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The Working Group on the Unintended Consequences of Anti–Money Laundering Policies examined how rich countries might rebalance their policies to continue to protect against money laundering and terrorism financing without hindering the ability of people from poor countries to conduct business and transfer money across borders. The working group's report provides policy recommendations for multilateral organisations and the US, UK, and Australian governments.
In 2014, migrants sent over $400 billion of remittances home through formal systems and at least an additional $130 billion through informal channels. In addition, businesses in poor countries engage in cross-border transactions to export goods and import key inputs. But banks in rich countries, under pressure from anti–money laundering and counterterrorism enforcement efforts, seem to be exiting entire sectors and regions in a process that has come to be known as "de-risking." A high-profile example of de-risking is the widespread denial of bank accounts to money transfer organisations. Following high-profile de-banking episodes in the UK, US and Australia, in some markets only the very largest players have had access to bank accounts, and many smaller players have been forced to close down or become agents of larger businesses.
What are some of the consequences of these actions? A reduction in competition within the money transfer sector could lead to higher remittance costs. Global remittances (the money migrants send home) are worth at least three times the total amount that is sent as aid to developing countries. Non-profit organisations also report damaging effects of de-risking on their ability to conduct humanitarian aid operations or recruit staff overseas.
Lower-profile but potentially even more significant is the drying up of correspondent banking services. Major banks across rich countries, including in the UK and the US, seem to be less and less willing to operate correspondent banking services for corresponding banks in developing countries. This reduces those banks’ access to the global financial system and damages important cross-border services such as trade financing. Recently, Bank of England governor Mark Carney referred to this worrying trend as "financial abandonment."
In addition to these cost concerns, de-risking may be undermining the effectiveness of the AML system by pushing transactions into less transparent channels. For example, some UK MTOs that were previously using bank transfers are now using bulk currency exchanges, rendering flows of money less transparent than before the de-banking. Similarly, the collapse of simple bilateral correspondent banking relations may mean more complicated routing for trade finance via less transparent jurisdictions like Dubai.
The working group is exploring the extent to which these concerns are legitimate, and determining the most appropriate policy response. The first working group meeting was on January 28 in London, with the second meeting in September in Washington. The final report will be available in November 2015.
In recent years, regulators have raised their expectations for what counts as adequate AML/CFT compliance. At the same time, they have cracked down on institutions that have fallen short. While arguably necessary, this more stringent enforcement has produced some unintended side effects. In particular, it has put pressure on banks’ ability and willingness to deliver certain types of services, notably correspondent banking services.
Regulatory pressure on international banks to fight money laundering (ML) and terrorist financing (TF) increased substantially in the past decade. We find countries that have been added to a high-risk greylist face up to a 10% decline in the number of cross border payments received from other jurisdictions, but no change in the number sent. We also find that a greylisted country is more likely to see a decline in payments from other countries with weak AML/CFT institutions. We find limited evidence that these effects manifest in cross border trade or other flows. Given that countries that are placed on these lists tend to be poorer on average, these impacts are likely to be more strongly felt in developing countries.
Distributed ledger technology, like Bitcoin’s blockchain, has the potential to transform cross-border payments, boost financial inclusion, and lessen the unintended consequences of anti-money laundering enforcement. Ripple, a fintech company using distributed ledger technology, made headlines recently, as did the appearance of a new cryptocurrency, Zcash. If you’ve gotten swept up in the enthusiasm around emerging financial technologies (fintech), you may think that the creaking system of international transfers in fiat currencies, and the problems of global financial exclusion associated with it, will soon come to an end. However, as we’ve said before, these innovations may not have as much of an impact as you expect.
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.
A recent flurry of legislative activity has seen the introduction of four bills that aim to crack down on the financing of terrorism. While it is very important to combat money laundering and the financing of terror, the actions can result in unintended negative consequences for poor countries as well. We like some things in these new bills, but they also leave a lot to be desired.
Last November, we released a report on the unintended consequences of anti-money laundering policies for poor countries that focused on remittances, corresponding banking, and the delivery of humanitarian aid. Today, we are pleased to report progress towards reducing the negative, unintended consequences of anti-money laundering (AML) regulation, despite the shadow cast on the international development community by Brexit. One significant policy change from the Financial Action Task Force (FATF) and three new reports give us reasons to celebrate a little, even when there is much work to be done.
Other recent studies have found relations between banks and certain nongovernmental organizations have grown tense.
“Even large international NGOs are sometimes having trouble operating bank accounts if they’re trying to deliver aid to Syria, Afghanistan or Pakistan,” areas of particularly high risk for terror financing, said Vijaya Ramachandran, an expert with the Center for Global Development, a Washington-based think tank that produced a report on the subject in late 2015.
In February of this year, more than 50 nonprofits asked the U.S. Treasury to publicly affirm that nonprofit organizations aren’t inherently high risk.
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