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De-risking: FATF clarifies what the best approach to take is

Today, FATF has issued a press release on the topic of the first day of the FATF Plenary meeting, the issue of de-risking.

There are few considerations which can be drawn. Firstly, the FATF defines what is generally accepted as “de-risking” :

It refers to the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach. De-risking can be the result of various drivers, such as concerns about profitability, prudential requirements, anxiety after the global financial crisis, and reputational risk. It is a misconception to characterise de-risking exclusively as an anti-money laundering issue.

Secondly, FATF highlights why this issue is of crucial importance to them:

  1. De-risking can introduce risk and opacity into the global financial system, as the termination of account relationships has the potential to force entities, and persons into less regulated or unregulated channels. Moving funds through regulated, traceable channels facilitates the implementation of anti-money laundering / countering the financing of terrorism (AML/CFT) measures.
  2. It is central to FATF’s mandate to ensure that the global AML/CFT standard is well understood and accurately implemented, and that countries and their financial institutions are provided with support in designing AML/CFT measures that meet the goal of financial inclusion.

Lastly, whilst the FATF Plenary has acknowledged that recent supervisory and enforcement actions have raised the consciousness of banks and their boards about these issues, it does not excuses any financial institutions to use “de-risking” as a mean to avoid implementing a risk-based approach, in line with the FATF standards.

FATF stresses that 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.

Therefore, FATF concludes that the risk-based approach should be the cornerstone of an effective AML/CFT system, and is essential to properly managing risks. It is expected that financial institutions identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them. This does not imply a “zero failure” approach.

All that said, the risk appetite of many financial institutions, mostly those which have been fined by law enforcement agencies, has turned towards a “zero failure” approach. This has meant cutting line of business or products without first trying to re-assess their risk based approach. Therefore, the FATF’s high-level guidance represents surely a good guidance for these institutions as well as law enforcement agencies.

It is unlikely that the FATF would propose any actions against those who apply the “zero failure” approach, but it would certainly represent a paradox if this materialised. In fact, for those who had used such approach as a sort of short-cut for not revising their internal risk based approach and avoiding fines, it would probably mean exactly the opposite.

Source: FATF





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