More stringent regulations and closer scrutiny of international money flows by US regulators risks turning the risk management policies of US banks into risk avoidance, suggests the Florida International Bankers Association (FIBA).
With compliance costs escalating, and the penalties for non-compliance exceptionally high, some US banks are taking pre-emptive actions, including exiting relationships with customers, customer segments and market areas that carry any hint of risk according to FIBA, a non-profit trade association.
This is occurring even when these entities may be bona fide and legitimate in their financial activities. The trend is called de-risking, and it is exerting a substantial impact on Latin America and the Caribbean.
The issue will be addressed next month by Luis Niño, vice chairman of Mexico’s Banco Azteca as part of a roundtable discussion during the upcoming Anti-Money Laundering (AML) Conference taking place in Miami, from March 7-9 and presented by FIBA.
He says that de-risking has caused some US banks to limit their correspondent banking activity with Mexico and Central America as they sever ties with customers in the region. These actions, intended to avoid any risk of non-compliance with AML guidelines or anti-terrorism sanctions, are creating obstacles for the economies of these countries, making it difficult to finance cross-border trade and to handle remittances and other transactions.
“While Guatemala and other countries face remittance challenges, in the case of Mexico, de-risking has left us with a surplus of US dollars in the billions,” he adds.
“Based on our strong tourism and trade, more US dollars (USD) come into the country than go out. So while we have to report taking in US$3.4bn a year, we have no way to return that money to the US Treasury.”
FIBA comments that the USD dominates the global financial system, making dollar clearance a crucial need for any business and especially important for businesses in Mexico, the largest trade partner for the US.
Yet Mexico has been without a correspondent bank for the past two years. Clearing the substantial amounts of cash earned through legitimate sources such as tourism, global trade and local commerce along the US-Mexican border has been a problem.
Niño and other members of the Mexican Bankers Association (ABM) are working to find a way forward. “The solution is a detailed account of every money transaction,” he says. “Banks need to know exactly where the money is coming from, where it is going and why. It’s no longer just required to know your customer (KYC), it is now imperative to know your customer’s customer.”
This cost of compliance is twice as high for Mexican financial institutions, which must meet new guidelines issued by Mexican regulators in full, and then meet heightened US standards.
“Mexican banks, large and small, can comply, and they need the compliance capability,” says Niño. “It takes time to do it right.”
He adds that banks of every size measure the return on investment against the risk. “Some have taken risks and received severe penalties. And some simply find the cost of compliance too high.
“It’s a matter of risk versus reward and we are seeing the banking world dividing itself into those who are willing to take some risks, and those who are not.”
FIBA’s three-day AML conference is expected to attract 1,400 participants and 200 organisations. The Association was founded in 1979 and members include financial institutions from 18 countries, across four continents, including some of the largest banks from Europe, Latin America and the Caribbean in addition to the US.
Most are ‘hugely optimistic’ that their business will succeed in the year ahead, according to Ricoh Europe.
A study of consumers across 20 countries found only three where more than half those surveyed trusted merchants’ ability to protect their data.
Companies have only a limited time to complete their preparations before the UK departs the EU, warns Marsh executive Mark Weil.
The bank and the International Financial Corporation are continuing the eight years old trade finance partnership with a further investment.