Conference Report

Royal United Services Institutefor Defence and Security Studies

Swiss–UK Dialogue Promoting a Coordinated Response to De-Risking

Florence Keen and Kayla Izenman

Swiss–UK DialoguePromoting a Coordinated Response to De-Risking

Florence Keen and Kayla Izenman

RUSI Conference Report, January 2019

Royal United Services Institutefor Defence and Security Studies

ii Swiss–UK Dialogue

188 years of independent thinking on defence and security

The Royal United Services Institute (RUSI) is the world’s oldest and the UK’s leading defence and security think tank. Its mission is to inform, influence and enhance public debate on a safer and more stable world. RUSI is a research-led institute, producing independent, practical and innovative analysis to address today’s complex challenges.

Since its foundation in 1831, RUSI has relied on its members to support its activities. Together with revenue from research, publications and conferences, RUSI has sustained its political independence for 188 years.

Royal United Services Institute for Defence and Security Studies

WhitehallLondon SW1A 2ET

United Kingdom+44 (0)20 7747 2600

www.rusi.org RUSI is a registered charity (No. 210639)

This paper gives an account of the discussions that took place at the Swiss–UK Dialogue: Promoting a Coordinated Response to De-Risking conference, held at the Royal United Services Institute (RUSI) on 29 October 2018. The views expressed in this publication do not necessarily reflect the views of RUSI or any other institution, or those of the authors.

Published in 2019 by the Royal United Services Institute for Defence and Security Studies.

This work is licensed under a Creative Commons Attribution – Non-Commercial – No-Derivatives 4.0 International Licence. For more information, see <http://creativecommons.org/licenses/by-nc-nd/4.0/>.

RUSI Conference Report, January 2019.

Printed in the UK by Kall Kwik.

Contents

Acknowledgements v

Executive Summary vii

Introduction 1

I. The Response to Date 3

II. Implementation Challenges 7

III. The Way Forward 9

About the Authors 15

Acknowledgements

RUSI would like to thank the Embassy of Switzerland in the UK for their support of this project. The authors would also like to thank the speakers who agreed to participate in the conference, and their former RUSI colleague Olivier Kraft, who was instrumental in delivering the conference and the subsequent report. Finally, they would like to thank Sabrina Downey and Allana Howard from RUSI’s events team for their support throughout the conference, and Melanie Bell from RUSI’s publications team for her diligent editing.

Executive Summary

DE-RISKING, WHICH REFERS to the phenomenon of financial institutions restricting or terminating relationships with clients who fall outside their risk threshold, has led to significant challenges for various sectors, including respondent banks, money-service

businesses and non-profit organisations (NPOs), to maintain or establish bank accounts and correspondent banking relationships. Concerns about financial crime risks are seen as an important – albeit not the only – contributing cause of de-risking. For example, banks providing services to NPOs operating in conflict zones are concerned about funds ending up in the hands of sanctioned actors.

However, the exclusion of certain actors from the formal financial system has been found to displace rather than address the underlying risk. In addition, by frustrating the financial operations of NPOs designed, for example, to facilitate post-conflict reconstruction or counter violent extremism, de-risking may in fact hinder other components of counterterrorism efforts.

Despite growing awareness of the de-risking problem and multiple initiatives designed in response, the affected sectors continue to report significant challenges. Accordingly, the conference co-organised by the Embassy of Switzerland in the UK and RUSI on 29 October 2018 sought to take stock of the implementation of existing initiatives, analyse remaining obstacles, and identify priority actions for the future.

As reflected in this conference report, discussions focused in particular on the need for trust among stakeholders, a nuanced risk understanding, clear regulatory expectations, and leadership in promoting financial inclusion at the national level. The report identifies specific measures that should be taken as a matter of priority, both to create the overarching conditions for an effective response to de-risking and to tackle sector-specific challenges.

Introduction

THE FINANCIAL ACTION Task Force (FATF), the global standard-setter on anti-money laundering (AML) and combating the financing of terrorism (CFT), has defined ‘de-risking’ as ‘the phenomenon of financial institutions terminating or restricting business

relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach’.1

De-risking has had a significant impact on correspondent banking relationships, including those of banks operating in low-income countries. It has also affected the ability of certain sectors, such as money remitters and non-profit organisations (NPOs) with a presence in conflict zones, to access financial services and thus operate effectively. By hindering reconstruction, peace-building and development work in conflict zones, de-risking affects a crucial component of counterterrorism efforts and can therefore undermine the original CFT objectives.

In addition, rather than reducing financial crime risks, de-risking has been found to displace those risks to unregulated channels and reduce opportunities for oversight. This is also true in cases in which financial institutions decide to close customer accounts after receiving related requests for information from a financial intelligence unit. In this scenario, opportunities for further monitoring will be immediately lost and the action will essentially ‘tip off’ the customer who will then move subsequent transactions underground or to another jurisdiction.

Extensive research conducted in past years has identified several interrelated drivers of de-risking, including banks’ concerns about clients’ capacity to adequately mitigate financial crime risks, increased regulatory pressure (prudential, AML, CFT, sanctions, anti-bribery), increased fines for non-compliance, a reassessment of profitability, and changes to banks’ risk appetite and business strategy.2 These overarching factors may be compounded by other concerns specific to each sector.

Given that the nature and impact of the de-risking problem are generally well recognised, the objective of the conference was to focus on solutions. Specifically, the conference sought to promote a coordinated response to de-risking, recognising the shared responsibility of all stakeholders.

1. Financial Action Task Force (FATF), ‘FATF Clarifies Risk-Based Approach: Case-by-Case, Not Wholesale De-Risking’, 23 October 2014.

2. See, for example, Financial Stability Board, ‘Stocktake of Remittance Service Providers’ Access to Banking Services’, 16 March 2018; World Bank, ‘Report on the G20 Survey on De-Risking Activities in the Remittance Market’, 101071, 2015; David Artingstall et al., ‘Drivers & Impacts of Derisking: A Study of Representative Views and Data in the UK, by John Howell & Co. Ltd. for the Financial Conduct Authority’, John Howell & Co. Ltd, 2016.

2 Swiss–UK Dialogue

The conference began with an opening address by Rachel Turner, a director at the UK’s Department for International Development, who gave an overview of HM Government’s initiatives at the international and national levels in response to de-risking.

The opening address was followed by a panel discussion on ‘The Response to Date: Successes, Challenges and Lessons Learnt’, with the participation of:

• Ambassador Alexander Karrer, Deputy State Secretary for International Finance, Swiss Federal Department of Finance and Chair, Correspondent Banking Coordination Group, Financial Stability Board.

• Tracy Paradise, Head of AML Strategy and Architecture, HSBC and Executive Secretary, Wolfsberg Group.

• Lia van Broekhoven, Executive Director, Human Security Collective.• Ben Joakim, Founder & CEO, Disberse.• Tom Keatinge, Director, Centre for Financial Crime and Security, RUSI.

During the second part of the conference, participants were divided into nine break-out groups, each of which focused on one of the following components of a coordinated response to de-risking:

• Promoting dialogue and understanding between banks, payment institutions and regulators.

• Promoting dialogue and understanding between banks, NPOs and donor agencies.• Promoting dialogue and understanding between correspondent banks, respondent

banks and regulators.

Based on the discussions, this report gives an overview of measures taken so far by various stakeholders in response to de-risking (Chapter I), implementation challenges (Chapter II) and potential areas for further action (Chapter III).

I. The Response to Date

BEFORE CONSIDERING WHICH additional measures might be necessary to address the causes or consequences of de-risking, participants took stock of existing initiatives. This chapter summarises the initiatives that were discussed, on the understanding that the

list is non-exhaustive.

Correspondent Banking RelationshipsThe Committee on Payments and Market Infrastructures (CPMI) has defined correspondent banking as ‘an arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks’.3 Correspondent banking relationships are particularly important for financial institutions that do not have direct access to the international financial system and therefore rely on global banks as correspondents.4

Ambassador Alexander Karrer, chairman of the Correspondent Banking Coordination Group of the Financial Stability Board (FSB), gave an overview of the FSB’s response to the decline in correspondent banking relationships (CBRs). The FSB’s Correspondent Banking Coordination Group (CBCG) was established to ensure the implementation of the FSB’s 2015 report to the G20 on actions taken to assess and address the decline in correspondent banking, which is organised around four pillars:

1. Further examining the dimensions and implications of the issue.2. Clarifying regulatory expectations, including guidance from FATF and the Basel Committee

on Banking Supervision (BCBS).3. Domestic capacity-building in jurisdictions that are home to affected respondent banks

(for example, by fostering public and private partnerships to identify gaps). 4. Strengthening tools for due diligence in correspondent banks (for example, technical

tools to facilitate customer due diligence – CDD – and know your customer – KYC).5

Karrer presented the key findings of a report published by the CBCG in July 2017, based on a survey of more than 300 banks in nearly 50 jurisdictions, in addition to data from the Society for

3. Committee on Payments and Market Infrastructures, Correspondent Banking (Bank for International Settlements, July 2016), <https://www.bis.org/cpmi/publ/d147.pdf>, accessed 23 November 2018.

4. Ibid., p. 9.5. Financial Stability Board (FSB), ‘Report to the G20 on Actions Taken to Assess and Address the

Decline in Correspondent Banking’, November 2015, <http://www.fsb.org/wp-content/uploads/Correspondent-banking-report-to-G20-Summit.pdf>, accessed 17 December 2018.

4 Swiss–UK Dialogue

Worldwide Interbank Financial Telecommunication (SWIFT) global payment messaging system.6 According to the data, 45% of surveyed banks reported relying on two or fewer correspondents for more than 75% of the value of wire transfers sent or received as of June 2016.7 The sample included small and medium banks from a range of countries, not only in fragile states.

Karrer pointed out that the decline in CBRs had continued in 2017, with the pace increasing across the three currencies most frequently used for international payments (USD, EUR and GBP). He noted that international payment chains might have become longer according to new data,8 but that payments continued to flow and that the decline in CBRs was therefore not seen as a global financial stability issue at this point.

In addition to the four pillars, Karrer referred to the FSB’s work on global remittances. Based on the recognition that the reduction in CBRs has had a significant impact on money remitters, a report published by the FSB in March 2018 issued recommendations designed to improve the accessibility of banking services to remittance service providers. Specifically, the recommendations focus on increasing the dialogue between the banking and remittance sectors, improving international standards and oversight of the remittance sector, the use of innovation in the remittance sector, and the provision of technical assistance on remittance-related topics.9

Tracy Paradise gave an update on relevant initiatives of the Wolfsberg Group, an association of 13 global banks with the objective of developing frameworks and guidelines to manage financial crime risks. In February 2018 the Wolfsberg Group updated its correspondent banking due diligence questionnaire (CBDDQ).10 The CBDDQ provides a standardised set of questions for correspondent banks when establishing CBRs. By clarifying and harmonising requirements, the CBDDQ is expected to reduce compliance costs not only for correspondent banks, but also for respondent banks that deal with several correspondent banks.

6. FSB, ‘FSB Correspondent Banking Data Report’, 4 July 2017, <http://www.fsb.org/wp-content/uploads/P040717-4.pdf>, accessed 17 December 2018. Since the conference, the CBCG has published a new report with updated data, see FSB, ‘FSB Correspondent Banking Data Report – Update’, 16 November 2018, <http://www.fsb.org/wp-content/uploads/P161118-2.pdf>, accessed 17 December 2018.

7. FSB, ‘FSB Correspondent Banking Data Report’, p. 3.8. Ibid., p. 2.9. FSB, ‘Stocktake of Remittance Service Providers’ Access to Banking Services’, 16 March 2018,

<http://www.fsb.org/2018/03/stocktake-of-remittance-service-providers-access-to-banking-services/>, accessed 23 November 2018.

10. The Wolfsberg Group, ‘The Wolfsberg Correspondent Banking Due Diligence Questionnaire (CBDDQ): Publication Guidance’, 22 February 2018, <https://www.wolfsberg-principles.com/sites/default/files/wb/pdfs/Wolfsberg%27s_CBDDQ_Publication_Guidance_220218_v1.1.pdf>, accessed 23 November 2018.

Keen and Izenman 5

While the CBDDQ should contribute to addressing the de-risking problem by streamlining compliance processes and strengthening financial crime controls, Paradise noted that financial institutions cannot solve the problem alone. A broader concerted effort also needs to include public–private partnerships designed to better understand and mitigate financial crime threats, as well as technological solutions relying, for example, on digital identities. Digital identities can act as a more secure way for individuals to verify their identity online, thereby improving onboarding and KYC procedures that are essential elements of a financial institution’s crime mitigation process.

Participants discussed how clarifying regulatory expectations is an important part of the response to de-risking. The Joint Fact Sheet on Foreign Correspondent Banking issued by the US Department of the Treasury and federal banking agencies in 2016 was mentioned as one example of measures that supervisors have taken to that effect.11

Non-Profit Organisations Lia van Broekhoven started by recognising various positive developments in the engagement between NPOs and other stakeholders, such as governments and international bodies.

A key step was the revision of FATF Recommendation 8, which used to state that the non-profit sector was ‘particularly vulnerable’ to abuse by terrorist organisations.12 This statement was removed in 2016 and replaced with a requirement that authorities conduct an assessment of terrorist-financing risks facing the NPO sector and take a risk-based approach to the sector.13 As another positive development, van Broekhoven noted that for NPOs, the reputational consequences of de-risking had decreased. While NPOs used to be concerned about the adverse consequences of informing government donors that they had been de-risked, the dialogue has become more transparent in recent years. In addition, there is a growing recognition among NPOs that they cannot resolve the problem individually and that collective action is necessary.

11. Board of Governors of the Federal Reserve System et al., ‘U.S. Department of the Treasury and Federal Banking Agencies Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement’, 30 August 2016, <https://www.treasury.gov/press-center/press-releases/Documents/Foreign%20Correspondent%20Banking%20Fact%20Sheet.pdf>, accessed 5 December 2018.

12. Civil Society, ‘A Huge Risk to International Charities’ Financial Security has Just Been Averted’, 30 June 2016; Global NPO Coalition on FATF, ‘FATF Recommendation 8 Revision: Risk to Charities’ Financial Security Averted’, 1 July 2016, <http://fatfplatform.org/uncategorized/fatf-recommendation-8-revision-huge-risk-international-charities-financial-security-just-averted/>, accessed 12 November 2018.

13. See FATF, ‘International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: The FATF Recommendations’, October 2018, <http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf>, accessed 12 November 2018.

6 Swiss–UK Dialogue

Van Broekhoven referred to a recent project of the World Bank and the Association of Certified Anti-Money Laundering Specialists (ACAMS) that has facilitated dialogue between banks and NPOs to help them understand each other’s regulatory requirements.14 While the current dialogue is focused on the US, the objective is to develop a reference guide that can be used in other countries as well. Van Broekhoven added that, in the Netherlands, there has been increased engagement between the Ministry of Foreign Affairs (which houses the Minister for Foreign Trade and Development Cooperation, who is in charge of the Netherlands’ international development aid) and compliance officers of large banks to help the latter determine to what extent they can rely on government vetting of NPOs. She also referred to efforts within large financial institutions to develop a coordinated response through enhanced internal discussions between relevant departments (such as compliance, charities, and private banking).

Participants also heard about the Trisector Working Group, which was established by the UK government in 2017 with a mandate to address the specific concerns and minimise the unintended consequences experienced by the NPO sector as a result of CFT legislation. The Trisector Working Group brings together UK government departments, the banking sector and NPOs. According to Rachel Turner, the group has looked at widening the exemptions in the UK’s domestic sanctions regime, which is covered in the following legislation: The Terrorist Asset-Freezing etc. Act (TAFA) 2010; the Counter Terrorism Act (CTA) 2008; and the Anti-Terrorism, Crime and Security Act (ACTSA) 2001.15 The group has also sought to unify guidance and approaches to due diligence across the sectors with the objective of harmonising the vocabulary of donors, financial institutions and NPOs to ensure that all sectors understand their obligations. In addition, the Department for International Development has been training its programme managers to support NPOs and implementing partners in navigating the UK’s counterterrorism and sanctions legislation.

The use of technology to facilitate NPOs’ financial transfers was referenced by various participants. Attendees heard from Ben Joakim, CEO of Disberse, who described the use of distributed ledger technology (DLT) to ensure the more efficient flow of aid finance. Disberse issues e-money onto the blockchain, which can be immediately distributed and provides a real-time audit, with a liquidity mechanism built in collaboration with financial institutions. As with any application of technology, the development of a new tool should always be based on a solid understanding of the underlying problem that needs to be resolved, and thus the adoption of technological solutions to facilitate NPOs’ financial services such as that offered by Disberse should be carefully considered before implementing.

14. World Bank Group and ACAMS, ‘Stakeholder Dialogue on De-Risking: Supporting Financial Access for Humanitarian Organizations and Charities’, February 2017, <http://files.acams.org/pdfs/2017/Supporting_Financial_Access_for_Humanitarian_Organizations_and_Charities.pdf>, accessed 17 December 2017.

15. For more on the domestic regime and specific exemptions, see Office of Financial Sanctions Implementation, HM Treasury, ‘Financial Sanctions Guidance’, March 2018, <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/685308/financial_sanctions_guidance_march_2018_final.pdf>, accessed 17 December 2018.

II. Implementation Challenges

BEFORE CONSIDERING THE way forward, conference participants discussed factors that had hindered the full and effective implementation of existing initiatives designed to address de-risking. Understanding those obstacles will help design future responses.

Participants discussed the following relevant factors.

Unclear and Competing ObjectivesInternational bodies such as the UN, the World Bank and the G20 have repeatedly recognised financial inclusion as a key component of international development efforts. In practice, however, there can be a gap between high-level commitments at the international level and the implementation of agreed objectives at the national level, where they sometimes exist in tension with other priorities, including efforts against illicit financial flows. Participants agreed that advancing financial inclusion objectives in a complex national context would require clear political leadership and ownership, which are often lacking. Participants also acknowledged that de-risking itself can increase financial crime risk by driving transactions underground, and that financial inclusion and financial integrity should reinforce each other.

One specific example of the need for increased political leadership is the risk appetite in connection with NPO operations in high-risk areas. Participants noted that a zero-tolerance approach to risk is not viable if the international community wants funds to reach people in need in conflict areas, because an absolute guarantee that the funds will not be used for other purposes (including terrorist financing) is often impossible to obtain.

Uncertainty About Supervisory ExpectationsAs mentioned above, international bodies such as the FATF and the BCBS have issued guidance for banks to mitigate the impact of de-risking. However, this guidance has not led to regulatory harmonisation at the national level. Diverging regulatory expectations across jurisdictions therefore contribute to a complex landscape and higher compliance costs.

In addition, participants suggested that, in certain cases, banks might have concerns as to whether supervisory expectations set out in official guidance will be followed in practice. In those cases, banks may adopt a more cautious approach than supervisors officially require.

In addition, due to the structure of the international financial system, the risk appetite of banks is often determined by the supervisory approach of authorities in clearing centres for the main international currencies, which limits the impact of measures taken by national supervisors in other jurisdictions.

8 Swiss–UK Dialogue

Continued Lack of Communication and Trust Between StakeholdersThe frequent lack of communication and trust between stakeholders was mentioned as another factor impeding the implementation of measures against de-risking.

Participants suggested that the communication between governments, NPOs and banks has improved in some jurisdictions, but that in others, stakeholders are still not communicating. As a result, banks continue to have concerns about NPOs’ understanding of the terrorist-financing risks that some parts of the sector may face. Similarly, the lack of communication has led to uncertainty among banks as to whether they can rely on government vetting of NPOs. This has in turn limited the effectiveness of licensing regimes introduced by numerous governments, including the UK, the EU and the US.

Communication gaps were also identified in the context of correspondent banking relationships, both among banks and between banks and payment institutions, such as money-service businesses. For a respondent bank, it is sometimes difficult to understand why its correspondent account was closed. Dialogue between banks and money-service businesses (for example, in working groups established by governments) is often limited to policy issues and does not extend to operational questions. The lack of a safe space for banks and money-service businesses to exchange information on typologies, for example, can hinder an intelligence-led approach to financial crime risks that may arise at the interface of both sectors.

III. The Way Forward

IN LINE WITH the conference objective, participants discussed steps needed to maximise the impact of existing initiatives, as well as any additional measures that would help address de-risking. The discussions revealed both structural changes that would be needed to create

the conditions for an effective response to de-risking across sectors and priority actions that are more specific to the challenges of respondent banks, money-service businesses or NPOs.

Creating the Conditions for an Effective Response to De-RiskingNecessary conditions proposed during the conference include the following.

Political Leadership

Participants expressed a desire for clearer messaging from governments on de-risking and the balance between competing policy objectives, for example between ensuring that transactions do not breach CFT requirements and delivering humanitarian and development aid. This balance cannot be addressed only by financial institutions and regulators. It also requires political leadership. For example, banks would be more likely to apply a nuanced risk-based approach if there was a clear signal from governments that there is not a ‘zero risk tolerance’ and that a certain level of risk is acceptable in light of the broader benefits of financial inclusion and the provision of humanitarian and development aid. Rather than being centred on negative incentives (mainly avoiding issues of non-compliance), the messaging could also include positive incentives if banks received recognition for promoting financial inclusion and aid delivery. Governments should be explicit in this regard, particularly as funds will otherwise divert to less transparent channels that are more difficult to trace.

In order to ensure clear and consistent messaging on de-risking, the accountability for the aforementioned objectives within government should be clarified.

More Nuanced Understanding of Risks

Financial institutions can only do business where they are in a position to assess the risks and decide how to mitigate them. Accordingly, developing a more nuanced understanding of risks is a key condition to promote access to banking services across sectors.

Public–private collaboration was mentioned as one of the most effective ways to enhance the level of risk understanding. For example, governments can facilitate dialogue between financial institutions and relevant sectors (such as money-service businesses and NPOs) in the context of national or sectoral risk assessments, including to implement a risk-based approach to NPOs

10 Swiss–UK Dialogue

in line with the FATF’s revised Recommendation 8. Creating a ‘safe space’ for all stakeholders to discuss risks is central to developing a consolidated risk picture.

Clear Regulatory Expectations

In response to the regulatory uncertainty mentioned above, regulators have a key role to play in clarifying standards and ensuring their consistent application. Specific examples that were mentioned include clarification on the expectations for AML audits to be conducted by money-service businesses, and updated guidance on licensing regimes and exemptions that exist within the various sanctions regimes.

Maintaining and Restoring Correspondent Banking RelationshipsBuilding on the discussions about existing initiatives designed to maintain or restore correspondent banking relationships and the implementation of those initiatives, participants suggested that further progress could be achieved through the following measures.

Identifying a Third Party to Facilitate Communication Between Correspondent and Respondent Banks

As mentioned above, respondent banks often do not understand why their correspondent account was closed. Generally correspondent banks are not required to provide an explanation – and choose not to in order to avoid debate. Without a transparent reason for closure, improvements and intervention points cannot be identified. A third party could help bridge the gap by collecting more information from correspondent banks about closure reasons and conveying key factors to respondent banks. This would help respondent banks to better understand the risks perceived by the correspondent bank and thus address the specific reasons affecting their correspondent banking relationships, including through technical assistance.

Developing Better Understanding of Financial Flows at the Macroeconomic Level

Participants noted that the decline in correspondent banking relationships had in some cases led to a displacement of financial flows to other channels, for example, alternative payment systems other than SWIFT. As part of their response to de-risking, supervisors should monitor those developments and consider implications for efforts to counter illicit financial flows.

A key component of this would be to ensure more transparency for cross-border money movements. Monitoring the volume, origin and destination of funds processed through the financial system would help authorities better identify trends and risks of illicit activities. This understanding of global financial flows would also support correspondent banks’ risk assessment.

Keen and Izenman 11

Regulatory and Supervisory Harmonisation

Based on guidance issued by international standard setters such as the FATF and the BCBS, further regulatory harmonisation is needed to align regulatory expectations and encourage correspondent banking relationships. Participants also noted that supervisory standards in host jurisdictions of respondent banks continue to be a cause for concern for correspondent banks. While international bodies such as the IMF are already engaged in capacity building for supervisory authorities, one recommendation was to develop a mechanism to match the demand and supply of technical assistance at the international level.

The wholesale adoption of the Wolfsberg Group’s CBDDQ would also ensure greater harmonisation between banks, particularly if it was embedded within SWIFT’s system, meaning that respondents would only need to fill it in once. Correspondent banks should also provide more support to respondents to ensure expectations are clarified and fulfilled.

Government Risk-Sharing Models

In the field of trade, governments often develop risk-sharing models where the provision of finance to a purchasing country by the private sector is underwritten (in part or in whole) by the government of the exporting nation (most often via their export credit agency). This risk-sharing model allows banks to provide finance to counterparties and jurisdictions that might otherwise fail to meet their risk appetite. A similar model could be developed to provide banks with the necessary comfort to maintain correspondent relationships and offer financial services to banks and other actors in jurisdictions that represent a high risk on a standalone basis.

Enhancing Money-Service Businesses’ Access to Banking ServicesConsidering the continued difficulties faced by money-service businesses in obtaining access to banking services, participants identified the following measures designed to improve the dialogue between banks and money-service businesses, and to encourage banks to engage more with the sector. While acknowledging the international dimension of remittances, discussions focused on the ‘first mile’ of remittances, or the point of origin of financial flows.

Information Sharing

Given the ongoing concerns among banks regarding financial crime risks associated with the business model of certain money-service businesses, participants highlighted the importance of information sharing to help both sectors develop a more granular risk understanding.

Information-sharing mechanisms among money-service businesses could, for example, allow businesses that offer services through the same agents to exchange information on those agents’ activities. This would help mitigate the risks arising when a remittance agent is licensed

12 Swiss–UK Dialogue

to transfer funds through several different channels, which is common in the remittance sector and hinders the identification of high-risk patterns if financial data cannot be consolidated.

As banks are investing increasingly in an intelligence-led approach to AML, going beyond traditional compliance mechanisms, better information sharing between banks and money-service businesses will be crucial to build a common risk picture. Existing initiatives designed to assess the scope and causes of de-risking should be complemented by more operational groups focusing on specific financial crime typologies facing money-service businesses and their banking partners. This will also enhance banks’ understanding of mitigation measures taken by money-service businesses.

Communication of Supervisory Activity

Participants welcomed the increasing evidence of supervisory activity with respect to the money-service business sector, such as the supervisory report published by HM Revenue and Customs in May 2018.16 Communicating the supervisor’s measures was seen as central to developing a coordinated approach to risk mitigation among all stakeholders and addressing the perception that the sector is not subject to consistent oversight.

Enhancing NPOs’ Access to Banking ServicesConsidering NPOs’ ongoing difficulties in accessing banking services and sending funds to projects on the ground, participants identified the following areas for further action.

Enhanced Transparency Between NPOs and Their Banks

Participants articulated that NPOs should do more to inform their banks on specific activities, particularly if they operate in or send payments to high-risk countries. The discussion should move from the macro level (policy) to the micro level (day-to-day operations). For example, in the case of a humanitarian crisis in a particular country, there should be a forum for all stakeholders, including central banks, to meet and determine how it may be possible to send funds to that country. A greater level of transparency between NPOs and banks was considered a useful first step in alleviating banks’ perceptions of risks in the NPO sector.

Training and Education for NPOs

Targeted NPO training was also recommended by numerous participants to educate the sector and bring NPOs up to the necessary due diligence standards that banks expect from them. One

16. HM Revenue and Customs, ‘AML/CTF Thematic Review: Anti-Money Laundering Compliance in the Money Service Business Sector’, February 2018, <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/683213/AMLS_Money_Service_Businesses.pdf>, accessed 17 December 2018.

Keen and Izenman 13

participant suggested that accountancy courses at universities could offer modules that would specifically target NPOs and finance.

Engagement in Non-Western Countries

It was noted that most studies on the impact of de-risking on NPOs have focused on North America or Western Europe. However, there is also evidence that the phenomenon extends to other parts of the world where some banks may have a more limited understanding of risks associated with NPOs and are therefore more likely to de-risk the sector as a whole.

Resilience

NPOs, where possible, should split their operations across multiple banks instead of relying on just one. However, it was noted that having multiple bank accounts would increase the burden of administration, and that smaller NPOs would likely not have the resources to do this. It was also emphasised that NPOs should strengthen capacity internally and ensure that they have their own due diligence procedures in place.

Further Analysis of Cross-Border Implementation Issues

A transatlantic ‘gap analysis’ was suggested as a way of visualising exactly where the frustrations and problems for the sector lie. This would be particularly useful where there is misalignment between the various sanctions regimes, notably between the US and the EU.

Technology

The adoption of technological solutions to facilitate the delivery of humanitarian and development aid, such as through the use of DLT, should be further explored. Potential benefits identified during the discussions include greater transparency, efficiency and effectiveness of payments. DLT-based solutions should be in line with relevant legislation, including to ensure adequate protection for the identities of NPO beneficiaries, which can be sensitive.

About the Authors

Florence Keen is a Research Analyst within RUSI’s Centre for Financial Crime and Security Studies. Her work focuses on public–private sector responses to financial crime, including: the global counterterrorist finance regime and its effectiveness; unexplained wealth orders and their role in tackling corruption and organised crime in the UK and internationally; and how emerging technologies are addressing financial crime. She has also extensively researched the impact of counterterrorism legislation on the non-profit organisation sector and civil society.

Kayla Izenman is a Research Assistant within RUSI’s Centre for Financial Crime and Security Studies. She joined RUSI in September 2018 following the completion of her degree in International Relations at Boston University, with a concentration in foreign policy and security studies. Her work primarily looks at the intersection of financial technology and national security, as well as the changing landscape of terrorism finance.