de-risking aml compliance

In recent years, there has been an increase in both the frequency and the magnitude of fines imposed by financial regulators against banks for failing to comply with anti-money laundering (AML) and know your customer (KYC) rules. A common response to this disciplinary action by financial institutions is to reject or close the accounts of groups of customers considered high-risk based on increasingly strict AML standards. This course of action is a growing trend called de-risking.

Why has de-risking become so popular among banks?

According to an article published by the Association of Certified Anti-Money Laundering Specialists (ACAMS), some of influencing factors include that the perceived risk is greater than the expected value of the business lost and a lack of resources to support increased due diligence and monitoring by financial institutions. One of Australia’s largest banks closed accounts held by customers trading in bitcoin in May 2014 because of a perceived reputational risk. Another example is that of a major U.S. bank that has scaled back on all lending to pawn shops, payday lenders, check cashers, and car dealerships.

What is the impact of de-risking?

While denying entire industries banking services based on perceived risk alone greatly simplifies the customer due diligence process for banks, the consequences from adopting such a policy may outweigh the perceived advantages.

Lost Revenue and Profit
Financial institutions could lose further revenue and profit from the profitable and legitimate businesses within those sectors being excluded.

Damage to Public Perception
The public perception and reputation of banks could be at stake if their decision to practice widespread de-risking was publicized.

Transferred Risk, Not Decreased Risk
Most significantly, rather than reducing risk, large-scale de-risking would simply drive high-risk customers to smaller financial institutions that need new income sources but lack the resources to manage the greater level of risk.

What alternative is there to mass de-risking?

The Financial Action Task Force (FATF) advises a systematic risk-based approach that involves risk assessment and mitigation and can be easily adapted to the size of the financial institution.

Case-by-Case Assessment
Banks should evaluate each potential new customer based on an individual basis rather than wholesale de-risking. In a statement on its website, the FATF makes it clear that it requires financial institutions to end customer relationships only in specific cases where money laundering and terrorist financing risks cannot be mitigated.

Initial Customer Due Diligence
Among the recommendations for mitigating risk, the FATF lists implementing customer due diligence (CDD) measures that include identity verification using “reliable and independent information, data or documentation” as well as screening the customer’s and beneficial owner’s names against United Nations and other relevant sanctions lists.

Ongoing Customer Due Diligence and Monitoring
Once initial due diligence has been completed, there is still a need for ongoing monitoring and CDD. Monitoring is necessary in order to ensure that transactions remain consistent with the bank’s knowledge of the customer and the nature of the business relationship. When any changes to the customer’s profile or behavior are detected, additional CDD measures may be needed.

Automating CDD checks with online identity verification solutions such as GlobalGateway is cost-effective, efficient, and increases profit margins by including business-worthy customers that might otherwise be excluded due to perceived risk.

“Identity verification has become a vital part of every smart business’ risk management strategy,” said Stephen Ufford, Founder and CEO of Trulioo. “By proactively using online identity verification for due diligence, banks can reduce their risk while improving their bottom line.”

What do you think are better alternatives to mass de-risking?