US Treasury Highlights Payments Firms Struggle With De-Risking

April 27, 2023
The US Treasury’s first-ever de-risking strategy names payments firms among those most impacted by the controversial practice.

  • High AML/CFT compliance costs and risks are most important causes of de-risking small payments firms
  • ISO20022 to mitigate compliance risk by providing more transparency

The US Treasury’s first-ever de-risking strategy names payments firms among those most impacted by the controversial practice.

According to the Treasury report, small and medium-size businesses that offer money-transmitting services are among the top three groups that face de-risking challenges most acutely.

This means that smaller payments firms, or money transmitters, may struggle to get access to financial products and services as banks terminate or restrict business relationships with them indiscriminately rather than analysing and managing the specific risks associated with their individual case.

As well as payments firms, the report also highlighted non-profit organisations (NPOs) operating in high-risk jurisdictions and foreign financial institutions with low correspondent banking transaction volumes operating in high-risk jurisdictions as being particularly exposed to bank de-risking.

The analysis was conducted for the first time pursuant to the 2020 overhaul of the US money-laundering laws and examines the causes of de-risking, identifies those most impacted and offers recommended policy options to combat it.

Banks’ cautious approach driven by non-compliance risk

The report finds that the most important root cause for de-risking of money transmitter firms is the high anti-money laundering and counter-terrorism financing (AML/CTF) compliance costs that affect the profitability of these relationships.

The report notes that the high cost of conducting the necessary due diligence and account monitoring for money transmitters that send money to high-risk countries “often outweighs the revenue generated by these accounts.”

The Treasury viewed compliance costs for managing the risks of certain customers as “prohibitively high” due to having to conduct “additional due diligence, such as on-site company visits, which increases the cost” of banking these businesses.

But profitability is not the only concern for banks. Other factors causing de-risking include reputational risk, low risk appetite, a lack of clarity regarding regulatory expectations and other regulatory burdens, such as compliance with sanctions regimes.

Mid-sized banks also complained about the lack of staff who have the necessary skills to properly evaluate the risks of money transmitters, while others pointed out that there is no sufficient guidance from regulators as to what a “risk-based approach” means.

Consequently, banks “err on the side of caution by taking a risk-averse approach with respect to certain customer types.”

Banks also noted that they have limited visibility into money transmitters’ transactions and they trust large money transmitters more because of the size and scale of their compliance departments, which they feel mitigates some of the money laundering risks.

While there have been general policy goals to stop de-risking, industry participants highlighted that there is no direct and tangible benefit for banks to provide wider financial access, other than “intangible benefits like public goodwill”.

ISO20022 may provide a solution to combat de-risking

The report highlights numerous efforts taken by international organisations, such as Financial Action Task Force (FATF) and the cross-border payment roadmap of the Financial Stability Board (FSB), to address de-risking.

The FSB, for example, is expected to come up with recommendations to strengthen the consistency of the application of regulation and supervision to banks and non-banks that is proportional to their respective risks.

The Treasury also notes that ISO 20022, the new data-rich messaging standard that is being adopted in large economies throughout 2023 and 2025, will increase payment transparency and ensure more consistency and efficiency in how AML/CTF risk mitigation practices are applied.

By providing richer payment message data, “the adoption of ISO 20022 is expected to increase confidence in payment transparency for improved detection, reporting and mitigation of AML/CTF and sanctions risks and enable financial institutions to improve access to financial markets and payment services,” the report says.

De-risking is still a significant concern for small firms

The Treasury’s outreach to market participants suggests that only small money transmitters continue to face significant issues when trying to access banking services.

Large money transmitters no longer face widespread denial of access, while medium-size firms told the Treasury the issue is not present to the same degree as it was in 2015, citing a previous World Bank study.

They raised concerns though that only a limited number of financial institutions are willing to provide financial services for them, for high fees and only after going through a rigorous onboarding process that often takes several months to complete.

The report concludes with a dozen recommendations to the US government, including promoting consistent supervisory expectations that consider the effects of de-risking and considering whether existing regulations should be updated to require banks to include a financial inclusion consideration in the design of their AML/CTF programmes.

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