Worldwide it is said that money laundering is a problem of staggering proportions and has potentially devastating economic and social consequences, as well as security. The Caribbean for the most part has been heavily criticized for being a safe harbour for criminals, establishing vehicles to hide beneficial ownership, tax evasion and corruption to name a few. Risk assessment is the buzz word as institutions are forced to ensure that they remain compliant to satisfy local laws and international standards. The Financial Action Task Force 2012 Recommendations has stressed the importance of Risk Assessment as a key tool to be carried out not just for financial institutions but at a national level.
Over the past decade, our financial institutions in the region have seen heightened levels of regulatory attention on the frameworks of Anti-money Laundering (AML) and Countering Financing of Terrorism (CFT). In order to “mitigate risks” some banking institutions have responded by strengthening their risk models to assess their customers on a risk based approach while some are opting to end relationships with clients deemed “high risk” such as Politically Exposed Persons (PEPs), Gatekeepers, clients with previous charges that may be related to Money Laundering, Terrorism and other predicate offences.
Being charged with an offence and convicted of the offence is certainly not the same. Similarly being a PEP, a Gatekeeper or a high risk individual or business should not prevent financial inclusion. The argument from many banks is that those high risk relationships may pose more risk than potential returns to them. In addition, maintaining their correspondent bank account is of more importance than taking on the headache of getting to know that high risk customer by having to frequently monitor that account. This practice, known as de-risking, is the preferred option from the financial services industry especially banks given the regulatory pressures on AML/CFT in recent years. This has prompted banks to rethink the way it defines and manages risk.
However, ambiguity remains as the criteria recommended for risk assessment is rather subjective and lacks uniformity in its implementation across institutions. This, therefore, presents challenges for financial inclusion; thus, prohibiting high risk individuals and firms
from conducting business. With the appetite for risk plummeting, the larger banks, especially those with International Head Offices are losing clients deemed high risk to smaller Domestic Banks, Credit Unions and other Depository Institutions. However, these smaller financial institutions may not have the resources and systems to be able to conduct effective AML/CFT compliance services. This may also result in a forcible shift to the use of the underground economy which can then have an effect on GDP indicators of countries.
One cannot argue that AML/CFT systems are not necessary to protect the stability of the banks and to a larger extent the international financial system. Neither can one argue that the reputation of the banks and the maintenance of correspondent bank accounts are not critical.
However, de-risking has to be carefully considered in order not to enhance financial exclusion which could have other negative effects. As banks continue to de-risk, governments will be forced to possibly change laws and regulations to ensure that the recommendations under the national risk assessment do not allow for too much financial exclusion and are best suited for economic growth and institution based needs. Failure to do so may lead to the blockage of development and growth of innovative mechanisms for the financial inclusion of those individuals and companies that are marginalized. In doing so, care must also be taken not to compromise to the point where international pressures and sanctions can have governments on their heels and possibly cause reputational damages to the country and financial institutions. The question is does the risk based recommendations allow for flexibility, proportionality and effectiveness or will the subjectivity allow for the return of a prescriptive approach to customer due diligence? Only time will tell.
About the Author:
Kem Warner is the Owner and Managing Director of KAW Management Services Ltd. in Antigua and KAW Management Services (Caribbean) Ltd. in St. Kitts and Nevis. Both companies specialize in Anti Money Laundering, Anti-fraud, Risk Management, Compliance Services, Operations Management Consultancy and Training. He can be reached at firstname.lastname@example.org