All organisations in the financial sector have an obligation to meet certain commitments. These commitments include complying with all laws that apply to their activities, as well as ensuring that they are aware of – and are acting in accordance with – any regulations that have been introduced that relate to the work they do.
What are the penalties for non-compliance in the financial sector?
The penalties for failing to meet these obligations can be severe. Any financial organisation that is thought to have broken the law may well face prosecution, as may individuals within it. The result of this – if the organisation or individual is found guilty – can be a criminal conviction and / or a fine or even imprisonment.
It is, therefore, important that organisations and individuals that operate in the financial sector ensure that they are aware of the obligations placed on them by the law and regulations – and do everything possible to comply with them.
This may seem time consuming. But a failure to do this can lead to the problems mentioned above. It can also lead to further difficulties, such as reputational damage and a loss of customers.
Those in the financial sector need to have compliance programmes in place to ensure the services they provide are not being used by those involved in money laundering and / or the financing of terrorism. Such anti-money laundering and countering the financing of terrorism (AML-CFT) programmes are rightly regarded as a priority by most in the financial sector.
But for some, the practice known as de-risking is also viewed as a useful approach.
What Is De-Risking?
The Financial Action Task Force (FATF), which is the international organisation set up to tackle money laundering, says that de-risking refers to situations where financial institutions terminate or restrict commercial relationships. It is the name given to financial institutions ending or limiting their dealings with certain clients or types of clients in order to avoid the risk of being used for money laundering or terrorist financing.
Who might be considered for De-Risking?
Clients who may be considered for de-risking by a financial institution include foreign embassies and the diplomats that work for those embassies. This is because people working in embassies may be considered at high risk of involvement in bribery and corruption – a category of individuals referred to as Politically Exposed Persons (PEPs).
Financial institutions may also choose to take a de-risking approach to correspondent banks - which are banks that provide those financial institutions with banking services, often in another country - and money business services, as these organisations are considered to be a high money laundering risk.
How do financial institutions deal with AML/CTF risks?
De-risking activities will vary from one financial institution to another, depending on the nature of the risks they face. But all institutions need to be aware of those risks.
Checks on customers – often referred to as Know Your Customer (KYC), Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) – need to be conducted to establish what, if any, risk of criminal activity they pose. Risk scoring models should be created in order to categorise customers based on that risk.
Such an approach has to be ongoing – not just when the relationship with the customer begins. Institutions must also have the appropriate software in place to monitor transactions. Procedures also need to be established for reporting any suspicious activity that such monitoring identifies.
The Importance of Taking the Right Approach to De-Risking
While each institution will face its own range of risks, they all have to ensure that they are managing those risks. Not doing this properly could mean a financial institution is not only failing to identify criminal activity such as money laundering or the financing of terrorism - it may even be helping it be committed.
There is little doubt that these risks exist. If we take the case of money laundering, the United Nations Office on Drugs and Crime (UNODC) estimates that between 2 and 5% of global gross domestic product is laundered each year[1]. That amounts to between 715 billion and 1.87 trillion euros (£593 billion and £1.55 trillion or US$745 billion and US$1.95 trillion).
It is important, therefore, that each and every financial institution knows exactly the nature of the risks it faces and what action to take to minimise them.
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