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The European Banking Authority (EBA) has issued its final guidelines on de-risking, which it hopes can stop banks in the trading bloc from using anti-money laundering (AML) controls to deny access to customers.
De-risking has been a drawback in the EU’s increasingly tough approach when it comes to money laundering and terrorist financing (ML/TF) controls.
Banks in the EU have a low appetite to take on riskier customers, and this situation has claimed a variety of victims, particularly vulnerable customer groups such as refugees and the homeless.
In January 2022, the EBA published an opinion on the scale and impact of de-risking in the EU.
This identified the main drivers of de-risking and the negative impact unwarranted de-risking can have on customers and access to financial services, as well as the prevention of financial crime.
Meanwhile, it also highlighted the steps that competent authorities in the EU and co-legislators should take to address unwarranted de-risking and mitigate its negative impact.
The European Commission welcomed the EBA’s opinion and asked the regulator to issue guidelines on the steps institutions should take to facilitate access to financial services among customers that were highlighted as particularly vulnerable to unwarranted de-risking.
Now that the guidelines have been published, the EBA is banking on them fostering a common understanding among institutions and supervisors of effective ML/TF risk management practices, particularly in situations where access by customers to financial products and services should be safeguarded.
Within the guidance, the EBA dictates that credit and financial institutions should set up policies, controls and procedures in a way that enables them to identify relevant risk factors while also assessing risks associated with individual business relationships.
As part of this effort, credit and financial institutions should differentiate between the risks associated with a particular category of customers and the risks associated with individual customers that belong to that category.
“Credit and financial institutions should ensure that the implementation of these policies, procedures and controls does not result in the blanket refusal or termination of business relationships with entire categories of customers that they have assessed as presenting higher ML/TF risk,” said the EBA.
The EBA has also recommended that credit and financial institutions put in place risk-sensitive policies and procedures to ensure that their approach to applying customer due diligence (CDD) measures does not result in them unduly denying customers legitimate access to financial services.
For example, to comply with their obligations in the 4th Anti-Money Laundering Directive, credit and financial institutions should set out criteria they will use to determine on which grounds they will decide that a business relationship may be rejected or terminated, or that a transaction may be denied.
As such, the EBA has said that firms should set out in their policies, procedures and controls all options for mitigating higher risks that they will consider applying before rejecting a customer on ML/TF-related risk grounds.
“These options should at least include adjusting the level and intensity of monitoring and, where this is permitted under national law, the application of targeted restrictions to products or services,” said the EBA.
The new guidelines add that institutions’ policies and procedures need to set out clearly in which situations the application of these mitigating measures may be appropriate.
The EBA has also recommended that firms use mechanisms such as limiting customer access, rather than terminating the relationship entirely, and ensuring that customers are aware that they hold the right to make complaints to the national competent authority.
Although the EBA’s final guidelines on this matter are clearly intended to help put a stop to the practice, there is no talk of enforcement in the document, which does not instil the same fear in being publicly censured for failing to comply with money laundering requirements.
As a 2016 paper that was commissioned by the UK’s Financial Conduct Authority acknowledged, “recent fines for egregious AML/CFT breaches have clearly led to a more risk-averse attitude to ML and (particularly) TF risks”.
Since then, the issue has failed to go away in Europe and has also become increasingly political.
As reported by VIXIO in September last year, Mairead McGuinness, the EU’s financial services chief, confirmed that the European Commission is carrying out a review of the Payment Accounts Directive and whether it remains fit for purpose.
