I will argue that most everyone understands derisking, as the word clearly states it: “the lowering of risk”, and in the case of financial services, that implies setting parameters of where the risk lies, and how to mitigate it and manage it. We can call it debanking too and maybe that is more appropriate. Because it means, for the International Money Transfer and Cross-Border Payments industry, the closing or failure to open bank accounts for Money Services Businesses (MSBs), Money Transfer Operators, Remittance Companies, International Payment entities, Fintechs, Forex Firms, Crypto Businesses, etc.
This is a long article of 2,600 words, and it should take you 14 minutes to read.
Pioneers in the long struggle against derisking and debanking in the US, I can name David Landsman, Eddy Cuesta, Jorge Guerrero, and others I am probably failing to record. Around 2005, banks in the US started closing accounts of remittance operators, mostly small ethnic companies. Ethnically motivated, some might argue. Ignorance driven, mostly. It was a time, as I am trying to portray it in my coming book “Remittances & Migration: an insider’s view” when the silent wave of migration, mostly from Latin America, was exploding. In 1970, the Latino population hovered around 9.6 million, grew to at least 14.6 million by 1980, rose to 22.4 million in 1990, increased to 35.3 million in 2000, and approached 50 million by 2010, as Professor David G. Gutiérrez 2 writes.
But the tsunami was silent. Migrants needed to send money home. And unrelated 3 to the growth of the Latino population, the US was experimenting with the start of an unyielding wave of drug use, and law enforcement agencies were waking up to trying to learn how to fight drug trafficking and money laundering. And they couldn’t believe migrants were really sending money home in such quantities. A cultural trait not shared by Anglo-Saxons, it was impossible to believe that migrants would send most of their earnings to their families in the home country. There was no research, no records, until Manuel Orozco at the Interamerican Dialogue, Donald Terry at the Interamerican Development Bank, CEMLA, and The World Bank began publishing information. In a private meeting with DEA officials in Miami that I had in the early 1990s, it became obvious that for them that all Latino migrants were laundering money, and all the companies helping them were conspiring with them. I was naive back then and couldn’t understand the implications of this lack of understanding.
The BSA was dusted off, all kinds of sting operations followed, many companies were persecuted, closed down, and many banks decided they needed to exit the provision of services to these money transfer operators. 9-11 came along and hit hard the remittance industry even though terrorism and remittances were clearly unrelated. In my time as an industry participant, I had so many bank accounts closed that it is hard to believe how creative and stubborn you had to be to keep operating.
The remittance industry spent billions of dollars in Compliance and Risk Management, from training 4 to developing the technology tools that are key to any financial services provider nowadays. All of the costs of such major developments have been incurred with the fees that migrants pay when sending money home. Have all these investments paid off? I don’t necessarily think so, even though the industry is in a better place than ever regarding compliance and technology. Multilateral agencies insist that the cost of sending remittances is too high and they could be brought down, but the financial system in place is still costly and complex. We will get there as more competition from fintech and crypto businesses come online.
The use of the word derisking appeared in 1987 and grew exponentially since 2011-2012. It has made it to dictionaries: “to make something safer by reducing the possibility that something bad will happen and that money will be lost.” The use of the word debanking is more interesting: it had a peak in the 1920s, a big drop, another peak in 1997, another drop, and now is peaking again. The Financial Action Task Force (FATF-GAFI) addressed the issue for the first time in 2014 when FATF President Roger Wilkins reacted 5 to the lead editorial warning by The Economist, stating “that some of the stronger regulatory practices in the area of AML and CTF threatened to de-bank significant regions or sections of the public.” The editorial came on the wave of bank account closings in the UK by Barclays Bank, resulting in a major public uproar, meetings, and discussions. But very little happened. FATF continued for about 3 years mentioning “derisking” until it decided to stop, either because it believed the situation was solved but, more apparently, because it couldn’t do much about it. Now, in February 2021, FATF launched a new project 6 to study and mitigate the unintended consequences resulting from the incorrect implementation of the FATF Standards, focusing on derisking, financial exclusion, undue targeting of NPOs, and the curtailment of human rights.
I like to point out the paper written in 2018 by Marco Nicoli in the World Bank Blogs titled “De-risking and Remittances: The myth of the “underlying transaction” debunked” 7 where he makes a statement that is crucial for the industry: “Any argument based on the bank’s lack of visibility to the underlying transactions performed by the MTOs should be dismissed in principle. Instead, it should be a requirement of the banks to ensure that MTOs have adequate AML/CFT checks and processes in place to avoid being exploited”.
The list is long of the number of organizations that have come forward denouncing the derisking practice and clearly showing the damage to the financial services offered to the poorest and vulnerable around the world. I have mentioned many of these reports through the years. The termination of Correspondent Banking Relationships (CBRs) has affected many countries, including countries in the Caribbean, such as Belize 8. The termination of the bank accounts of charities and humanitarian aid organizations providing services to war-torn and natural disaster-stricken countries is also part of the derisking wave.
In 2016 the U.S. Department of the Treasury and four U.S. federal banking regulators issued a “Joint Fact Sheet on Foreign Correspondent Banking” 9 stating that U.S. banks had overreacted to concerns over AML/BSA enforcement by unnecessarily terminating correspondent banking relationships with foreign banks. It noted that these relationships are crucial to the global economy, and reflexive “derisking” could destabilize or disrupt access to U.S. financing, hinder international trade, cross-border business, and charitable activities, and make remittances harder to effectuate. It was well written, but nothing came out of it. Or very little.
Just in February of last year, Pavel Kuskowski, CEO & Co-founder of Coinfirm, said in Forbes 10: “Anyone doing business in the crypto space knows it’s not regulations that are the biggest obstacle to getting off the ground. Rather, it’s the widespread lack of access to basic financial necessities — like a bank account. This is killing crypto businesses by shutting them out of the mainstream economy”. He goes on to talk about Europe’s new actions to help.
The view from our colleague Daniel Trias, an Uruguayan consultant, is very worrisome as he describes in his blog titled “Pandemia y Derisking – ¿Oportunidad Perdida?” 11 (Pandemia & Derisking: A lost opportunity) where he follows his own blog on derisking from 2017 (The risk of no-risk) where he states that there are two issues that the covid pandemic hasn’t change: the resilience of remittances and derisking.
Derisking and debanking of fintech, blockchain, and crypto businesses are happening everywhere. When Risk Management becomes Risk Avoidance, as clearly discussed by Kroll’s Malin Nilsson and Ed Shorrock in their May 2019 article “Debanking and the Law of Unintended Consequences“, there is very little to say except that the system is not working. And Dr. Ellen R. Wald from the Atlantic Council, in an article in Barron’s, puts it plainly: “Debanking Hurts Everyone” questioning if OCC’s Fair Access to Financial Services Rule is the right move to stop debanking.
1You can use derisking or de-risking. I feel it is time we get rid of the dash.
2Professor Gutiérrez was educated at the U. of California, Santa Barbara, and Stanford University and is a faculty member at UC San Diego, Dept. of History. Has written many books on Migration into the US and has served in many editorial boards and think tanks.
3There is a connection between outward migration from Latin America and the violence and corruption generated by drug lords and gangs in the region, as well as the government crackdown on farmers growing and processing drugs.
4We believe that along with ACAMS and FIBA, two organizations targeting banks, IMTC has been actively contributing to the training of many MSB compliance professionals, a work that was lead by Ms. Connie Fenchel from 2011 to 2020 and saw the development of the Money Transfer Compliance Certification Course (MTCC) and the Regliance conference, which began this year.
5The danger of driving both illicit markets and financial exclusion – https://bit.ly/3gx4kWg
6Mitigating the Unintended Consequences of the FATF Standards – https://bit.ly/3iEG4Ru
7 De-risking and remittances: the myth of the “underlying transaction” debunked – https://bit.ly/3BC47cC
8 Assessing the Impact of the De-risking on Remittances and Trade Finance in Belize – https://bit.ly/2Ve90rt
9 Joint Fact Sheet on Foreign Correspondent Banking – https://bit.ly/2V8gfBm
10 Pavel Kuskowski article in Forbes “Europe’s New AML Directive Means Banks Can No Longer Shut Crypto Out” https://bit.ly/3eSdBXi
The European Banking Authority (EBA) referred to derisking back in 2016 to mitigate the financial exclusion of asylum seekers. In May 2020, the EBA consulted the public to better understand the drivers, scale, and impact on derisking 12. In March 2021, as explained in this one-pager 13 published by our European partner Payments in Europe (PIE) consultants Pascale-Marie Brien and Nina Huelsken, the EBA issued three regulatory instruments to address derisking practices: 1) an “Opinion” in which it concluded that derisking is a continuing trend that has substantial implications from an ML/TF risk, consumer protection and financial stability point of view; 2) the publication of its revised ML/Risk Factor Guidelines clarifying that the application of a risk-based approach does not require financial institutions to “refuse or terminate business relationships with entire categories of customers that are considered to present higher ML/TF risk”; and 3) launched a public consultation on potential changes to its existing guidelines on risk-based AML/CFT supervision to request European competent authorities in each Member State to address derisking in their own risk assessments.
In Spain, the situation has been different from other places in the world 14 where Payment Institutions have taken the banks to court to stop the closing of their bank accounts and have been successful in doing so. In a report 15 written by consultant Lourdes Soto, she explains how in Spain, two banks around 2005, Santander and BBVA, decided to aggressively pursue their money remittance service to migrants, followed by Sabadell, Caixabank, and Banco Popular. Soon afterward, and related or not, they closed the accounts of Payment Institutions, their competitors. In a breakthrough case in 2016, the Court of Justice of the European Union (CJEU) condemned Spain for violating the fundamental rights of citizens with its law for the Prevention of Money Laundering. The restrictions of this regulation, approved in 2010, served the banks to block the business of payment institutions with the excuse that the money transfer operations that passed through their accounts were suspected of laundering 16. Many Money Transfer Operators have used these rulings and the law to defend their right to use the banking system and stop the closing of bank accounts. The opening of bank accounts is another matter. That is another issue on its own.
What better way of highlighting what is going on in Australia than the article by Denham Sadler, Senior Reporter at InnovationAus, and his article “Debanking risks ‘undermining’ local tech sector”. It has undermined the remittance sector for so long but now that it is hitting the fintechs and the millennial-driven tech sector it is now making waves. Denham writes: “The increasingly common practice of large financial providers “debanking” Australian tech firms is a “significant threat to competition” and risks “undermining” the growth of the local sector, a Parliamentary committee has heard. Debanking is shaping as a central issue for the Select Committee on Australia as a Technology and Financial Centre, which launched earlier this year as an expansion to the fintech inquiry. Debanking is the process of a bank cutting off banking services to businesses for a range of reasons, such as “commercial reasons” or concerns over compliance with anti-money laundering and counter-terrorism financing laws.“
Will this Select Committee on Australia as a Technology and Financial Centre, come out with clear answers and practical steps in solving the problem for every non-bank financial services provider? Or will it only look at the undermining of the tech sector? The 2015, long and detailed Strategic analysis brief by Austrac titled “Bank de-risking of remittance businesses” didn’t make any difference in the market. How many more good analyses and reports can we do?
HAS ANYTHING POSITIVE ACTUALLY HAPPENED?
Every time I step onto a podium and discuss derisking, something I have done for years and continue to do, industry participants come to me and say that I am too optimistic. Even when my own business had five bank accounts closed down in Costa Rica in early 2010 after the Costa Rican regulators forced our company to seek a foreign exchange license – we were a remittance business, I had to remain optimistic. In business, you must be, to stay on, or you have to drop out. And we did this in 2015 when we sold the Costa Rican company to our larger competitor.
I feel a bit more optimistic now that there have been interesting developments in the market that seem to answer the need for banking rails by industry participants, traditional and fintechs, domestic and international. New banking alternatives, new digital banks, fintechs, and trusts are working diligently to bring services online, with the right Compliance and Risk Management systems in place conceived by properly trained compliance professionals with strong ethical values, expert legal counsel, and with the technological tools that Regtech companies are bringing.
After so much frustration accumulated through the years, I am pleased to be helping providers and industry participants to help in establishing successful banking partnerships. With my colleague and industry veteran Rob Ayers, we team up to address the derisking in most IMTC Conferences 17 and we have discussed the fact that banking services providers are now, more than ever, clear about the partners they seek and transparent about the risk matrices they have implemented, which narrows their client base but makes it easier to build more solid partnerships. The MSBA (Money Services Business Association) was founded in the US five years ago and works diligently with “MSB friendly banks” to seek solutions. We hope that regulators understand and try to help, that their reviewers and auditors become allies in the quest to provide more efficient, more compliant, and better services, especially to the ones that need them most. Non-Bank Financial Services Providers (NBFSPs), and small “debanked” banks in many countries, are coming with alternative solutions to big commercial banks. That is fine as long as regulators understand and agree that such solutions are viable, safe, and compliant.
THE US GOVERNMENT ACCOUNTABILITY OFFICE (GAO) AND DERISKING
GAO 18 has in the past analyzed the issue of derisking and issued recommendations. In April 2020, GAO wrote to the US Federal Reserve System 19 (The Fed) and the Federal Deposit Insurance Corporation (FDIC) to follow up on a series of “high priority” recommendations it had previously issued on topics related to, among other things, derisking. The letter stated the concern that a review was needed to “focus on how banks’ regulatory concerns may be influencing their willingness to provide services.” Fast forward to 2021, and Congress now tasks GAO with conducting an analysis on derisking and submitting a report within one year. The analysis should provide recommendations for combating derisking and to identify real options for financial institutions to open bank accounts for clients that might be deemed high risk and, at the same time, mitigating AML risks. Read a more detailed account in Ballard Spahr’s blog written by Shauna Pierson 20.
Should we be optimistic? I like the fact that Congress wants GAO to identify “real options” and not only continue to analyze the problem. I also hope GAO also looks at what Europe is doing and what has happened in Spain and Australia. GAO should also look at all the alternative ways derisking has pushed companies to use alternative banking methods and the creativity of fintechs and organizations, domestic and international, to continue seeking and even providing banking services despite all the hardship derisking and debanking has caused to so many financial services providers and their clients.
I also hope the industry believes that there is an honest desire in the US and Europe to solve the problems derisking has brought and contribute with information and recommendations. Seeking solutions in the US and Europe will probably help the collateral problem that derisking brings to countries where their commercial banks continue terminating the accounts of local non-bank financial services providers, forced by their US and European Correspondent banks 21.
12 Several organizations have tried to consult the industry on the effects of derisking. I have tried to convince industry participants to be vocal about the bank account closures they have experienced. They have always been very reluctant, thinking that this will affect their reputation and maybe prevent them from keeping the fragile bank partnerships they have secured.
14 We know of cases in Chile, also favoring the MSBs plight, Australia and the Philippines, with little effect in the market.
16 We have published the summary of the cases, with examples and explanations, in a document written in Spanish by Lourdes Soto, which you can view and download.
17 In the coming IMTC EMEA 2021 in September and IMTC WORLD 2021 in November, we will be discussing banking partnerships.
18 Often called the “congressional watchdog,” GAO is a US, independent and non-partisan agency that works for the US Congress.
19 Letter from GAO to the Fed – https://bit.ly/3rxQgPX
20 GAO Report on De-Risking; Ballard Spahr – https://bit.ly/3eUSqUH
21 Foreign ownership of local banks in many countries make it very difficult for local regulators to solve derisking in their own backyards.