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Remittance Firms - How Not to Fall Foul of De-risking

Regulation Remittance Knowledge & Training

Today, the trend of de-risking by banks still remains one of the greatest threats to the remittance industry. Not only does it put these businesses out of practice, it also deprives people who have limited access to the formal banking system of vital funds. But how can remittance providers ensure that they don’t fall foul of de-risking?

What is De-risking?

The FATF defines “de-risking” as situations in which financial institutions terminate or restrict business relationships with entire countries or classes of customer in order to avoid risk. The rapidly changing Anti-Money Laundering and Counter Terror Financing (AML/CTF) regulatory landscape is commonly attributed as the main driver of de-risking. As the cost of complying with these regulations for banks will often outweigh the low return on investment of doing business with those operating in high risk countries.

High-risk nations however, are not the only ones to suffer from the implications of de-risking. Many argue that de-risking is in fact counterproductive for the integrity of the global financial system. When not able to use formal channels, those who wish to transfer funds are forced to do so by using alternative and usually illegitimate methods. Not only are these less reliable but they are also completely unregulated, meaning that they are highly vulnerable to being used for terrorist financing and money laundering.

What does De-risking mean for Remittance Companies?

Money Service Businesses (MSBs) such as remittance companies are vulnerable to de-risking because they rely on partnerships with the banking community to operate. But they typically service countries which are underdeveloped and so may suffer from problems such as high levels of corruption, organized crime or terrorism. All of which makes them more likely to trigger AML/CTF red flags. Ultimately, this could lead to their banking partners terminating their relationship –  being de-risked – and unable to conduct transfers. In practice it means that whole countries can lose out on money they desperately need for development.

Somalia is one such country, with 23% of its GDP coming from remittances, it is essential that correspondent banks don’t cut services with the nation’s remittance providers. However, the general lawlessness in the majority of the country and its connection to the Al Shabaab terrorist group means that it is especially vulnerable to de-risking. The extent of the problem in Somalia was highlighted when the Somali Money Services Association struggled to get a bank account. Despite only being an association that represents remittance providers and not actually having anything to do with the transfer of money themselves.

Somalia is not the only victim of de-risking. Companies operating in Iran, Cuba and more recently Syria all suffer from this problem and of not knowing if the banking relationship they rely on will be terminated.

What can be done?

For remittance companies to avoid being de-risked they must comply with the same high AML/CTF standards as banks. But they must do so on considerably smaller budgets and, due to the nature of their business, usually in near real-time. Two simple ways for remittance services to avoid being de-risked is by increasing transparency with better audits and by automating their AML/CTF compliance procedures.

  1. It is important for remittance providers to show and communicate to correspondent banking partners that they fully understand the risks of their business. Unsurprisingly, this starts with producing and regularly updating their risk assessment. But more can be done, by having a completely transparent and available audit trail, banks can see that remittance providers have nothing to hide. Using a system that can show stage by stage how suspicious behavior was dealt with and appropriately reported will put remittance providers in good stead with their correspondent bank.
  2. To avoid de-risking remittance companies have to instill confidence in their banking partners that they are constantly monitoring their AML/CTF risk exposure. By automating their AML/CTF compliance obligations remittance companies can ensure total regulatory coverage without draining their resources. Intuitive screening systems can be used to automatically identify and alert providers when high risk individuals or politically exposed persons (PEPs) are trying to use their services. Additionally, by automating transaction monitoring companies can be confident they can rapidly respond to suspect behavior and make sure nothing falls through the cracks. At ComplyAdvantage we have also found that using additional tools such as advanced adverse media scanning, powered by artificial intelligence, has given remittance companies the assurance they need to maintain their correspondent banking relationships.

What’s Next?

The topic of de-risking is quite rightly receiving more and more attention from regulators and governments. In October 2016, the FATF produced new guidance for correspondent banks, which encouraged big banks to work with, and not against, remittance providers. Both the FCA and the Basel Committee on Banking Supervision have endorsed these guidelines. Hopefully, this attention will mean we see less de-risking and more financial inclusion in the future.

Originally published January 26, 2017, updated November 17, 2021

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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