Financial institutions have increasingly embraced the practice of de-risking as part of their AML strategies. This approach involves reducing or severing business relationships and services with entities deemed high risk. While de-risking may seem like a sound strategy in theory, it is crucial to examine its impact on the very customers these financial systems aim to serve. Banking compliance officer John Calderon issues a warning about the potential pitfalls of broad-based de-risking practices.
De-risking is essentially a risk-avoidance tactic employed by financial institutions. By terminating or limiting business relationships with sectors or regions considered high risk for money laundering or terrorist financing (CFT), institutions seek to minimize potential legal and financial exposure arising from non-compliance with AML regulations. This exposure can result in hefty fines, reputational damage and operational costs.
De-risking presents a double-edged sword for financial institutions. On one hand, it reduces their risk profile and potentially shields them from costly regulatory penalties. On the other hand, it may lead to the loss of business and customer relationships, particularly when the perceived risks are associated with specific geographical regions or sectors.
While de-risking may seem like a prudent risk management approach, it can have unintended consequences. Innocent customers, especially those belonging to vulnerable groups or residing in high-risk regions, may find themselves financially excluded. This exclusion can have significant socioeconomic impacts as individuals and businesses struggle to access essential financial services.
Consider the case of Caribbean countries. In the late 2010s, Caribbean banks experienced significant de-risking, with major North American and European banks limiting or cutting ties. This action was driven by the Caribbean’s perceived high-risk status, linked to its proximity to illicit trade routes and by rigorous AML/CFT regulations in the West making compliance more costly.
As a result, the trade-dependent region faced disruptions, with challenges in trade financing stalling economic growth. Moreover, the crucial remittance flow to the Caribbean became pricier and less efficient, impacting many reliant on it.
Another example worth examining is that of money service businesses (MSB). These businesses provide financial services, including money transfers, check cashing, currency exchange and payment processing, often catering to underbanked populations. Due to their vulnerability to money laundering and terrorist financing activities, they are considered high-risk clients in terms of AML.
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Read moreDetailsWhen de-risking practices took hold, many banks severed ties with MSBs, deeming their risk profiles too high. This loss of banking relationships posed operational challenges for the businesses, compromising their ability to provide services and leading to higher fees passed on to already vulnerable consumers.
The repercussions extended beyond the MSBs themselves. Migrant workers, for instance, who used remittance services to support their families back home, encountered obstacles in accessing such vital and affordable services.
The drive for de-risking contrasts sharply with efforts aimed at promoting financial inclusion. By limiting access to financial services, de-risking can push individuals toward informal and less-regulated financial systems. This exacerbates financial exclusion and contradicts the very purpose of AML measures, which is to curb illicit financial flows.
Rather than resorting to broad de-risking measures, financial institutions could adopt more nuanced risk management strategies. Customer risk-profiling, enhanced due diligence and adoption of sophisticated AML technology could provide ways to manage risks without sweeping de-risking actions. These strategies, of course, come with their own challenges, such as cost implications related to staffing and technological demands.
Regulators worldwide are increasingly recognizing the unintended consequences of de-risking. Bodies like the Financial Action Task Force (FATF) have issued guidance advising banks to adopt a risk-based approach instead of wholesale cut-offs that can harm innocent customers. However, these guidelines must be accompanied by concrete actions to be truly effective.
The future of de-risking will likely be influenced by various factors, including technological advancements, regulatory shifts and evolving industry practices. The challenge of striking the right balance — protecting the integrity of financial systems without unduly compromising financial inclusion — is not a task for financial institutions alone. It’s a collective challenge, requiring collaboration, conversation and proactive steps from all stakeholders.
As consumers, policymakers and industry professionals, our voice can influence the direction of these practices. Engage with your local and regional financial institutions. Participate in discussions, forums, and public consultations on financial policies. Stay informed, and most importantly, advocate for a financial ecosystem that is both secure and inclusive. Every voice counts, and together, we can build a financial future that safeguards interests without isolating those who need it most.
John Calderon currently serves as the chief compliance officer for Bison State Bank. John is a seasoned regulatory compliance executive with more than a decade of industry experience. In his role, he directs the bank’s comprehensive regulatory compliance program, including the BSA/AML/OFAC program, leveraging his vast experience from previous leadership roles at multinational financial institutions. 
