Within the past year we have seen a trend that has produced significant and, very often, problematic issues for money services businesses (MSBs), foreign correspondent banks, state sanctioned marijuana businesses, virtual currency companies, and digital currency businesses.
While not a new concept or business practice, de-risking, generally speaking, is the process of ending business relationships with high-risk customers with the intent of avoiding challenging compliance issues that come with maintaining those relationships.
The trend of de-risking typically has been occurring with larger financial institutions that already have in place the expertise and resources needed to manage risk. A trickling effect happens when large financial institutions start a major exodus with higher risk customers. These customers are forced to seek new banking relationships with financial institutions that may lack these resources and expertise. The result may be the money laundering or terrorist-financing activity could shift or go underground versus being detected, potentially blocked and reported to the appropriate federal regulatory agencies.
A NERA (National Economic Research Associates) analysis of data from FinCEN enforcement actions and BankersOnline.com BSA/AML penalties list shows that banks comprise 80% of enforcement actions from January 2002 through February 2014. The recent string of unprecedented enforcement actions evidences enhanced regulatory scrutiny and strict enforcement. The five largest monetary penalties assessed in connection with violations of BSA/AML regulations have all been incurred since 2010, and three of the five have been incurred since 2012.
Case: JPMorgan Chase Bank, N.A. – January 2014
Main Allegations: JPMC admitted and accepted responsibility for violations of the BSA during the period between 1996 and 2008, including failure to file SARs and failure to maintain an effective AML program, in connection with its relationship with Bernard Madoff and his Ponzi scheme
Monetary Penalities: $2.05 billion:
Case: HSBC Holdings – December 2012
Main Allegations: HSBC accepted and acknowledged responsibility for violating the BSA from 2006 through 2010 by failing to adequately enhance and implement an effective AML compliance program, failing to maintain due diligence information on HSBC Group Affiliates, and ignoring money laundering risks associated with doing business with high-risk foreign customers
Monetary Penalties: $1.9 billion:
Case: ABN AMRO Bank – May 2010
Main Allegations: ABN AMRO accepted and acknowledged responsibility for violating the BSA by knowingly and willingly engaging in transactions with entities associated with state sponsors of terrorism and Cuba and willfully failing to establish an adequate AML program; all after already being assessed an $80 million civil money penalty for BSA/AML violations in 2005.
Monetary Penalties: $500 million:
Case: Wachovia Bank, N.A. – March 2010
Main Allegations: Wachovia consented to pay monetary penalties without admitting or denying allegations that it violated the BSA by failing to properly report $8 billion in suspicious transactions via SARs and failed to timely file over 11 thousand Currency Transaction Reports (CTRs).
Monetary Penalties: $160 million:
Case: Moneygram International Inc. – November 2012
Main Allegations: Moneygram admitted to violating the BSA by criminally aiding and abetting wire fraud and failing to maintain an effective AML program for failure to conduct AML audits, failure to conduct due diligence on Moneygram agents, and failure to file SARs on/terminate agents Moneygram knew to be involved in scams
Monetary Penalties: $100 million:
De-risking is not only problematic to MSBs and other companies; it can create problems for the entire financial system. Specific to MSBs, the most significant impact involves large financial institutions that have terminated their banking relationships with MSBs. These MSBs still need access to banking services and will potentially shift to smaller financial institutions that may not possess the expertise and resources necessary to effectively manage high-risk customers. MSBs, as a business, are higher risk but that doesn’t mean that all MSBs are high risk, nor does it mean that other types of businesses couldn’t be used for illicit purposes.
We have been hearing about instances of “de-risking,” MSBs are losing access to banking services because of perceived risks with this category of customer and concerns about regulatory scrutiny…But just because a particular customer may be considered high risk does not mean that it is “unbankable” and it certainly does not make an entire category of customer unbankable. It is not the intention of the AML regulations to shut legitimate business out of the financial system. I think we can all agree that it is not possible for financial institutions to eliminate all risk. Rather, the goal is to provide banking services to legitimate businesses by understanding the applicable risks and managing them appropriately. MSBs play a vital role in our economy and provide valuable financial services; especially to individuals who may not have easy access to the formal banking sector… banking organizations may provide banking services to MSBs that operate lawfully. MSBs play an important role in implementing procedures to thwart serious illicit activity that, left unchecked, could jeopardize the U.S. financial system. MSBs also play an important role in providing crucial reporting used to combat a wide range of criminal and security threats.
While there may not be a single solution to this issue, regulators support a risk-based approach. Adopting a risk-based approach indicates the adoption of a risk management process for dealing with money laundering and terrorist financing. This process encompasses recognizing the existence of the risk(s), undertaking an assessment of the risk(s) and developing strategies to manage and mitigate the identified risks.
The intent of the risk-based approach is not to prohibit financial institutions from engaging in transactions with customers or establishing relationships with potential customers, but to assist financial institutions to effectively manage and mitigate potential money laundering and terrorist financing risks.
This article was written by Jill Emerson.