Latin American bankers have had a lot to deal with lately: a slump in commodity prices, China’s lower demand for their clients’ exports, and correspondent banking relations being cut because of ‘de-risking’.
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De-risking has become a buzzword to describe both banking regulators’ tougher stance – particularly in the US – on fighting money laundering and terrorist financing, as well as international banks’ reaction to the new environment: cutting relations with clients or exiting whole markets that are deemed too ‘risky’. It has also been used as justification for unprecedented fines imposed by US authorities, which have cast bankers’ risk/reward analyses in a new light. Indeed, charging several dollars for a transaction for which they might be fined millions or even billions of dollars is not worth the trouble. Banks are now expected to be certain that no part of a transaction is in any way related to illicit activities. They need to know their customers, and their customers’ customers, and so on.
While all agree that banks should make sure proceeds of illicit activities are not flowing through their networks, a broad-brush approach to de-risking is hurting legitimate international transactions too. Often, these are crucial to economic development. One Latin American country in the de-risking spotlight, Mexico, receives about $24bn-worth of remittances from the US every year. Bankers report that remittances to a number of countries – in Central America particularly – are struggling to flow.
International trade may also end up suffering because of smaller numbers of foreign exchange or trade finance providers, basic services that evaporate when relations with international lenders are lost. Indeed, regulators in the US as well as Europe have come to realise that banks have often chosen to deal with anti-money laundering compliance risk by indiscriminately exiting whole client segments. Policy-makers say this ought not to be the case, but so far bankers seem to disagree. However, the industry is coming up with potential solutions, such as systems that can provide intelligence based on social network data, for example, or an international certification that could function similarly to an ISO quality guarantee.
As international trade and trade agreements have expanded in scope and ambition over the past decade, corporates – as well as governments – require solid, experienced banks to support them. Regulators need them to continue to invest in smart systems and solutions to reduce risk. But if experienced banks continue to see a sharp exit as the only reasonable answer, everyone suffers. Their retreat will likely encourage less experienced and less strongly supervised players to enter. This is potentially adding risk, rather than eliminating it.
