ICT Views

The law of unintended consequences

by: (Director ICT Academic Faculty) on

There is  currently a great deal of scrutiny on the negative wider impact on society of AML and Sanctions regimes.  But we must not apportion blame solely on the firms trying to play by the rules and regimes set for them while trying to remain commercially viable.  Rather it’s time to look again at the policy and law makers, and the regulators enforcing the rules of the game.


“De-risking”.  It’s a lovely euphemism isn’t it?  De-risking typically involves banks exiting clients and sometimes whole sectors based on a risk versus reward judgment. The UK’s Financial Conduct Authority has announced its does not expect to see firms solely using AML risk as the criteria for existing business relationships. The FATF has also issued recent statements urging firms to ensure a case by case evaluation of risks in the business relationships rather than employing sweeping de-risking criteria based on overly broad considerations.

Sanctions Risk

Sanctions risk is also driving firm’s behaviour. The recent Guardian Newspaper article highlighting Paypal’s move to suspend an account belonging to Justice for Iran (JFI), a non-profit body highlighting human rights violations in Iran, is another example of what on the face of it looks like an over vigorous application of the OFAC regime. JFI have complained that they are unable to open bank accounts because their organisation’s title contains the word “Iran”.  Without reference to the facts of the case it’s impossible to fully judge Paypal’s thought process, but clearly the increasing desire to mitigate the growing level of regulatory and legal risk on the part of banks and regulated firms is having impacts beyond the scale of that intended by lawmakers.

riskSanctions compliance is such a complicated area that firms will overlay their own risk appetite over their Sanctions policy and procedures, which may mean in practice that even if a firm is not legally prohibited from entering in a relationship or processing a payment under the OFAC regime, they may decide the risk considerations renders the relationship or payment unacceptable.

Perhaps one of the most striking examples of the impact of this approach is the final ending of money transfers to Somalia by US Banks due to tighter money laundering and terrorist financing regulations from the Office of the Comptroller of the Currency. In a country where ordinary people depend on cash remittances to survive and this flow of value is a life supply for the local economy this has the potential to be catastrophic. To put this in context, it’s estimated that $1.2 billion is remitted back to Somalia by expats every year, a sum that surpasses foreign aid by a distance.

Correspondent Banking Risk

The rapid consolidation of correspondent banking relationships undertaken by larger banks in recent years has led to exiting of perceived higher risk respondent relationships.  However in many cases this has merely driven the risk underground with many smaller respondent banks entering into a Downstream or “nested “ correspondent relationship with those banks that still maintain correspondent accounts with the larger players.

As FATF make it clear in their core recommendations, financial inclusion is a key priority, as if we regulate in a disproportionate fashion we will drive many toward the informal and grey financial sectors. 

Civil Litigation Risk- Impact on Banks and Charities

The escalation in US based  civil litigation targeting banks and their alleged “material support” for  foreign terrorist organisations (see the Arab Bank case and the wider litigation tabled recent against HSBC, Barclays, Standard Chartered, the Royal Bank of Scotland and Credit Suisse), is driving justifiable levels of risk aversion in banks.

 In the current swathe of chaos and human suffering in the Middle East and North Africa, there is more need than ever for charities to be active in conflict zones.  However increasingly they are finding it difficult to acquire and maintain banking facilities.

Where to from here?

What is clear is that when implementing and reviewing AML and Sanctions laws, regulations and rules, lawmakers and regulators need to more carefully consider the wider impacts on firms and society as a whole.

Firms are being placed in a position of facing rapidly rising levels of litigation risk and of course potentially significant regulatory enforcement action.  It is not surprising in this environment that some firms are taking extremely risk adverse actions which are disproportionally affecting financially excluded and disadvantaged members of society.

You can learn more about money laundering risk in correspondent banking with this online ICA Specialist Certificate course.

ICA will also be launching a Specialist Certificate course focussing on sanctions later in the year. Keep an eye on our website for more information.


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