Once Bitten, Twice Shy

Top of mind among anti-money laundering professionals is the “de-risking” trend in which financial institutions drop entire categories of business customers perceived to pose excess risk, such as money transmitters or third-party payment processors.

But less noticeable is how de-risking by larger financial institutions can spread more risk throughout the financial sector. After all, a money services business needs access to the financial system to survive; if it gets turned away by a big bank, it will try to find an easier access point.

Brian Wimpling, SVP and compliance chief at the Tallahassee, Fla.-based Capital City Bank, a $2.6 billion bank with branches mainly in northern Florida and southern Georgia, has “absolutely” noticed an uptick in inquiries from MSBs in the last few years. “We get a big influx of new business because we serve that customer base,” he explains. “We’ve gotten calls from MSBs as far away as Miami looking for us to bank them because—I suppose—they’ve lost their relationship with a larger financial institution.”

Capital City Bank doesn’t serve MSBs outside of its service areas; to do so would exceed the bank’s risk appetite, explains Wimpling, who co-chairs the advisory board for the ABA/ABA Money Laundering Enforcement Conference, to be held Nov. 15-17 in Washington, D.C. But the surge of interest creates some unique headaches for smaller institutions.

While Wimpling is confident that his bank has personnel and systems that are sophisticated enough to handle the business, some wary MSBs, burned once by de-risking, have obscured their true nature when they open an account. As a result, he explains, banks need to ask detailed questions when businesses open their accounts, maintain robust monitoring systems and train frontline staff thoroughly in what to expect.

“If someone’s told you that they’re not going to be a check casher, the last thing the teller should see in the deposits is a big stack of payroll checks coming in on Monday morning,” he says.

The risks ironically posed by de-risking have top regulators and law enforcement officials scrambling to clarify that AML and Bank Secrecy Act requirements do not require banks to drop whole classes of clients.

ABA VP Robert Rowe, who monitors AML compliance issues, observes that de-risking has been driven in part by pressure from examiners. “For banks to feel confident using a risk-based AML approach, they must see the same message in exams and enforcement actions that they get from speeches and pronouncements by top officials,” he says.

At last year’s Money Laundering Enforcement Conference, David Cohen—at the time the Treasury Department’s top official for financial crimes and terrorist financing—acknowledged “concerns that there may be a gap between regulatory risk and illicit finance risk” but warned that “to the extent that de-risking occurs, it undermines important economic and financial transparency objectives, and reveals a misalignment between regulatory risk and actual risk that serves no one’s interests.” He and other officials have pledged to work more closely with the industry to refine the balance.

Wimpling’s biggest concern is that in responding to de-risking and looking for new banks, MSBs can catch community financial institutions off-guard. “They may not have that awareness that the risk is out there,” he says. “If you don’t know what you don’t know, that’s the real risk.”

This article originally appeared in the November/December 2015 issue of the ABA Banking Journal.

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