New AUSTRAC De-Banking Guidance Calls For Risk-Based Approach

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is urging the financial sector to take a risk-based, case by case approach to managing anti-money laundering/counter-terrorism financing (AML/CFT) concerns, as it issues new guidance around the “complex global problem” of de-banking.

“Businesses vulnerable to exploitation should not automatically have their accounts closed simply to avoid managing risk,” the regulator states.

De-banking or “de-risking” is defined by the Financial Action Task Force (FATF) as situations where financial institutions terminate or restrict business relationships with clients, sectors, or even entire countries, in order to avoid risk.

The fast-changing regulatory landscape is seen as a main driver of de-risking, with the cost of compliance outweighing the low return on investment in doing business with high-risk countries or companies.

But the effect of de-banking on legitimate financial services can impact national economies and increase the risk that illicit activities go unnoticed, as businesses unable to use formal channels are forced to transfer funds through less reliable routes.

“Contrary to managing and mitigating risk, these activities lead to criminal activity moving underground and compounds the risks criminals pose to Australia’s financial system and the community,” AUSTRAC states.

In this, the latest in a flurry of guidance in recent months, AUSTRAC highlights that the range of businesses impacted by a loss or limitation of banking services has expanded in the past decade. New and emerging financial services businesses, money transfer (remitters), digital currency exchanges, not-for-profit organizations, and fintech businesses, are now disproportionally facing bank account closures because of their risk of exploitation by criminals.

These businesses “provide valuable services to communities in Australia and internationally and contribute to Australia’s economic prosperity,” AUSTRAC says, adding that financial institutions should be discouraged from indiscriminate and widespread closure of accounts. With appropriate systems and processes in place, firms should be able to manage high-risk customers.

Additionally, AUSTRAC expects businesses operating in vulnerable sectors to understand and meet their AML/CFT and other regulatory obligations and improve risk management. They should ensure they have appropriate systems to help identify, track and disrupt criminal exploitation of the financial sector. Such efforts strengthen and protect their own businesses and demonstrate a strong culture of compliance to banks they seek to partner with.

De-banking was also a major focus of the Senate Select Committee on Australia as a Technology and Financial Centre, in October.

As part of its recommendations, the committee called for a “clear process” for businesses that have been de-banked. “De-banking is debilitating. It destroys the ability of Australia’s small business to disrupt and deliver new ideas,” said the committee’s chair.

The Australian guidance also ties in with the strategic initiative of “mitigating the unintended consequences of the FATF standards” raised at FATF’s October plenary. “De-risking and financial exclusion remain challenges for many sectors and run contrary to the RBA [risk-based approach] promoted by the FATF,” the body agreed.

De-banking and de-risking across Asia Pacific

AUSTRAC’s statement highlights concerns that banking services in the Pacific region, previously enabled through Australian banks, are also at risk of de-banking – an issue that the Pacific Islands are already seeking to address.

In August, the Pacific Islands Regional Initiative (PIRI) – regional members of the Alliance for Financial Inclusion (AFI) – issued a de-risking action plan.

The group – including Fiji, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, and Vanuatu – agreed in 2019 to implement a strategy aimed at curbing losses in correspondent banking relationships due to AML/CFT concerns, and to boost their economic stability.

New Zealand is also concerned about the effect of de-risking on small, low-income markets. A July report about correspondent banking in the Pacific by the Reserve Bank of New Zealand highlighted that Pacific banks are particularly vulnerable for a number of reasons, including weak incentives, elevated levels of AML/CFT risk because of large volumes or remittance flows, offshore banking licenses, high perceived corruption scores and historical appearances on FATF and EU monitoring lists and less developed regulatory compliance and reputational risk programs.

The report concludes that blanket de-risking policies directly conflict with New Zealand’s Anti-Money Laundering and Countering Financing of Terrorism Act 2009, and echoes AUSTRAC’s call for measured risk management.

Firms should avoid de-risking and speak with national regulators and governments for guidance on how to manage payments from high-risk countries.

Compliance teams should particularly be on the lookout for capital flight following political unrest, the laundering of vast quantities of assets, and related party transactions where links have been identified to politically exposed persons, including via family members and their enablers.