Faced with heavy regulation, international banks are de-risking by cutting financial services to poorer countries. This could push money flows underground, while leaving many vulnerable sectors unbanked.
When thousands of Syrian refugees began fleeing their conflict-scarred homeland a few years ago, the search for safety was driven primarily by war. A dearth of food, water, medical supplies and shelter motivated those most at risk to brave the dangerous journey to Europe.
But the hidden story behind this movement of people was, in part, the failure of the world’s financial institutions to engage with transactions linked to Syria. This included opening bank accounts for aid agencies and charities, facilitating payments and the transfer of funds, as well as the payment of aid agency staff, and others engaged in humanitarian support.
Stringent regulations covering anti-money laundering, combating the financing of terrorism and sanctions-related prohibitions had combined to make the risk of doing Syrian-related business too high. Nervous bankers looking to earlier, multi-billion-dollar penalties applied to their peers for breach of these rules in the US, had decided the risk-reward dynamic was too unfavourable.
As a conflict zone, Syria is exceptional. Yet similar trends are at play in markets untouched by war, including the Caribbean and Pacific islands, much of the Middle East, parts of Africa and beyond.
Banks are now ‘derisking’ on a wholesale basis from entire jurisdictions and customer segments, as a result of skyrocketing compliance costs. Taken together, this termination of correspondent banking relationships is hitting small and medium-sized enterprises, money transfer operators, exporters and exchange houses in perceived higher risk markets.
Addressing this problem will require balance. Regulators must discourage banks from irresponsible activities – but in a way that does not foster financial exclusion. As things stand, an appropriate equilibrium has not been found. Money flows are increasingly being pushed underground, making them harder to track, while those most in need of financial services are being denied the support they need – or offered it at great cost.
Better dialogue and information sharing between regulators and banks is needed to find a solution. Both parties must also act to raise the standards of their peers in markets worst affected by derisking. The road ahead will not be easy, but solving these problems is now a matter of urgency.
