U.S. Treasury will be required to develop a derisking strategy under the most comprehensive update to banking regulation since the passage of the PATRIOT Act. The Anti-Money Laundering Act of 2020 was passed as part of the National Defense Authorization Act (NDAA) over President Trump’s veto in early January 2021. The banking law is contained as Division F of the NDAA.
The mandate to create a derisking strategy is part of a larger section of language on bank derisking and nonprofit organizations (NPOs) that was drafted by and/or pushed by Charity & Security Network (C&SN) during the 116th Congress.
Although implementation of the various components will take place over the next two years, the inclusion of this language marks Congress’ concern about the impact of derisking on humanitarian aid and its willingness to tackle the problem.
The banking language in the NDAA is drawn from similar language in the Senate’s ILLICIT CASH Act, introduced last year, and the House of Representatives’ COUNTER Act, which passed the full House a year ago.
Section 6215(a) of the NDAA includes Sense of Congress language drafted by C&SN. That language stresses the impact of derisking on NPOs, that “providing vital humanitarian and development assistance and protecting the integrity of the international financial system are complementary goals,” and that “anti-money laundering, countering the financing of terrorism, and sanctions policies must ensure that the policies do not unduly hinder or delay legitimate access to the international financial system for underserved individuals, entities, and geographic areas.” The Sense of Congress language also notes that “incidental, inadvertent benefits that may indirectly benefit a designated group in the course of delivering life-saving aid to civilian populations are not the primary focus of Federal Government enforcement efforts.”
Section 6215(c) includes a robust definition of derisking that emphasizes that banks are avoiding rather than managing risk:
“actions taken by a financial institution to terminate, fail to initiate, or restrict a business relationship with a customer, or a category of customers, rather than manage the risk associated with that relationship consistent with risk-based supervisory or regulatory requirements, due to drivers such as profitability, reputational risk, lower risk appetites of banks, regulatory burdens or unclear expectations, and sanctions regimes.”
Treasury will be required to undertake a formal review of the financial institution reporting requirements and propose changes to reduce unnecessarily burdensome requirements. It must consider the adverse consequences of derisking various groups, including charities, the reasons why financial institutions engage in derisking, and the most appropriate ways to promote financial inclusion. It also must consider “formal and informal feedback provided by examiners that may have led to derisking” and best practices from the private sector.
Specifically, Section 6216 requires a review of regulations to identify those, and guidance, that do not promote the risk-based approach, and make appropriate changes. This section specifically requires Treasury to solicit public comment as part of the review. Treasury also will be required to conduct a review of “the most appropriate ways to promote financial inclusion and address the adverse consequences of de-risking …..” and issue a report containing the findings of this review and propose rulemakings to implement them (Section 6204(b)(2)(F)).
Section 6215(b) requires a new GAO analysis of derisking that would include a consideration of the drivers of derisking, and options for financial institutions to minimize the negative effects of AML and CFT requirements on certain sectors and geographic jurisdictions.
Treasury’s derisking strategy will be the culmination of these reviews and reports.
Finally, Section 6307 requires that bank examiners attend annual training, including training on derisking. Statements made by bank examiners to banks regarding charities, painting them in a negative light, were identified as a possible driver of derisking in C&SN’s 2017 report, Financial Access for U.S. Nonprofits. The training language was included in an early version of the COUNTER Act but was removed in the House-passed version of this bill, and was not part of the original NDAA amendments. The language was reinserted after advocacy efforts by C&SN and colleagues in both the NPO and banking sectors.
C&SN looks forward to engaging with Treasury on implementation of these new requirements.