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FCA warns that banks must manage risk rather than avoid it

November 11th, 2015 - Posted by Annabella Cyril in Anti-Bribery And Corruption

The de-risking trend within Financial Services, where banks are refusing to offer financial services to entire categories of 'high risk' customers, including money transmitters, non-profit organisations and financial technology companies, is having a disproportionately negative effect on a number of sectors, essentially excluding them from the global financial economy.  If the trend continues, it could have the opposite effect to that intended by the banks.

Why has de-risking emerged?

Banks point to an increased scrutiny from regulatory bodies over money laundering, bribery and terrorist funding risk in the UK, and especially the US, as justification for taking a blanket de-risking approach to compliance.  While the extraterritorial reach of the US Foreign and Corrupt Practices Act (FCPA) has certainly put more pressure on international organisations, both the UK Financial Conduct Authority (FCA) and the intergovernmental Financial Action Task Force (FATF) have continued to voice concerns at de-risking, recommending that banks should be managing rather than avoiding risk.

A statement issued by the FCA in April this year attempted to clarify its stance:  "We require banks to put in place and maintain policies and procedures to identify, assess and manage money-laundering risk. These policies and procedures must be comprehensive and proportionate to the nature, scale and complexity of the bank's activities."

Effect on non-profits

Ironically, a fear of negative publicity is another underlying contributor to banks taking a blanket approach to avoiding risk.  The significant impact this trend is having on non-profit organisations however, including humanitarian and aid organisations embedded in crisis areas around the world, means that banks are actually facing a higher level of reputational risk than they otherwise would if they were taking a balanced and holistic approach to risk management.

Denying these organisation access to basic financial services, such as overseas fund transfers, insurance and overdrafts, is preventing them from carrying out essential lifesaving assistance, and has the potential to cause significant reputational damage to the banks that are freezing accounts and denying services to previous customers.

Management: the right approach to risk

De-risking may appear to be the easy way out, but banks are actually transferring this risk to elsewhere in the global financial system.  De-risking forces banned organisations and individuals to move money out of transparent and regulated channels into more clandestine routes, particularly as many of the organisations affected provide critical humanitarian services that must continue.  Although, according to the FATF, there is "currently no evidence that de-risking is adversely impacting global financial stability," if not curtailed, the practice may begin to have the opposite effect to that intended: making it more difficult for legitimate organisations, but far easier for money launderers and terrorist financiers to carry out financial activities.

Charities have some of the most stringent and comprehensive due diligence processes, due specifically to the high-risk jurisdictions many operate in.  Consequently, the level of risk associated with charities is actually relatively low, and according to the National Terrorist Financing Risk Assessment Report 2015 issued by the US Department of Treasury, abuses relating to terrorist financing are extremely rare.  While it is not the place of governments to say which customers banks should or should not do business with, the banks themselves need to recognise the significance of their own practices and step up to find a more effective risk management practice.

Regulatory bodies have been clear that effective money-laundering risk management need not result in wholesale de-risking and a recent statement issued by the FATF demonstrates recognition that it is a balance for the private sector.  Moving forwards, banks need to work with regulatory authorities to strike the correct balance and implement an appropriate and effective approach to compliance.   
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