Termination of business relationships

by | Feb 24, 2021 | Newsroom | 0 comments

Financial Institutions must operate with the ultimate and overriding objective to countervail money laundering and terrorist financing activities. A risk-based approach is adopted to the implementation of AML/CFT regime. However, in some cases financial institutions may take decisions to limit further exposure to risk by terminating high risk relationships, customer segments or transactions. This is often referred to as “ De-risking”.

In the Mauritian context, Regulations 12(3) and 13 (b) of the FIAML Regulations 2018 stipulate that financial institutions should cease business relationships with clients whose required CDD information and EDD as applicable cannot be satisfied.  A Suspicious Transaction Report (STR) should likewise be filed with the FIU under section 14 of the Act. In these cases, financial institutions should take into account the following aspects when communicating with their client:

  1. It will become apparent to criminals that elements of their criminal activity is known to the financial institution, if it begins to ask probing questions regarding certain activities or if it seeks to terminate the relationship or decline entering into a business relationship without a meaningful pretext. The financial institution is therefore encouraged to carefully consider the wording of any statements made to customers explaining their decision; and
  2. the more information is included in the STR, the more valuable it will be to the FIU.

 

Drivers of de-risking

De-risking can be triggered by a sheer number of factors. Drivers of de-risking include inter alia profitability concerns, reputational concerns, ensuring compliance with legislature, local regulatory authorities, international regulatory bodies (FATF,EU) and to avoid sanctions. This is further underpinned by World Bank findings (2015) which stated that some banks discontinued correspondent bank relationships (CBRs) for the relationship was not found to be lucrative and the bank could not manage ML/TF risks effectively thereby weakening their position and exposing them to sanctions by local and international AML/CFT watchdogs. This view is also shared by the International Monetary Fund (IMF) in its survey dated 2016. Other plausible reasons to cease business relationships include risks of bribery, tax evasion, United Nations Security Council Resolutions (UNSCRs) financial sanctions and accountability concerns. Following the global financial crisis in 2008, banks have also reduced their risk appetites as a result of increased monitoring by US financial regulators, which have resulted in the wholesale exit of high risk customers.

 

Impacts of de-risking

On the other hand, it has been noted that de-risking tend to have a domino effect on the overall financial system.  Although it appears to help financial institutions prevent money laundering and terrorist financing risks, it may unfortunately redirect investors to unregulated channels. Thus, creating avenues to launder money. As such, it can be argued that the mechanism of de-risking is not an effective way to curb financial crimes and enhance transparency. Furthermore, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) survey report 2017 revealed that 40% of respondent banks within ESAAMLG have been adversely affected by ceasing CBRs. The termination of CBRs has in some cases affected multiple correspondent banking accounts with various currencies, namely USD, EUR, AUD and GBP. Correspondent Banks, as stated by the respondent banks, were targeted to customers such as gambling (casinos, betting companies and lotteries), non- profit organizations and the like. The report also pointed out to the fact that 80% of the financial institutions ceased relationships with customers including those trading in high risk countries, PEPs and forex offices.

The termination of correspondent banking relationships can also have a negative bearing on International Trade because it prevents access to the foreign currencies required to conduct international trade and investments. This can be a serious threat to developing economies as this may be a barrier to economic growth and may impinge on the state’s ability to meet social and security services. The ESAAMLG report also demonstrated that in some countries within the ESSAMLG, de-risking has had a negative impact on financial products and services thereby impinging on financial inclusion. For those countries, the mostly affected financial product was international wire transfers.

Recommendations

The FATF in its triannual Plenary Session in October 2014, stated that “De-risking should never be an excuse for a bank to avoid implementing a risk-based approach, in line with the FATF standards. The 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 the 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. The risk-based approach should be the cornerstone of an effective AML/CFT system, and is essential to properly managing risks.”

The ESAAMLG survey report also made some proposals as regards to de-risking:

  1. Countries that have not undertaken enterprise-wide risk assessment should do so as to take cognizance and better understand ML/TF risks that their countries are facing and adopting mitigating factors commensurate with the ML/TF risks identified;
  2. Regulatory authorities should strive to retain confidence of correspondent banks and financial regulators by proving that their country is working towards a solid regulatory framework; and
  3. Financial regulators should impose upon financial institutions, which rely upon manual guidelines, the use of technological resources to monitor clients, performing customer due diligence (CDD) and screening.

 

 

HOW CAN TEMPLE CONSULTING HELP YOU?

Temple Consulting Ltd specializes in the provision of compliance consultancy services to firms which are licensed by the Financial Services Commission and the Bank of Mauritius and has expert consultants to provide compliance advice on the prevention of financial crimes, the adoption of money laundering processes, and measures to combat terrorism financing.

Temple Consulting Ltd also provide assistance at any stage of the business cycle, and may assist financial institutions in the event that they decide to so terminate business relationships with clients.

 

 

Sources

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