluntarily committing financial intelligence suicide by deciding only certain countries should be dealt with.”