Share

Last November, a CGD working group of experts convened to address the unintended consequences of anti-money laundering (AML) policies for poor countries, where they recommended that the Financial Stability Board (FSB) should take the lead on addressing problematic de-risking by banks. Below, we outline our takeaways on the FSB’s progress thus far.

De-risking has potential negative consequences for senders and receivers of remittances, businesspeople operating across borders, and charities working in conflict zones. Given that the FSB’s mandate is to coordinate and review the work of financial standards-setters and regulators, the CGD working group felt that it was particularly well-suited to address the full range of causes of problematic de-risking behavior by banks and the subsequent decline in correspondent banking relationships between rich and poor countries.

The FSB has in fact taken on the challenge. Late last year, it issued an action plan to undertake the following tasks:

  1. Examine the dimensions and implications of the decline in correspondent banking.
     
  2. Clarify regulatory expectation relating to AML compliance in correspondent banking relationships.
     
  3. Build domestic capacity in jurisdictions that are home to affected respondent banks.
     
  4. Strengthen the due diligence tools available to banks.

In March 2016, the FSB established the Correspondent Banking Coordination Group (CBCG), comprised of senior representatives from international organizations and standard setters and national authorities in the FSB and its Regional Consultative Groups, in order to implement its action plan. Last week, it issued a progress update indicating its work in each of the four key areas.

Our takeaways:

  1. Process is important. The FSB is a key player in shaping the global financial architecture and its involvement in this area is both timely and significant. Its ability to convene the key players at the national and international level has raised the level of dialogue around the problem of de-risking.
     
  2. The FSB report’s emphasis on four key areas is exactly right. And we feel compelled to point out that they are very similar to our recommendations! In particular, we like the emphasis on data collection and data sharing.
     
  3. Significant progress has been made since the FSB began working in this area. Recommendations made by us and by the FSB in November 2015 to enable banks to include Legal Entity Identifiers on payment messages are now well in progress. Other big players are also addressing the issue, with new pieces of work especially from the IMF and the US Treasury.
     
  4. There’s a lot more to be done! Notably, the FSB has talked about the need for systematic data collection and sharing between governments of information relating to the number of correspondent banking relationships between jurisdictions and the types of further customers served by these relationships, like money transfer organizations. So far, there’s been no sign of that sort of systematic data collection and sharing. The emphasis, rather, has been on one-off surveys that are useful right now, but don’t create a system for assessing the effect of AML enforcement on payment flows going forward.

All in all, the FSB is doing a great job of progressing the effort to address the issue of de-risking and the unintended consequences of anti-money laundering. But much more is needed, not just from the FSB and other standards-setters, but also from national governments. That’s why, here at CGD, we are continuing our research and dialogue with key policymakers.