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Watch CGD’s related podcast with Nathan Sheets

Last Thursday, Under Secretary of the US Treasury Nathan Sheets spoke at CGD about anti–money laundering policies and the problem of de-risking, in connection with the launch of a new CGD working group report on the unintended consequences of anti–money laundering policies for poor countries.  Sheets’s comments were consistent with the report’s key recommendations including the need for better data and for clearer guidance from financial regulators and standards setters.

It is difficult to write about this issue in light of the recent events in Paris and Beirut.  But our analysis suggests that there need not be a tradeoff between security and development — we can mitigate the unintended consequences of anti–money laundering while preserving (and even strengthening) national and global security. 

In his speech at CGD, Dr. Sheets acknowledged the existence of problematic “de-risking,” a key concern raised by the working group. He explained that de-risking occurs when a bank “indiscriminately terminates or restricts broad classes of customer relationships without a careful assessment of the risks and the tools available to manage and mitigate those risks.” He cautioned that this can threaten financial connectivity, inclusion and the vital remittance flows that contribute more than 10 percent of GDP to over two dozen developing countries.  The full recording of the event, including Dr. Sheets’s speech, a Q&A with him and a panel discussion including Jean Pesme from the World Bank is here.

While Dr. Sheets echoed CGD’s calls for better data relating to account closures, he was also able to share some new data from the World Bank ahead of their report’s publication. That data confirms that the money service business on which remitters rely are finding it harder to access banking services in some G-20 countries, particularly the United States. Roughly half of the banking authorities surveyed by the World Bank reported a decline is correspondent relationships in their jurisdiction. Correspondent relationships are essential for trade finance, as the chair of the CGD working group, Clay Lowery, underscored in his remarks.

Most importantly, Dr. Sheets called for banks and regulators alike to “commit significant resources and take on new responsibilities” in order to improve the enforcement of legislation related to anti–money laundering and combating the financing of terror (AML/CFT).

Jean Pesme, practice manager in the World Bank Group, Finance & Markets Global Practice, also spoke at the report launch event, describing the effect of de-risking as increasing the “fragility of the system” and undermining transparency. Jean also underscored that the causes of de-risking are complex, and that the implementation of anti–money laundering laws is just one driver among several that need to be understood, in order to find the right solutions.

Our colleague, Matt Collin, who carried out an analysis of the cost of remittances for the CGD report, outlined the state of the evidence and offered hope for the future by describing some simple ways in which new data could be made available. As we reflect on recent events in Paris, Beirut, and elsewhere, our goal will be to provide practical policy solutions that reconcile the twin objectives of financial inclusion and a secure financial system free from criminal and terrorist abuse.

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.