Recent News about De-Risking, Financial Exclusion and Bank Discontinuance

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On November 11th, as part of IMTC WORLD 2016 we will be having a “DE-RISKING & BANK DISCONTINUANCE FORUM” to discuss the impact of this practice in the Money Transfer, Remittance and Payment Industry as well as the U.S. depository institutions termination of correspondent accounts of foreign financial institutions (FFIs) as well as some US Banks forcing local bank account closures by their corresponding banks in many countries in the world.

These are some of the recent news:

U.S. BANKING REGULATORS ISSUE A “JOINT FACT SHEET ON FOREIGN CORRESPONDENT BANKING” – The Office of the Comptroller of the Currency (OCC) publishes Bulletin 2016-32. Our colleague Judie Rinearson asks: Is this a response to global fears of US “De-Risking”?

The U.S. Department of the Treasury and Federal Banking Agencies (FBAs) published a Joint Fact Sheet on Foreign Correspondent Banking entitled: “Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement“. The document reiterates the expectation of the FBAs that U.S. depository institutions have robust BSA and OFAC compliance programs that include appropriate customer due diligence to make an adequate assessment of the risks present in maintaining correspondent accounts for foreign financial institutions (FFI). The statements in the last paragraphs is where we need to pay attention: “With regard to the sanctions violations, these cases did not involve unintentional mistakes, but generally involved intentional evasion of U.S. sanctions over a period of years and/or the failure of the institutions’ officers and/or senior management to respond to warning signs that their actions were illegal. Same as the HKMA in previous note, US FDAs are saying loudly that they “do not utilize a zero tolerance philosophy”.

The OCC in Bulletin 2016-32,”Risk Management Guidance on Foreign Correspondent Banking” states that one best practice or Banks is: “Communicating foreign correspondent account termination decisions regularly to senior management, with consideration given to the extent to which account closures may have an adverse impact on access to financial services for an entire group of customers or potential customers, or an entire geographic location“. This best practice is important to the industry.

Judie Rinearson in her article states: “Will this help stem the derisking flood? It’s a step in the right direction, but probably does not go far enough.

Read the U.S. FDAs statement, the OCC Bulletin and Judie’s article.

LONG IN COMING: LOCAL REGULATORS REACT TO INTERNATIONAL DE-RISKING – The Hong Kong Bank Monetary Authority warns local banks about financial exclusion

On September 8, the HK Monetary Authority (HKMA) sent a letter to all Authorized Institutions (AIs) entitled “De-Risking and Financial Inclusion” in which it states that even if the HKMA expects AIs to adopt a Risk-Based Approach (RBA) they must refrain from adopting practices that would result in financial exclusion, particularly in respect of the need for bona fide businesses to have access to basic banking services. The HKMA also states that even if apart from the local requirements, some AIs need to also comply with requirements mandated by their head offices or overseas authorities, it warns them of the use of disproportionate measures related to the likely risk level of the customers involved. It also designate watchdogs, officials that will be monitoring the De-Risking actions.

I think all industry compliance officers must read the letter and send it to their local regulators pressuring them to issue letters like this to their local Banks and establishing the persons in charge that should monitor financial exclusions of businesses. If local regulators do not act, international banks will continue pressuring local institutions and hurting the local economies; protective actions need to be taken soon.

DE-RISKING CAUSES MAJOR BLOW TO REMITTANCES IN CENTRAL AMERICA – Pressured by Banks Grupo Monge closes down its remittance operations in five countries

I have to first thank Gaston Monge, the CEO of Grupo Monge, the chain of low-cost stores El Gallo Mas Gallo, El Verdugo, Despensas Familiares & Prado to discuss with us in a conference call organized by IMTC, the details and reasons for this extremely sad decision that narrows down the competition in the remittance industry and sends nervous chills in the spine of many Non-Bank Financial Institutions faced by the same Risk. See Gaston’s video at IMTC in 2012.

As Dominican Lawyer Claudia Alvarez-Troncoso stated in an excellent article (in spanish) entitled De-Risking, a paradox that increases financial risk, she states: “De-Risking is causing more risk“.

A good business man, Mr. Monge does not criticize the banks as he needs them to manage his retail operations and provide funding. “I didn’t want to make my bankers feel uncomfortable; local banks have pressure from their international HQ to stop servicing money transfers“.

Remittances accounted for only 2% of the Monge Group’s revenue, but boosted purchases from remittance recipients, revenue that might was not accounted for. The group had 10% of the $1 Billion Nicaraguan Remittance Market. Local Central Bank officials should have intervened as some other Central Banks have been doing recently. Gaston, asked in the talk by Sonia Plaza from the World Bank: “Where are the customers going for their remittances now?“; the answer was simple; “We don’t know: we could speculate, maybe to banks, western union, some will go back to their old informal ways“.