De-risking: The role of the FIU

by Carla James

Director, Financial Intelligence Unit

The Financial Intelligence Unit (FIU) is the designated body responsible for matters relating to Money Laundering and Terrorist Financing in Saint Vincent and the Grenadines (SVG). As such, the FIU is tasked with the responsibility of ensuring that all service providers captured under the Anti-Money Laundering and Counter Terrorist Financing (AML/CFT) regime establish systems and procedures for the implementation of the statutory requirements stipulated under the AML/CFT legislations. The phenomenon of de-risking is inextricably linked to the application of measures to counter money laundering and terrorist financing activities, whether rightly so, is an issue for discussion.{{more}}

De-risking refers to financial institutions exiting or restricting business relationships to avert the risk related to anti-money laundering and terrorist financing. The main drivers of de-risking are the banking institutions, while the affected recipients are money service businesses, credit unions, non-profit organizations and correspondent banks.

The intergovernmental organization responsible for developing policies to combat money laundering and terrorism financing is called the Financial Action Task Force (FATF). This body is responsible for establishing regulatory standards that hold all countries to account for the implementation of AML/CFT measures. The regulatory standards call on countries to require that financial institutions carry out a process of customer due diligence and monitoring to prevent money laundering and terrorist financing. This requirement does not call upon countries to mandate their banks and other financial institutions to conduct in-depth inquiries into their customers. Rather, the FATF regulatory standards requires that financial institutions identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in an effort to mitigate them. This approach is reflected in the AML/CFT legislation which calls for the application of a Risk Based Approach (RBA), which involves critical analysis of the anti-money laundering and terrorist financing risk to which an institution is exposed. The FIU in line with the legislative provisions and the position of the FATF, is of the view that the cornerstone of an effective AML/CFT system is the application of a risk based assessment that allows for the proper management of risks.

The application of the regulatory standards in no way calls for a guaranteed “no failure” approach, as promulgated by some, as nothing in the standards requires an inflexible, blanket application.

The regulatory standards call upon financial institutions, when establishing correspondent banking relationships, to perform enhanced customer due diligence on the respondent bank. The financial institutions are required to obtain adequate information about the respondent bank in an effort to understand the respondent bank’s business, reputation and quality of its supervision in relation to AML/CFT. The requirement is not for the banks to perform customer due diligence on the customers of their respondent banks when establishing and maintaining correspondent banking relationships.

Some argue that the de-risking phenomenon is the result of stronger regulatory practices in the area of AML/CFT, and as a result of penalties and fines imposed, international institutions have adopted a new means of addressing deficiencies. That is, to terminate business relationships with certain types of businesses and regions because of the overall risk posed, rather than managing the risk. However, it must be noted that the cases of financial institutions which were fined hefty sums were exceedingly horrendous cases, involving banks that have intentionally breached the laws for decades, and had significant fundamental AML/CFT failings.

It must be noted that this phenomenon has been and is affecting the Caribbean negatively. Quintessential financial institutions within our region have had their business relationships terminated or restricted. In light of this, the FIU, as part of its mandate, continuously provides training and awareness to the necessary financial institutions in relation to their obligations under the AML/CFT regime. As such it must be noted that both the FATF standards and the AML/CFT legislation in SVG only require financial institutions to terminate customer relationships on a case-by-case basis, where the money laundering and terrorist financing risks cannot be mitigated. This is the objective of the AML/CFT regulatory standards. What should be avoided at all cost is the wholesale termination of entire classes of customers, without comprehensively and seriously taking into account the level of risk or risk mitigation measures for individual customers within a particular sector.