Is De-risking Riskier than a Risk-Based Approach?

challenges-kyc-breakfast-BA-adIn recent years we have seen a significant increase in anti-money laundering control failures. Various institutions have been subject to regulatory reviews resulting in fines, due to the lack of controls and appropriate Risk-Based Approach in place. As the fines are increasing year on year, banks are looking into ways to put a stop to these inefficiencies.

Most banks will agree that they are increasing their compliance budgets year on year, and that they are recruiting more staff to keep up to date with any changes that may affect their institution, or any relationships that they may be dealing with.

However, apart from increasing their spend on compliance related issues, organisations have started to wonder if they should exit ‘riskier’ relationships. This fairly new trend of off-boarding or exiting relationships, called de-risking, aims to lower institutions’ risks for money laundering or illicit behaviour. De-risking is heavily impacting new FinTech organisations, but it also impacts cross border correspondent relationships.

The key reason for these two sectors being heavily impacted by de-risking is that they pose higher levels of risk in comparison to the return that they make. Banks are now developing mass customer exit programs while trying to reduce their exposure to risk, but these programs are affecting entire sectors, client types and even regions. Of course, in the long term, mass de-risking causes problems in financial systems.

De-risked clients will still continue to operate and move money, but the money will more likely be moved towards smaller institutions and institutions that lack resources and expertise that are necessary to manage higher risks. In addition, we could end up with whole regions becoming disconnected, which could heavily impact trade, especially between those regions that are trying to develop.

In a recent report published by the European Central Bank, results show a significant decrease in the number of Nostro – 15%, and Vostro accounts – 33%. In larger institutions it is quite difficult to ensure that a counterparty that has been exited via one business line will not enter the bank via another business line, due to the lack of communication and co-ordination between teams.

The FCA advises that firms should put in place adequate AML policies and procedures. This being said, they have to identify and assess their money laundering risk and put in place systems and controls that will help them manage and mitigate this risk. Effectively, applying a Risk-Based Approach at the bank can help with proactively seeking information about money laundering threats and risks.

In an ideal scenario, every bank would have in place on-going monitoring solutions that can help with efficiencies around dealing with higher risk entities.

Article by Nina Kerkez, Business Solutions Specialist – Financial Counterparty KYC, at Accuity

If you’re interested in the topic of de-risking versus a risk-based approach, Accuity is hosting a complimentary breakfast briefing which addresses this, amongst other related issues.