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De-risking refers to the actions of banks to close accounts or exit client relationships for risk management purposes, particularly in order to address anti-money laundering, sanctions or other regulatory concerns. De-risking many affect individual clients, categories of clients or entire countries.
The banking system is under certain obligations set by national governments, regulators or supranational bodies to comply with rules to prevent money laundering, adhere to economic sanctions and combat financing of terrorism. Governing bodies set certain standards for the enforcement; contraventions may attract significant fines, payable by the bank. Given the visible nature of fines for breaches, banks also consider reputational risk and wider issues of trust.
Techniques used by banks to comply with regulations include: name screening, client identification, account and transaction monitoring as well as sanction list checks. In addition, banks have in place suspicion reporting and staff awareness programs in order to identify and act on potentially suspicious clients and transactions. Given the complexities of money laundering, a layer of human and automated data analytics and risk scoring is in place.
Between 2012 and 2015, nine banks faced fines of US$ 20 billion for oversight breaches relating to clients and transactions. In addition, the largest 14 banks spend around US$ 2.6 billion per year in operational expenses for their efforts to comply with regulations.
De-risking has been criticized by some Governments and Charities, who claim that de-risking is not about risk, but about limiting competition, as the Commonwealth Secretariat noted was observed was particularly clear in smaller remittance dependent countries such as those in Latin America, Africa, Asia, and the Pacific.
Large organisations that also act as "clearing" banks in developed economies, have been accused of creating market failures, and undesirable 'unintended' consequences, when undertaking the policies of wide-spread closures of non "clearing bank" access to clearing and payment systems.
Organisations such as the IMF, FATF, UN, World Bank, and the BIS have been critical of the process, which has been partially defended by clearing banks, as a response to tough AML/CFT penalties imposed after the Global Financial Crisis.
These rules have been in place, and are largely unchanged since the 1980s. Updates, expanding the scope of these rules, to extend the reporting obligations from Banks, to new entrants, "forced" the banks to begin "excluding" the new entrants from the market, for potentially not complying with the AML/CFT rules.
This coincided with considerable lessening of technology costs to communicate reliably internationally, which had previously been the exclusive domain of large Institutions (Correspondent Banks). The arrival of Fintech's, leveraging these considerable advances in technology, challenges this incumbent advantage.
However, there has been a strong backlash from regulators, and new entrants, contesting these views, but a solution, such as early attempts in the Pacific Islands has not yet been universally accepted, and the situation, remains un-resolved.
- Artingstall, David; Dove, Nick; Howell, John; Levi, Michael (2016). Drivers & Impacts of Derisking (PDF). Financial Conduct Authority.
- Correspondent Banking Services (PDF). Paris: FATF. 2016.
- Banks’ management of high money-laundering risk situations (PDF). Financial Services Authority. 2011.
- Tims, Anna (2018-02-22). "Play-it-safe banks 'de-risk' and freeze out customers". The Guardian. ISSN 0261-3077. Retrieved 2019-08-03.
- Parkman, Tim (2012-12-14). Mastering Anti-Money Laundering and Counter-Terrorist Financing: A compliance guide for practitioners. Pearson UK. ISBN 9780273759058.
- PricewaterhouseCoopers. "Using the right tools for anti-money laundering compliance". PwC. Retrieved 2019-08-12.
- "The new frontier in anti–money laundering | McKinsey". www.mckinsey.com. Retrieved 2019-08-12.
- Onaran, Yalman (4 April 2019). "Stung by Big Fines, Big Banks Beef Up Money-Laundering Controls". www.bloomberg.com. Retrieved 2019-08-05.
- Durner, Tracey; Shetret, Liat (2015). Understanding Bank Derisking and its Effects on Financial Inclusion (PDF). Global Center on Cooperative Security.