The Financial Action Task Force (FATF), the international standard setting body for anti-money laundering and counter-financing of terrorism, has taken a welcome step forward into the risk based approach being adopted by banks to prevent money laundering and terrorist financing.

At its latest Plenary in October 2014, FATF discussed the issue of de-risking, which it sees as financial institutions terminating or restricting business relationships with clients or categories of client to avoid, rather than manage, risk in line with FATF's risk-based approach. FATF recognises that de-risking can be as a result of various factors such as prudential requirements, anxiety after the global financial crisis and reputational risk but it sees the issue as crucially important for two reasons:

  • de-risking can introduce risk into the financial system, as the termination of account relationships has the potential to force those seeking business relationships into less regulated or unregulated channels; and
  • it is vital that the global AML/CFT standard is well understood and accurately implemented so that financial inclusion can be achieved.

FATF recognises that recent supervisory and enforcement actions have increased awareness of AML/CFT risks at Board level but it stresses that these cases involved banks which had deliberately broken the law and which had significant and fundamental AML/CFT failings.

A pertinent quote from FATF's press release issued in advance of the Plenary, which strikes at the heart of what we are seeing in the banking industry on the Isle of Man:

"De-risking should never be an excuse for a bank to avoid implementing a risk-based approach....FATF Recommendations only require financial institutions to terminate customer relationships, on a case by case basis, where the money laundering and terrorist financing risks cannot be mitigated. This is fully in line with AML/CFT objectives. What is not in line with FATF standards is the wholesale cutting loose of entire classes of customer, without taking into account, seriously and comprehensively, their level of risk or risk mitigation measures for individual customers within a particular sector."

FATF has said that it will gather further evidence and analysis on the drivers and scale of de-risking and that it will consider whether additional work is needed on specific issues.

At DQ, we hear from our clients about the 'gold plating' of AML/CFT requirements by global banks and other financial institutions and we have seen de-risking taking place in such sectors as e-gaming and crypto currency. We see this as a significant barrier to business which is contrary to the Isle of Man's 'can do' approach. We understand that a number of banks are handcuffed by Group policies and procedures and so we welcome the indication from FATF that wholesale de-risking should be replaced by a careful and considered assessment of AML/CFT risk on a case by case basis.

DQ's Expertise

To discuss any aspect of your AML/CFT arrangements and your risk-based approach, please contact DQ's head of regulatory and compliance services, Sinead O'Connor.

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