The House of Representatives Financial Services subcommittee on Financial Institutions and Consumer Credit has held a hearing looking at the effects of financial institutions terminating or restricting business relationships simply to avoid perceived regulatory risk, not in response to an assessment of the actual risk of illicit activity, called de-risking. The hearing, held on June 26, 2018, was entitled "International and Domestic Implications of De-Risking" and examined concerns that legitimate businesses, such as money service businesses, pay day lenders, nonprofit organizations, and financial technology companies, are being shut out of the banking industry.
Several witnesses testified at the hearing, which considered regulatory and legislative opportunities to combat these negative impacts of de-risking.
Costs of regulatory compliance. De-risking can be defined as instances in which a financial institution seeks to avoid perceived regulatory risk by terminating, restricting, or denying services to broad classes of clients, without case-by-case analysis of risk or consideration of mitigation options. This can occur as a result of banks re-evaluating the Bank Secrecy Act and anti-money laundering risk posed by their customer relationships, and can have consequences including disrupting longstanding business associations and driving transactions underground.
Subcommittee Chairman Blaine Luetkemeyer (R-Mo), expressed concern about the impact of de-risking on U.S. financial institutions, as well as the global implications of the regulations instituted in the wake of the financial crisis. According to Luetkemeyer, de-risking "has resulted in the elimination of consumer and small business access to financial products and services, a decrease in the availability of money remittances, and reduced flow of humanitarian aid globally." Luetkemeyer supports a "modernized regulatory system" and stated that "compliance with BSA/AML is so costly, and the penalties so steep, financial institutions would soon rather end customer relationships than run the risk of running afoul of their regulators and law enforcement."
GAO findings. In his statement, Government Accountability Office Director of Financial Markets and Community Investment Michael E. Clements discussed two recent reports regarding de-risking: a February report (GAO-18-263) on access to banking services along the southwest border of the United States, and a March 2018 report (GAO-18-313) on the effects of de-risking on remittance flows to fragile countries.
According to Clements, the GAO findings "indicate that BSA/AML regulatory concerns have played a role in banks’ decisions to terminate and limit accounts and close branches."
Charities affected. Sue E. Eckert, an Adjunct Senior Fellow for the Center for a New American Security, focused her testimony primarily on the impact of de-risking on charities and nonprofit organizations (NPOs). Eckert stated that before 2017 there had been no solid data available concerning NPOs’ problems accessing banking services, but referred to a report released in February 2017, which presented the first empirical data as to the scope and nature of problems NPOs encounter. According to Eckert, the report showed the problem is "far more pervasive" than expected, affecting many kinds of NPOs operating in all parts of the globe. "Without the ability to transfer funds internationally, NPOs are unable to deliver vital humanitarian and development assistance," stated Eckert.
The report concluded that international banking difficulties constitute a "serious and systemic challenge for the continued delivery of vital humanitarian and development assistance," a core component of U.S. foreign and security policies.
Eckert proposed potential solutions, including:
- raising awareness and promoting a balanced approach;
- providing regulatory and policy guidance;
- exploring incentives for financial institutions to bank NPOs;
- creating safe payment channels;
- improving humanitarian licensing and exemptions;
- exploring technological solutions to facilitate NPO transfers; and
- providing capacity assistance.
Effect on credit unions. John Lewis testified on behalf of the National Association of Federally-Insured Credit Unions. Lewis stated that credit unions continue to work with regulators "to develop ways to provide services to legitimate higher risk businesses without incurring compliance burdens and costs that are so onerous that ‘de-risking’ becomes the only option." He encouraged Congress to help by working with financial regulators and law enforcement to alleviate burdens and pressures on credit unions.
Lewis testified about several ideas to improve the issues, including creating a "safe-harbor" for the financial institution providing services to high risk accounts; ensuring that risk-based review requirements for financial institutions are understood by examiners; and not making the financial institution the "de facto" regulator of a business. According to Lewis, "It is not uncommon for the financial institution to be pushed to scrutinize legitimate businesses that are already regulated by another entity (often the state)."
NAFCU supports the following legislative proposals related to de-risking:
- H.R. 6068, the Counter Terrorism and Illicit Finance Act;
- H.R. 4545, the Financial Institutions Examination Fairness and Reform Act; and
- H.R. 2706, the Financial Institution Customer Protection Act of 2017.
International effects. Gabrielle Haddad, Chief Operating Officer of Sigma Ratings Inc., focused her testimony on the international impacts of de-risking resulting from the termination of correspondent banking relationships. According to Haddad, de-risking has impacted the concentration of trade flows and cross-border payment activity, which affects financial stability and inclusion for the affected markets.
Haddad concluded that "where there are emerging market institutions who can demonstrate their commitment to complying with international best practice, combating illicit financing and transparency more broadly, we should create avenues for their participation."
Tourism industry in Caribbean. Sally Yearwood, Executive Director of the Caribbean-Central American Action spoke about the effect of de-risking on the tourism and hotel industry, one of the Caribbean’s main industries. According to Yearwood, most hotels have overseas accounts, which allow them to operate more efficiently, but which have caused some hotels to lose their U.S.-based banks due to de-risking. Yearwood stated that de-risking is "destabilizing economies, threatening trade, and creating security concerns that require constructive solutions sooner rather than later." She warned that among the Caribbean Association of Banks, "nine members have no U.S. correspondent banks, but instead have been onboarded by third parties to manage correspondent banking services. Seventeen of their members have only one U.S. correspondent, leaving them vulnerable in the event of withdrawal."
Yearwood pointed out that the Caribbean trade supports hundreds of thousands of jobs in the United States and in the region and stated that "if access to banking is removed, or becomes more costly and difficult, it is likely that this healthy trade relationship will begin to be eroded."
Companies: Center for a New American Security; National Association of Federally-Insured Credit Unions Sigma Ratings Inc.
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