The problems caused by anti-money laundering regulation have hit smaller countries, smaller banks and therefore the poorer members of society. Brian Caplen asks if matters have gone too far.

Tougher anti-money laundering regulations have led international banks to cut correspondent lines. The unintended consequence has been to push more money into unsafe informal networks.

The due diligence costs for a global bank to clear a high-risk counterparty are as much as $50,000. This means that fees earned from the relationship have to be sufficiently high to make it worthwhile. Hence a lot of correspondent lines have been cut due to cost as much as risk.

Small banks in small countries such as those in the Pacific and Caribbean islands have been hurt the most. Either the fees charged rise to uneconomic levels or they find themselves arbitrarily cut off at short notice.

In Africa the picture is more mixed. In some countries, such as Nigeria, the local banks have done their own derisking by cutting off bureaux de change and small remittance agents. Nigerian banks have maintained their lines to international banks but at the cost of leaving some genuine small customers high and dry.

Where this has not happened, the impact has been felt at the local bank level. In Angola, the number of counterparties has fallen by 37% between 2013 and 2015 and in South Africa by 10%, according to Swift. In a research paper Swift also detected another trend – a rise in transactions at the same time as correspondent lines were being cut, suggesting that traffic was finding its way back into the system by another route.

Ahmad Safa, an executive board member at Lebanon’s Banking Control Commission, told The Banker: “Derisking is being driven by a number of factors. These include, but aren’t limited to, a decline in the overall risk appetite of foreign financial institutions, changes to the legal regulatory or supervisory environment in foreign financial institutions’ jurisdictions, the fact that some respondent banks don’t generate sufficient volumes to recover compliance costs, and the lack of profitability of certain correspondent banking relationships’ services and products.” 

It is obvious this process has got way out of hand, to the point where the Financial Stability Board has proposed a  number of initiatives around clarifying the regulations, strengthening tools for due diligence by correspondent banks and capacity building in impacted emerging markets.

But this may all be too little too late. When overseas workers cannot send money home to their families and where the problem of financial exclusion is acute, ill-thought-out regulation may have done more harm than good. 

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

Register to receive my blog and in-depth coverage from the banking industry through the weekly e-newsletter. 

Order The Banker July edition

FREE trial access to Top 1000 World Banks

Join our community

View from Sibos: cybersecurity

Swift CEO Gottfried Leibbrandt reviews the various industry initiatives to prevent cyberattacks.

The Banker on Twitter

By continuing to use this site you consent to the use of cookies on your device as described in our cookie policy unless you have disabled them. You can change your cookie settings at any time but parts of our site will not function correctly without them.