Innovation and Collaboration to Stem the Tide of De-Risking

Governor Atalina Enari of the Central Bank of Samoa speaks at the Alliance for Financial Inclusion (AFI) 2016 Global Policy Forum (GPF) on 8 September in Nadi, Fiji.
Governor Atalina Enari of the Central Bank of Samoa speaks at the Alliance for Financial Inclusion (AFI) 2016 Global Policy Forum (GPF) on 8 September in Nadi, Fiji.

Innovation and Collaboration to Stem the Tide of De-Risking

By Dr. Justine Walker

The theme of last month’s Alliance for Financial Inclusion (AFI) Global Policy Forum (GPF) ‘Building the Pillars of Sustainable Inclusion’ was highly appropriate given discussions on the de-risking phenomenon. It is clear that the unintended consequences of changing AML/CFT risk management and regulatory frameworks have had a profound effect on certain AFI members and across numerous business lines. Unfortunately there is little sign that the situation in respect of the provision of correspondent banking services and access to financial services for remittances providers is likely to change within the near future. If anything the situation appears to be continuing to deteriorate.

Access to finance services is at the very heart of the international quest for sustainable development and inclusion. Yet, when such access becomes limited, or indeed overly complicated, the pillars of inclusion and sustainability begin to look fragile. This has most evidently been set out in AFI’s special report on stemming the tide of de-risking. Here we see the drivers of de-risking covering a convergence of issues with both similarities and differences between corridors, business lines and impacted countries. It is clear that minor tweaks to global standards or regulatory expectations are unlikely to resolve modern day de-risking concerns. Instead policy makers need to consider more innovative partnerships that connect standard setting bodies, regulators, banks, the Fintech community and other stakeholders.

Ensuring the correct incentives needs to become a central pillar of solution based thinking. Asking commercial global banks to hold unprofitable (or perceived risky) correspondent accounts is unlikely to achieve much traction in the current day environment. Instead, we should move the debate to exploring ways of ensuring integrity but reducing regulatory costs. The cost – benefit dialogue alongside proportionately are fundamental. Overcoming this risk-reward dilemma will require embracing new ideas. According to a new study launched at Sibos last week there’s a growing desire among compliance professionals to pursue shared utilities as a means of reducing the cost burdens of understanding their customers and transactions. The question now is to what extent regulators will encourage such initiatives.

There is obviously a big role for innovators. Technology and the application of different approaches to know your customer (KYC) and account opening have become absolutely critical in addressing financial inclusion. During our panel sessions at the global policy forum concerns that KYC requirements were an inhibitor to local financial inclusion initiatives were a re-occurring theme. Yet we also heard some inspirational examples of how countries had overcome such uncertainties. There is no doubt that if embraced correctly new technologies can offer enhanced transparency. What we need is a shared public-private sense of how to foster innovation to ensure growth and prosperity.

Global AML/CFT standards offer various options for simplified due diligence and risk based implementation; the challenge is one of implementation and acceptance. Here AFI and global standard setters, including the Financial Action Task Force, need to work together to construct a genuinely supportive regulatory environment for ensuring a mutually beneficially balance between KYC, simplified due diligence and financial inclusion priorities. The refugee crises is an illustrative example on the need for new thinking. How to respond to the estimated 59.5 million forcibly displaced people worldwide will clearly require some new tools within the KYC box.

Money laundering, terrorist financing, corruption and tax evasion can be expected to remain firmly on global regulatory radars. Ensuring this drive for financial integrity compliments that of financial inclusion will require a bringing together of minds. The world is changing so fast with new ideas, new opportunities and new challenges. If we do not collaborate better we risk exacerbating the problem of financial exclusion.

Dr Justine Walker has extensive experience in threat finance, compliance, sanctions and risk management. She draws on a diverse career working across government, regulatory and international organizations and was a long standing member to the inter-governmental Financial Action Task Force. The views expressed here are entirely those of the author.