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Treading a delicate path: The problems associated with derisking

August 25th, 2015 - Posted by Mark Dunn in Anti-Money Laundering

Banks are risking significant reputational damage as they attempt to 'derisk' their operations in the face of increased international efforts to tackle money laundering and bribery and corruption.

Who is affected?

The accounts of a significant number of charities – both UK and international – have been frozen by a number of major financial institutions. Many of the NGOs concerned have been engaged in relief work in Middle Eastern trouble zones including Iraq, Syria and Palestine.

The banks are responding to increased regulatory pressure which is being led by authorities in the US.  Money laundering, sanctions and corruption are among the targets of enforcement and many charities have, in effect, become collateral damage.

In an effort to counter accusations that a lack of clarity from the regulatory authorities is behind the freezing of the accounts of charities, financial technology firms and money transmitters, the UK's Financial Conduct Authority (FCA) has issued updated guidance to banks.

Regulatory guidance

The FCA has said that it recognises that money payment services, charities and fintech companies were having difficulty accessing financial services because some banks regard them as higher risk.  It says that banks should use "judgement and common sense" to ensure that their anti-money laundering (AML) compliance procedures do not create or exacerbate issues over consumer protection or competition.

Banks are encouraged in industry and other regulatory guidance to adopt risk-based procedures to financial crime prevention which may lead to business with specific customers being declined or access to certain products & services limited. But the FCA has stressed that this does not mean that banks should deal with entire categories of customers in a generic way.

While certain community groups claim to have been unfairly targeted and aid workers have faced delays in salaries and other payments, both the UK and US governments have said that the not-for-profit sector has repeatedly been used by terrorists to raise finance and launder money.  The Financial Action Task Force, a global body set up by governments to track terrorist finance, found more than 100 instances of charities being used for terrorist funding, mostly involving the diversion of funds.

What next?

Many campaigners claim that the increasing extraterritorial reach of US enforcement makes it vital that the UK government works with Washington to try to counter the impact on charities.

Banks anticipate that more financial crime prevention measures emanating from the US will lead to further derisking.  Meanwhile, HM Treasury in the UK is proposing that AML compliance requirements are extended to include digital currency trading platforms.  While HM Treasury says that it wants to do this in a way that both "supports innovation and prevents criminal use", it is only likely to further increase the compliance burden and risks facing the financial services sector.

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