During remarks this week at the American Bankers Association and the American Bar Association Money Laundering Enforcement conference, Treasury Acting Under Secretary Adam Szubin provided some clarity on de-risking and anti-money laundering controls.
Szubin defined “de-risking” to mean “instances in which a financial institution seeks to avoid perceived regulatory risk by indiscriminately terminating, restricting, or denying services to broad classes of clients, without case-by-case analysis or consideration of mitigation options.” Typically, de-risking is discussed in the cross-border context, but the term may be applied to some domestic financial relationships as well, he said.
Rather than simply dumping risks, Szubin said banks should address it. “We believe that most risks can and should be managed, not simply avoided altogether,” he said, adding that Treasury continues to investigate the scope of the problem.
Based on data that Treasury has gathered so far—along with the World Bank, the Financial Stability Board, the Financial Action Task Force (FATF), and the G-20—the findings indicate that the drop in correspondent banking varies significantly by region. “Small jurisdictions with significant offshore banking activities appear to be the most affected, but some large and mid-size economies in Asia and Europe also are reporting declines in their correspondent banking relationships,” said Szubin.
During his remarks, Szubin said Treasury convened a meeting on de-risking with representatives from 13 U.S. financial institutions. “All of these discussions addressed the importance of opening and maintaining cross-border banking relationships and included candid exchanges on de-risking,” he said.
Through this dialogue, these banks told Treasury that “they are reassessing their exposure to risks related to cross-border banking, but those same banks emphasized that they were largely doing so on a case-by-case basis, not across broad categories of clients,” said Szubin. “While we heard reports that fear of perceived regulatory risk was driving some banks’ decision-making, banks also cited other factors, such as lack of profitability, evolving business strategy, and reputational risk.”
Szubin also talked in detail about anti-money laundering standards. Under both the FATF's international standards and Treasury’s domestic standards, “regulators expect financial institutions to establish and implement policies and programs that are reasonably designed,” he said.
“We tell financial institutions to take a reasonable risk-based approach that addresses illicit finance risk on a client-by-client basis,” Szubin added. “That means that we require institutions to be vigilant as they identify potential risks that different clients present, and to design and implement effective AML/CFT programs that assess and address those risks.”
One way to achieve that, he said, is to focus on improving guidance and supervision. “To that end, we have engaged with the private sector and foreign governments to improve the clarity and consistency of our guidance—to effectively communicate what our AML/CFT regime requires and does not require,” he said.
Although some financial institutions remain risk averse due to a number of factors, not just involving AML/CFT, “our AML/CFT standards and implementation are much better today than five years ago,” Szubin said.
“Our markets remain closely connected. Working together, we have promoted an international financial system that can support both inclusiveness and transparency. [W]e will see increasing gains in transparency and inclusion going forward.”