House Subcommittee Considers AML De-Risking

The U.S. House Subcommittee on Financial Institutions and Consumer Credit considered testimony regarding the implications of “de-risking,” wherein financial institutions end relationships and close the accounts of “high-risk” clients to avoid legal liability and regulatory scrutiny. The subcommittee noted that de-risking (i) may affect “many legitimate businesses,” (ii) could reduce access by small businesses to financial products domestically, and (iii) could affect the flow of humanitarian aid globally.

Witnesses at the hearing included Michael E. Clements, Director of Financial Markets and Community Investment of the Government Accountability Office (“GAO”); Sue E. Eckert, Adjunct Senior Fellow at the Center for a New American Security; Gabrielle Haddad, Chief Operating Officer of Sigma Ratings Inc.; John Lewis, Senior Vice President of Corporate Affairs and General Counsel at the United Nations Federal Credit Union on behalf of the National Association of Federally-Insured Credit Unions; and Sally Yearwood, Executive Director of Caribbean-Central American Action.

GAO Reports

Mr. Clements based his testimony on GAO reports from February 2018 and March 2018. He stated that Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulations have been a factor for some banks in terminating or limiting accounts and closing branches. The February report found that certain geographic areas were more likely to lose bank branches if they were (i) urban and had higher per capita personal incomes and younger populations, or (ii) designated as High-Intensity Financial Crime Areas or High-Intensity Drug Trafficking Areas, or featured higher rates of banks filing suspicious activity reports. According to the February report, approximately 80% of U.S. Southwest border region banks, due to increased BSA/AML oversight, either limited or did not offer accounts to customers considered to be at high risk for money laundering. According to the March report, money transmitters in Haiti, Liberia, Nepal and Somalia (collectively, “fragile countries”) reported a significant loss of banking access and increased reliance on nonbanking channels as alternatives.

The February report urged the Financial Crimes Enforcement Network, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency to conduct a retrospective review of BSA/AML regulations and their implications for banks. The March report advised the U.S. Treasury Department (“Treasury”) to analyze how “shifts in remittance flows from banking to non-banking channels for fragile countries may affect the Treasury’s ability to monitor for money laundering and terrorist financing.”

Testimony and Recommendations

Mr. Lewis testified that financial institutions may de-risk themselves in response to examiners who go beyond what is required by guidance, or in response to broad law enforcement requests for information about particular types of customers. He said that additional pressure from examiners and the threat of overbroad investigatory demands are both factors in de-risking decisions. Mr. Lewis recommended (i) implementing a “safe-harbor” policy for financial institutions that provides services to high-risk accounts if the financial institutions conduct sufficient scrutiny of the accounts, (ii) educating financial institutions on risk-based review requirements and (iii) amending regulations so that a financial institution is not “the ‘de facto’ regulator of a business.”

Ms. Yearwood recommended that (i) the Treasury continue providing assistance to Caribbean nations (a high-risk region), (ii) regulations be harmonized to better enable small countries with limited capacities to remain compliant, (iii) investments in new technology be made to “level the playing field” and (iv) regulations be recalibrated when they are weighted against smaller economies.

Ms. Haddad recommended (i) improving the sharing of risk information between the private and public sectors to enhance overall transparency, (ii) using third-party providers to conduct assessments of respondent banks’ compliance with global standards, and (iii) using technology to lower AML and other related compliance costs without threatening financial institutions with regulatory backlash.

Ms. Eckert testified that the “de-risking phenomena” restricted financial access for non-profit organizations with “deleterious humanitarian consequences.” Ms. Eckert called for U.S. leadership to ensure the flow of humanitarian funds.

Lofchie Comment: Well-intended rules may have negative consequences. In this case, the potential fines — and the potential for public embarrassment for accepting an account that appears in any way AML-uncertain — far outweigh any ordinary business gain from accepting the account. It is not so clear how the regulators can be very tough on AML failures and at the same time motivate financial institutions to accept accounts that appear in any way AML-risky.

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