Efforts to curb money laundering and illicit terrorist financing have had unintended negative consequences internationally, in particular for people and organizations in poor countries via remittances, correspondent banking and humanitarian aid. More transparency, greater data and a stronger risk-based approach (RBA) are needed, according to a new report from The Center for Global Development, Unintended Consequences of Anti-Money Laundering Policies for Poor Countries.
Anti-money laundering and combating of the financing of terror policies (AML/CFT) have created pressure for institutions to be uniformly risk-averse. As a result of mixed messages and imprecise guidelines from the Financial Action Task Force (FATF), along with a chilling effect from enforcement actions and fines on large financial institutions, banks are engaging in “derisking” by ceasing to engage in any activity with organizations or individuals that a seen to be higher risk.
Industry fears of enforcement action are not unwarranted. Over the last 15 years, both the number and value of AML-related fines have increased in both the US and the UK. The number of fines issued by US regulators has followed a sharp upward trend while the amount of those fines has increased as well.
The report highlights four key areas that are most drastically impacted:
The Money Transfer Organization Sector – a decline in MTO activity negatively affects the migrants who want to send money home (remittances) and those families who rely on that money, which amounts to more than three times foreign aid.
Non-Profit Organizations – NPOs’ effectiveness is being limited and this hurts vulnerable people in post-disaster and conflict zones, who often rely on this aid for the most basic of human necessities.
Small- to medium-sized firms in poor countries – Correspondent banking relationships and trade finance in some corridors are tightening. As a result, local banks no longer have the means to provide substantial credit to regional firms.
Regulators – As risk-aversion practices constrict the legitimate methods for MTOs and NPOs to operate, individuals are turning to less transparent methods, which creates greater risk in turn.
Impact on Remittances and Humanitarian Aid
Several large banks have withdrawn completely from the remittance sector over the past few years. As a result, money transfer operators in the US and elsewhere are facing difficulty opening or maintaining bank accounts. Drivers of this trend include the fact that most remittances flow to global hot spots, and remittance companies have become known as inherently risky despite the compliance procedures they have implemented. Any decrease in remittance flows could have a serious impact on poverty, as these money transfers are “one of the most critical sources of finance for developing countries,” the report states.
NPOs have also felt the sting of the global derisking trend, a hurt that trickles down to the vulnerable populations they serve around the globe. De-banking of NPOs has been accompanied by derisking by donors and sometimes NPOs themselves, as they withdraw from the most high-risk areas of need. The report notes that the withdrawal of banking services by one bank “has a knock-on effect as other banks follow suit” and some banks have admitted in correspondence that they won’t transfer funds to NPOs they perceive to be “Islamic,” even if the transfers do not involve sanctioned countries or entities.
In the interest of creating greater transparency and cooperation, the CGD offers five key recommendations that public officials, particularly FATF and the Financial Stability Board, should undertake: further assess the unintended consequences of AML/CFT and its enforcement; generate better data and sharing of data; strengthen the risk-based approach (RBA); improve standards of good practice and low risk indicators; and facilitate identification and lower the cost of compliance.
Read the full report here.