The consequences of de-risking

Money By Dave Plank April 4, 2019

Well-intended anti-money laundering and terror financing regulations have created unintended consequences for the livelihoods of people around the world, write Western Union’s Public Policy leads in Global Banking & Finance Review.

“De-risking,” the practice by which financial institutions pre-emptively close the accounts of customers they see as possible risks for money laundering or terror financing, has become more widespread in the wake of regulations implemented in response to the global financial crisis of a decade ago, write Chloe MacEwen, Western Union VP of Public Policy, Europe; and Barbara Span, Western Union VP of Public Affairs, MEA/APAC. But some financial institutions have used those regulations as a rationale to cease serving entire classes of customers, regardless of the actual risk any individual customer may pose.

In effect, MacEwen and Span write, such banks are freezing out customers and “cherry-picking services with lower regulatory costs and higher profits.”

This practice flies in the face of global guidelines issued by the Financial Action Task Force, as well as regulations of countries around the world which call for banks to take a “risk-based” approach to evaluating individual customers — and specifically state that banks should not remove entire categories of financial services from their portfolios.

The removal of such services has severe on-the-ground impacts: It chokes off access to financial services in the developing world; drives actual money launderers and terror financiers further into the shadows, where they are harder to catch; and raises the cost of sending remittances, which in recent years has been on an encouraging downward trend.

The people who suffer the most from these effects, say the authors, are the ones who are on the world’s financial margins to begin with. De-risking impacts vulnerable communities that need to move money across borders, pushing people even farther away from the formal financial system and making financial security that much harder for them to achieve.

Solving the problem will require “a willingness and determination from nations and banking systems around the world,” MacEwen and Span write. “It is high time the global community takes action.”

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