Getting the balance right on AML regulation

  • By Elizabeth Fry

Anti-money laundering laws don’t need to be strengthened but there are arguments for a rethink since banks everywhere are culling hundreds if not thousands of customers because increased regulatory and compliance costs as well as the threat of multi-billion fines are too high to maintain certain segments.

This is the opinion of Kevin Nixon, head of Deloitte’s global regulatory centre, who warned that when people complain that AML laws aren’t strict enough, it’s important to remember that legitimate businesses - and even whole regions - are being cut off from banking services as a result of high compliance costs and penalties for breaking these laws.

It’s not that policymakers have gone too far with the laws, he added. But in the same breath Nixon said he would be wary of any knee-jerk reaction by regulators to strengthen AML laws without considering how the whole financial system is functioning right now.

"Global regulators have been struggling with this issue for years. No-one want to ease up on the rules but at the same time you can’t have banks stopping doing business with everyone," he told AB+F.
 

'Tricky to manage'

The complexity of the rules coupled with the massive fines that are levied on lenders has led to concerns of financial exclusion by the Financial Stability Board, the regulator that reports to the G20 nations.

“The policymaker’s KYC rules have become so tricky to manage and the fines have gotten so large, whole groups of people were being refused banking services since it was easier for the banks to turn off the customers than to manage the controls to the level of accuracy required," said Nixon.

“In Australia, we have seen banks reduce correspondent banking relationships as it is easier to stop the relationship and lose the business than it is to comply with the regulations."

Because you need to know where the money is ultimately going, he went on to say, the source and the destination of funds is very hard to trace when you deal through a correspondent bank.

The correspondent banking sector is shrinking globally. Fears of breaching AML laws and the severe penalties have pushed banks to cut ties with lenders with perceived weak controls, particular in the developing world.

So big is the problem that Mark Carney, Governor of the Bank of England and head of the FSB, said that for some developing economies, the persistent threat of financial abandonment - due to the de-risking in correspondent banking relationships - could curtail their access to the global banking system and drive financial flows underground.

“This has potentially serious consequences for growth, financial inclusion, as well as the stability and integrity of the financial system."
 

Zero-tolerance regime

For Australia’s major banks, the cost of offering foreign exchange to parties outside their networks has become just too scary.

“This is a really challenging area since the more you learn about how illicit money flows through the system, the more you want to shut it down and slap on more controls," said Nixon.

And according to the Deloitte expert, no one has made much headway. Everyone wants to stop money going to the wrong places, he argued, but the question is how do you control that in what has rapidly become a zero-tolerance regime?

“How can you manage everything that could possible occur?" he asked. “Also, if you look at nearly all the money laundering cases, the perpetrators have been caught under existing regulations – it’s not as though there were any massive loopholes in the rules.

“Everyone wants to make sure you have the best set of rules in place to do that.”

Nixon pointed to the Indian Authorities who last December chose to demonetise their system on the basis that electronic transactions are much easier to trace than cash which does not leave an indelible fingerprint on the Internet.