A Guide to De-Risking AML and FATFs View

4 mins

What is De-Risking?

Every organisation in the financial industry must be up to date on compliance requirements as well as new updates, regulations, and trends in this field.

Although monitoring the regulatory developments in this sector is repetitive and time-consuming, failing to do so results in non-compliance with the new regulations. Failure to follow regulations can also harm an institution’s reputation, cost its clients, and result in harsh fines from regulators.

Therefore, institutions must develop the proper AML-CTF compliance programmes. On the other hand, de-risking is a tactic that businesses use when they are unable to manage the money laundering risks that they are required to handle. In other words, the financial or reputational cost of providing AML/CFT compliance is too high to justify beginning or maintaining a particular high-risk customer connection (for instance, a relationship with a politically exposed person).

Increasing compliance spending, creating new remediation processes, or even taking the more drastic measures of limiting or ending business contacts are just a few of the de-risking AML strategies that firms might use. De-risking strategies may involve discontinuing a relationship on an individual basis or on a sectoral level, which would require breaking off business ties with groupings of clients.

Businesses adopting a sectoral de-risking strategy frequently sever ties with high-risk clients and consumers like foreign correspondent banks (FCBs), money service businesses (MSBs), or embassies. Some countries, in particular, are more affected by de-risking AML practices than others. This is especially true for developing countries with limited financial markets and a higher AML/CFT risk.

Unintended Consequences of De-Risking

The negative repercussions of financial exclusion are clear, and the de-banking of sectors that provide access points to the formal financial sector for underserved populations and jurisdictions exacerbates these issues even further.

Without knowledge about the quantity and variety of accounts being closed, it is difficult to determine which communities are most in danger and to gauge the urgency and scope of the threat, in addition to identifying the industries that are vulnerable to de-risking. Anecdotal evidence indicates that de-risking practices will likely further isolate vulnerable communities, particularly women, from the formal financial sector and may have wide-ranging humanitarian, economic, and security implications.

Many claim that de-risking actually has the opposite effect from what is intended, which is to lessen the vulnerability of the formal financial sector to misuse from money launderers and terrorist funders. Consumers have been forced to rely on smaller banks and credit unions that might not have enough resources to handle higher-risk customers due to the closure of accounts at several major financial institutions. James Richards, a senior AML executive at Wells Fargo, stated that “the paradoxical outcome of de-risking is re-risking... You are delivering them to banks that most likely are unable to handle it.

FATF’s View Of De-Risking

The FATF has some preliminary data that emphasises the importance of identifying the causes and consequences of De-Risking in the private sector. The primary de-risking strategy used by FATF is based on FATF recommendations. As a result, it mandates that financial institutions recognise, comprehend, assess, and put into practice AML/CFT procedures that are proportionate to the risks that have been identified.

Financial institutions must do customer due diligence (CDD) on the defendant bank before establishing correspondent banking relationships. Additionally, financial institutions are obligated to compile enough data about the accountable bank to comprehend the defendant bank’s reputation, operations, and level of supervision, including during a money laundering or terrorism financing inquiry. The FATF Recommendations state that banks affiliated with financial institutions are not required to apply standard customer due diligence (CDD) procedures to their clients when establishing and maintaining correspondent banking relationships. Still, it’s crucial to note that this is not true for high-risk relationships.

De-Risking Programmes

Many banks have created specialised de-risking programmes to explicitly address the requirement to directly depart high-risk clients in bulk. To decide whether to terminate or restrict access, these programmes weigh the possible business benefits of a high-risk relationship against how serious the money laundering danger it poses.

Alternatives to De-Risking AML

De-risking AML is a methodical, economic reaction to money laundering concerns. Still, it lacks the sensitivity and diligence indicated in the risk-based approach to AML, which calls for businesses to seek out and gather information about their clients actively.

De-risking is a desirable alternative because this requirement might be expensive and time-consuming.

However, organisations might lessen or eliminate the need to de-risk by using more cost-effective risk-based AML strategies, hence increasing the accessibility of financial services for potential clients.

In practice, this means enhancing customer due diligence procedures by utilising clever, automated AML/CFT solutions. Innovative technology helps businesses establish effective risk scoring models to prioritise customers better and allocate them to the appropriate AML risk categories, increasing AML screening and monitoring efficiency and accuracy.

How Tookitaki can help

The FATF recommends that financial institutions recognise, comprehend, assess, and put into practice AML/CFT procedures that are proportionate to the risks that have been identified.

Successful CDD and KYC processes rely on a combination of technology and expertise. When risk profiles and criminal threats change, financial institutions must be as agile and creative in their approach to CDD as they are in any other aspect of their AML/CFT strategy. While technology can help with CDD processes, human awareness is still required to recognise and respond to emerging threats.

As regulators are becoming more stringent globally around AML compliance, strengthening the AML systems continues to remain among the top priorities. Tookitaki’s AML solution enables financial institutions to see benefits with dynamic customer risk scoring, leveraging advanced machine learning models for improved effectiveness of CDD with fewer resources.


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