Financial Crime World

Global Concerns Over Money Laundering, Terrorism Financing, and Proliferation Financing Intensify

De-Risking Threatens Financial Stability in Pacific Island Countries

A recent high-level meeting of Pacific Island Forum (PIF) Ministers expressed grave concerns over the impact of “de-risking” on Correspondent Banking Relationships (CBRs) in the region. The phenomenon of financial institutions terminating or restricting business relationships with clients to avoid risk, rather than manage it, is seen as a significant threat to the financial stability and development of Pacific Island countries.

Consequences of De-Risking

  • Loss of CBRs has led to a steep reduction over the past two decades
  • Challenging for small island economies to maintain access to affordable and reliable banking services
  • Disproportionate impact on vulnerable groups such as seasonal workers, small and medium enterprises, and rural communities

Understanding the Issue

The PIF Secretariat has decided to conduct a study on the closure of CBRs in the region, aiming to understand:

  • The current situation
  • Lessons learned
  • Potential remedial actions to prevent de-risking
  • Requested assistance from the World Bank in this endeavor

Importance of Correspondent Banking Relationships

CBRs are critical for international trade payments and remittance flows, providing the infrastructure for cross-border transactions. However, they also hold risks of:

  • Money laundering (ML)
  • Terrorist financing (TF)
  • Proliferation financing (PF)

Mitigating Risks

  • Adequacy of Anti-Money Laundering/Know Your Customer (AML/KYC) measures and risk assessment by correspondent banks is crucial in mitigating these risks
  • Technological advancements have complicated matters further, with new FinTech entrants posing a threat to traditional banking models

Potential Solutions

  • Use of eKYC measures and digital ID systems can provide trusted, up-to-date KYC information, providing greater comfort to correspondent banks
  • Data analytics can help demonstrate payments flow (origin and destination of funds) and integrity levels
  • Supported by appropriate data protection, cyber security, and consumer protection measures

Global Policymaker Concerns

Global policymakers have been building concern over de-risking since 2013, with various solutions proposed. The Financial Action Task Force (FATF), the US Treasury, the European Banking Authority, and AUSTRAC are among the agencies contemplating steps to limit unintended de-risking consequences of their standards.

Policy Response

Reforms in this space may address CBR de-risking concerns and offer alternative payment pathways. In formulating a policy response to the de-banking problem, it is essential to understand:

  • How serious the issue is
  • Its impact on economies and societies
  • Why it has occurred