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De-Risking AML – Strategies and Alternatives

Chess board in black and white to signify strategyIn an era of increased regulatory scrutiny and expectation, and as AML failures result in high-profile financial penalties, banks and financial services firms around the world seek to mitigate the threats they face and address deficiencies in their own AML compliance programs by adopting de-risking AML strategies.

What is De-Risking?

De-risking is a strategy that firms may employ when they cannot, or can no longer, manage the money laundering risk that a given business relationship presents. In other words, the financial or reputational cost of delivering AML/CFT compliance is too great to warrant entering into, or continuing, a specific high-risk customer relationship (for example a politically exposed person) or type of customer relationship.

Firms may adopt a variety of de-risking AML strategies, from increasing their compliance spend or developing new remediation processes, to taking the more significant steps of restricting or terminating business relationships. Terminating or exiting a relationship as a means of de-risking may be a case-by-case option or may take place on a blanket sectoral level and involve ending business relationships with groups of customers.

Where firms take a sectoral approach to de-risking, they tend to end relationships with higher risk customers and clients, such as foreign correspondent banks (FCBs), money services businesses (MSBs) or embassies.

De-risking AML practices tend to affect certain regions of the world, and in particular developing countries with emerging or limited financial markets and higher AML/CFT risks. In these contexts, de-risking may disproportionately affect the work of charities or legitimate businesses’ interests.

Problems with De-Risking AML

In adopting blanket de-risking practices, firms often generate new AML problems and challenges for the wider financial system.

  • When customer relationships are terminated, the need those customers have for financial services remains. If they are unable to access services from larger providers, they may move on to banks with less stringent AML controls. These banks may be unaware of or unable to safely manage the money laundering risk certain customers present.
  • Large banks often operate with a complex administrative infrastructure in which certain systems lack mutual integration. When a bank terminates a relationship for de-risking purposes, customers may be able to simply re-enter the bank through a different business vector.
  • De-risking often frustrates the ultimate goals of AML/CFT programs to share information and reduce crime since the practice pushes criminal organizations into less regulated territory where they become harder to monitor.
  • When several banks de-risk entire sectors, there may be a significant impact on the financial system. That collective action may also create the appearance of banks acting in collusion and, therefore, generate potential legal consequences.
  • In some cases, de-risking AML ends up harming humanitarian organizations or charities that rely on certain financial services to get supplies and other types of critical assistance to vulnerable people in developing countries.
  • De-risking customers en masse requires a coordinated exit program, which can be both expensive to manage and difficult to implement consistently.
  • De-risking tends to disadvantage smaller countries since customers in these countries may not represent attractive financial prospects for larger banks.

De-Risking Programs

Many banks have developed dedicated de-risking programs to deal specifically with the need to exit high-risk customers en masse. Those programs function to critically review the commercial benefits of a potential high-risk relationship against the severity of the money laundering risk it presents, and ultimately make the decision to terminate or deny access.

Alternatives to De-Risking AML

De-risking AML is a calculated, cost-efficient response to money laundering threats but lacks the sensitivity and diligence implicit in the risk-based approach to AML, which requires firms to actively seek and collect information about their customers. That requirement can be costly and time-consuming and make de-risking an attractive alternative option. By implementing more cost-efficient risk-based AML strategies, however, firms can reduce or remove the need to de-risk and, in so doing, broaden financial services access for potential customers.

Practically, this means taking advantage of smart, automated AML/CFT solutions to enhance customer due diligence procedures. Smart technology adds efficiency and accuracy to AML screening and monitoring and helps firms to develop effective risk scoring models to better prioritize customers and assign them to the correct AML risk categories.

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Originally published 12 January 2020, updated 13 July 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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