AML and the problem of “derisking

One of the more welcome aspects of the post-financial crash environment has been the consolidation of momentum towards financial literacy and financial inclusion.

Governments and regulatory authorities have long recognized the positive economic benefits of maximum public participation in the formal financial system, in terms of overall economic growth, personal prosperity and the overall tax take.

But one of the ironies of the present clampdown on money laundering, however, is that the same requirements that raise the bar for customer due diligence might have the undesirable secondary effect of excluding perfectly valid customers from the financial system.

As the UK’s Financial Conduct Authority (FCA) states, while everyone can agree that tackling financial crime is desirable, “the steps that the financial services industry takes to tackle money laundering and comply with financial sanctions are not costless. They are, in fact, expensive, occupying the time of many thousands of staff across the financial services industry.” This, the FCA suggests, is having a knock-on effect of at least implicitly discouraging people from participating in the formal financial system and certainly restricting mobility between suppliers.

The question is retaining the correct balance between vigilance and “red tape”. The UK Government is currently preparing a report on the impact on business of the current anti-money laundering and terrorist finance regime, and specifically the role of supervisors in that regime. Another UK review, by the Competition and Markets Authority, is examining what barriers might constrain competition among banks offering services to small businesses and has specifically identified the need for customer due diligence checks as a potential obstacle. 

“Is the need to provide documentary evidence of the identity a small business’s owners one of the reasons those same businesses do not switch provider?” the FCA asks. “And could more uniform customer due diligence requirements for small businesses encourage more switching without significantly increasing money laundering risk?”

This “derisking” phenomenon, as it has become known in regulatory parlance, is now recognized to have far-reaching implications beyond what may have originally been envisaged, particularly around financial inclusion and competition.

“The measures taken by industry to detect and prevent money laundering pose burdens on the public, particularly on some types of firm, like small businesses. Some people – a minority, but not an insignificant group – may also be left without banking facilities as a result of decisions banks make about financial crime risks,” the FCA states.

In particular, “money transmitters, charities and financial technology companies say they are affected and some banks are also withdrawing from providing correspondent banking services. This is a matter of widespread concern in some sectors, social groups, among regulators and at senior political level.”

The need to provide a balance between a suitably rigorous and effective regime and also to make the banking and financial system as accessible as possible is no doubt something the Central Bank is pondering in the run up to implementation of the 4th Money Laundering Directive.

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