Burgess COMMENTARY

Peter Burgess

The Unintended Consequences of Rich Countries’ Anti–Money Laundering Policies on Poor Countries

The Unintended Consequences of Rich Countries’ Anti–Money Laundering Policies on Poor Countries Working Group will examine how rich countries might rebalance their policies to continue to protect against money laundering and terrorism financing without hindering the ability of people from poor countries to conduct business and transfer money across borders. The goal of the working group is to produce a short report with specific policy recommendations for the US, UK, and Australian governments.

In 2014 migrants sent over $400 billion of remittances home through formal systems and at least an additional $130 billion through informal channels. Businesses in poor countries also engage in cross-border transactions to both export goods and import key inputs. But banks in rich countries, under pressure from anti–money laundering and counterterrorism enforcement efforts, are increasingly “de-banking” money transfer organizations, thereby raising costs or removing services for users, some of whom then turn to informal channels. This shift may have detrimental effects on poor people as well as on the security situation.

Formal remittance providers, which primarily service poor countries, are often identified as high-risk customers. Banks are therefore de-banking remittance providers who are not judged to be implementing “know your customer” requirements to an adequate standard. The withdrawal of banking to some customers or even sectors is also driven by the cost of the compliance measures necessary to reduce banks’ reputational risk and the risk of punitive regulatory action to an acceptable level. De-banking of some remittance providers can thus be viewed mostly as an unintended consequence of the risk-based AML/CTF approach.

This situation implies an increase in the proportion of transfers conducted through informal channels and an increase in costs for formal and informal money transfer operators. These, in turn, imply detrimental effects for the very security situation which motivates AML/CTF enforcement.

The first working group meeting was on January 28 in London and the second meeting in September in Washington. The final report will be available in November 2015.

Working Group Members

Full biographies available here Clay Lowery (Chair), Rock Creek Advisors LLC, former US Treasury Alex Cobham, Tax Justice Network Louis De Koker, Deakin University Maya Forstater, Independent Alan Gelb, CGD Casey Kuhlman, Eris Industries Ben Leo, CGD Michael Levi, Cardiff University David McNair, ONE Jody Myers, Western Union, former IMF Rav Padda, WorldRemit Peter Reuter, University of Maryland Amit Sharma,Empowerment Capital, former US Treasury Gaiv Tata, Independent, former World Bank CGD Secretariat Vijaya Ramachandran, Senior Fellow Matt Collin, Research Fellow Matt Juden, Research Assistant

Fear of Being “Outed”: Why Banks Are Deserting Developing-Country Clients 3/10/15Rajesh Mirchandani CGD Podcast Clay_Lowery_newedit_mixdown.mp3 play stop mute previous next 00:0020:38 DOWNLOAD PODCAST (MP3).

Rules to name, shame, and punish banks, whose clients may funnel money to terror groups, are denying much-needed funds to developing countries. It’s a clash of two sets of sound policies, says Clay Lowery, former assistant secretary for international affairs at the US Treasury and the chair of a CGD working group on this problem of “de-banking.” “Those two policies are in conflict with each other,” Lowery says, “and that’s a very difficult thing to overcome.”

The first set of policies was designed to curb money laundering and the financing of terrorism, especially in the wake of the 9/11 attacks on the United States, Lowery told me in a new CGD podcast. Faced with the obligation of trying to track the final destination of money flows they service — and the reputational risk involved if their clients are less than law-abiding — a string of big-name financial institutions have simply been closing down the accounts of legitimate businesses that offer remittance services to millions of people working in different countries.

One of the primary aims of those rules, Lowery says, “was to hurt the reputation of financial institutions: so if they were going to be doing business with bad people we were going to ‘out’ [them]. So that reputational risk became something that banks worried about a lot.”

CGD Working Group Chair Clay Lowery discusses de-banking

The second set of policies was focused on how to facilitate finance flows into developing countries in an efficient way that aids economic growth and development. Remittances — money sent home by workers overseas — are estimated to total $400bn annually through formal channels and another $130bn through informal channels. They have become a huge source of revenue for developing countries — far greater than official aid. Money transfer organizations are often the only route available to send funds to poor countries. De-banking may deny revenue to some criminal or terror groups but it also stops innocent people sending much-needed money to their families.

As Lowery and I discussed, central banks in the United States and United Kingdom, as well as regulators and policymakers are among many key players examining these unintended consequences of rich countries’ anti–money laundering policies, along with CGD’s working group which aims to report later this year. RELATED POSTS: Heads and Tails: How Can Cryptocurrencies Enable Legal Cross-Border Money Transfers? And Then There Were None? Banks Are De-Banking on a Grand Scale The Unintended Consequences of Anti–Money Laundering Policies #Luxleaks: The Reality of Tax ‘Competition’ ‘Taxing across Borders’: An Academic Milestone Authors: Rajesh Mirchandani

Felipe P. Manteiga • 2 hours ago Opportune discussion and well crafted in Clay's always clear statements. The U.S. should try to enforce its anti-laundering legislation in a more homogeneous fashion. It causes confusions when laundering in Honduras goes unpunished while our Moroccan allies suffer harsh treatments. Current state of the arts allow the transfer of small amounts almost point to point (from a Manahattan borough to a hamlet in Cape Verde) while satellite based software allows tracking, aggregations and parsing of those flows. And this is good. However, but for the golden days of Pablito in Medellin, remittances are usually modest, and the aggregators must answer for every 'packet' in the total transferred to a country, or their counterpart base. Usually is not terrorism based, but drug, weapons, Federal fraud, and slavery related. And we have some fine agencies monitoring those 'emitters.' The Al Qaeda financial network was totally disrupted by fairly basic technology. The same can now be applied to solve this quandary. Because, as it is well noted, often those remittances make the difference between hope and despair. And also, those remittances must come to take the human traders off the back of the 'sending' family or community. If they do not get paid, a lot of suffering will be endured and daughters and handsome young kids sold into prostitution. Migrants do not work three jobs at a time because they must save, they usually do so to pay for the debts incurred in theirs or relatives trek al Norte. So this 'quandaruy' is causing signficant human pain. • Reply•Share ›

Avatar Luc Lapointe • 2 hours ago Hopefully not limited to remittances!!! • Reply•Share ›

Avatar FFR • 3 hours ago IFAD FFR have recently launched a 'Virtual Forum on Remittances and Development' - one of the topics currently being discussed is MTO bank account closures. It would be great if CGD Working Group could share this link and further insights on the Virtual Forum. Please register at www.remittancesgateway.org and follow the links to the 'Virtual Forum'. The Virtual Forum is informal and free to partake in. The de-risking by banks has extremely concerning consequences.

And Then There Were None? Banks Are De-Banking on a Grand Scale 2/20/15Matt Collin Global Development: Views from the CenterIllicit Finance, Finance, access to finance, CGD Europe

In a few weeks’ time Australia’s Westpac bank will start closing down the accounts of money transfer organizations used by immigrants to send money home. Westpac is the last major Australian bank still offering services to organizations in the country’s US$25bn remittance sector.

Two weeks ago, Merchant’s Bank of California also decided to close the accounts of all money transfer organizations (MTOs) sending money to Somalia. The source of Merchant’s decision appears to have been a cease-and-desist order issued by the Office of the Comptroller of Currency (OCC) in June, purportedly due to the bank’s failure to appropriately monitor the destination of remitted funds.

Unfortunately, we’re seeing a trend here. In 2013, Barclay’s closed the accounts of nearly 90% of its UK-based MTOs, despite being the last large bank in the country willing to do business with remitters. HSBC made the same decision the previous year, following a nearly US$2bn handed down by US regulators.

Regulators gone wild

This `de-banking’ is a response to growing pressure from national and international regulators to comply with rules on anti-money laundering and combating the financing of terrorism (AML/CFT). Since 2010, the Financial Action Task Force (FATF) has placed 23 countries on its `blacklist’ of nations seen as high risk for money laundering or terrorist financing, or as not doing enough to comply with international standards. That’s more than double the number from the previous five years.

Local regulators have responded by drastically increasing the fines they hand out. In the UK data shows the size of fines issued by the Financial Conduct Authority (formerly the FSA) skyrocketed in 2011, up to almost £10m in some years. That might not seem like a lot of money, but it highlights a trend in which banks now increasingly run the risk of large penalties. Last year, South Africa’s Reserve Bank fined its top four banks approximately $10m for AML violations. Just last week, the US Financial Crimes Enforcement Network (FinCEN) handed down a $20m fine to Oppenheimer & Co for similar problems with compliance.

Throwing remittances under the bus

Remittance companies do not bring in much money to the big banks, but the size and random nature of regulatory fines has turned these firms into a liability. Based on 2012 data, four out of the ten most popular destinations for UK remittances in the global south were placed on the FATF blacklist in the last five years. Many other countries which represent only a small portion of remittances (such as Somalia) nonetheless generate concerns over terrorist financing, which in turn raises the expected costs for banks who do business with them.

In testimony given during a legal battle over its decision to kick out its remittance clientele, Barclay’s admitted that it was regulatory pressure, combined with the `high risk’ nature of MTOs which led to their decision to largely withdraw from the market. Rather than assess their customers on a case-by-case basis, as recommended by bodies such as the FATF, Barclays and many other banks are instead opting to minimize their exposure by cutting out risky remittance corridors altogether.

These decisions will ultimately drive up the costs of remitting. Sonia Plaza at the World Bank has documented a rise in bank remittance costs in Australia following its recent spate of de-banking. In the UK, while it is merely suggestive evidence at this point, the price of sending money to Somalia from the UK began climbing following the Barclays decision, despite previously being fairly similar in cost to other remittance corridors from the UK (note that the largest UK remittance provider to Somalia, Dahabshiil, won an injunction against its closure until late 2014). Rising costs mean less money in the pockets of receiving families as well as more cash traveling through informal channels - two pernicious effects that should alarm the development community and regulators alike.