De-Risking is not a one-size-fits-all

In discussions at the ACAMS annual conference in London yesterday, officials did not dispute arguments that a bank's risk appetite must lie on top of the de-risking framework or that de-risking was about debate between the board, compliance and the business.  An FCA study found costs of compliance were considered an issue, reflecting the concerns of the Financial Conduct Authority's commissioned study on de-risking, published coincidentally on the same day.

The FCA's study, conducted by John Howell & Co, found banks were de-risking for multiple reasons, including higher compliance costs, and there was no "silver bullet" answer. 

The FCA's study found almost all banks surveyed had increased spending on AML/CFT compliance, including onboarding, monitoring and second line functions. Shortage of staff had been a constant restraint, although compliance employees had risen in number steeply, by 30-100 percent over two to three years in known cases. 

Cost increase

According to the study, compliance costs are bound to have increased since salaries for compliance professionals are up materially. One interviewee bank quoted £110,000 per annum inclusive of pensions, IT support and similar extras, for mid-ranking compliance professionals in central London. Compliance consultants are also charging significantly more and staff turnover was another concern.

Few banks could provide figures for compliance costs on a "per client" basis, whether for onboarding or monitoring. Compliance costs are spread across various teams, such as front-line and financial crime but most banks are not using estimated compliance cost figures as an explicit input to the profit-per-customer calculation. 

There was little appetite to share increased compliance costs for bank accounts with customers on the basis of their money laundering/terrorist financing risk rating. Some banks feared the FCA would frown on such differential pricing as an example of not treating customers equitably, although it would exemplify the risk-based approach. 

The study suggested some banks were being too cautious here and regulators would recognise a clear policy of passing on higher compliance costs to customers as good practice.

In addition, the study found recent fines for egregious AML/CFT breaches had clearly led to a more risk-averse attitude to AML and particularly CFT risks. Regulators had pointed out that fines had been levied for serious failures in the controls of the banks themselves but the study found no evidence this reassurance had any effect on de-risking behaviour. A perception exists within banking of a zero tolerance to all AML/CFT risks by supervisors.

De-risking focus

At the ACAMS conference, feedback confirmed that de-risking featured in every single panel session in the Wolfsberg group of international financial institutions meeting this month.

Delegates were polled on whether their institution had a stated policy on de-risking and when to exit an account, and 36 percent said yes, with 64 percent saying no, reflecting one of the themes of the discussions, that de-risking was not about one size fits all.

Karim Rajwani, global head of financial crime IT strategy, Deutsche Bank, said his own risk appetite was significantly different from five years earlier and it was impossible for every institution to offer every product to every person in every country.

"Discussion must instead focus on risk appetite versus client risk. Risk appetite has to go to the top of the framework. It's got to be top down from board level, and this is a new area for banks," he said.

Dialogue with compliance

Markus Schulz, global head FCC controls, group financial crime compliance, Standard Chartered Bank, said risk appetite was not about how many times one got it wrong. "It's what type of business you want to engage with. It's dialogue between board and compliance and the business."

Schulz said in correspondent banking, much money had been spent on nesting bank accounts. "I think this increases the risk. I'd rather have a direct relationship."

Dr Ulrich Goeres, attorney-at-law, former global head anti-financial crime, Deutsche Bank AG, said governments and regulators needed to take a more realistic approach. To focus money laundering and financial crime related regulation did not work because it led to de-risking, he said.

Indemnities should be provided for financial institutions sometimes, or governments should use central banks to provide specific banking services such as providing accounts to refugees, he said.

Charities were problematic because of the risks attached to money flows, Schulz said. 

Panama Papers

The European Commission meanwhile pledged to close the gaps on the Panama Papers by December 20.

"The Panama Papers provided a rethink whether go further on closing the gaps," said Kallina Simeonoff, director general, justice directorate. The Commission has in addition a main focus on beneficial ownership, she said.

Brian Dilley, group director of financial crime prevention, Lloyds Banking Group, said beneficial ownership was a major concern, and that it was worrying that, for example, in the Channel Islands, the register would be available to law enforcement but not regulated firms.

"Financial institutions have to identify whether someone had lied to the beneficial ownership register, so it is of very limited benefit," he said.

Alex Davidson is senior editor, AML/Financial Crime, in London for Thomson Reuters Regulatory Intelligence..

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