The Treasury Department might propose new regulations for financial institutions aimed at discouraging banks from shutting out large swaths of potential banking customers because of risk concerns, an issue called “de-risking.”
In a report released Tuesday, the agency recommended proposing regulations that would “require financial institutions to have reasonably designed and risk-based AML/CFT (anti-money laundering/countering the financing of terrorism) programs supervised on a risk basis, possibly taking into consideration the effects of financial inclusion.”
The report also recommended clarifying and revising AML/CFT regulations under the Bank Secrecy Act (BSA) and guidance for money service businesses (MSBs) that offer money transferring services, which are among the entities most affected by de-risking actions taken by financial institutions.
The report was part of the Treasury’s response to requirements of the Anti-Money Laundering Act of 2020 (AMLA) to modernize and strengthen the U.S. AML/CFT framework, which included an instruction to examine the issue of de-risking in financial services.
For the purposes of the report, the Treasury defined de-risking as the “phenomenon of financial institutions making wholesale, indiscriminate decisions about broad categories of customers rather than assessing and mitigating risk in a targeted way.” Under the BSA, financial institutions must implement and maintain AML/CFT programs, keep records, and file suspicious activity reports with the Treasury’s Financial Crimes Enforcement Network when necessary.
De-risking can increase the use of financial services outside of the regulated financial system, the report said, which can make it harder to detect and deter illicit finance. In addition to MSBs, customers most affected by de-risking include nonprofit organizations (NPOs) operating in high-risk foreign jurisdictions and foreign financial institutions with low correspondent banking transaction volumes.
The report said the Treasury is preparing rulemaking that would implement a provision of AMLA to “revise AML/CFT programs so that they are ‘effective,’ ‘reasonably designed,’ and ‘risk based.’” The rulemaking will “provide financial institutions with greater clarity in how to prioritize the allocation of their compliance resources, which could allow them to maintain broader access to banking services while at the same time effectively meeting their AML/CFT compliance obligations,” the report said.
Other recommendations contained in the report included continuing to “assess the opportunities, risks, and challenges of innovative and emerging technologies for AML/CFT compliance solutions,” as well as having the Treasury “[t]rack and measure aggregate changes in banking relationships with respondent banks, MSBs, and NPOs.”