The three stages of money laundering are: placement, layering and integration. With that, money laundering often involves a complex series of transactions that are difficult to separate. Ultimately, it is a result of any crime that generates profits for the criminals involved. It doesn’t know any borders, and illicit money movements are not easy to prevent or track.
Various international bodies, such as FATF, publish a list of less cooperative countries which in most cases are considered higher risk jurisdictions. These are the countries which potentially have loopholes in financial regulations, obstacles to international cooperation and inadequate resources for preventing and detecting money laundering activities. Jurisdictions where there are weak or ineffective AML and CFT legislation are the most vulnerable to illicit money movements. Money laundering could have significant economic and social consequences on those jurisdictions in riskier regions. If money is moved without any questions being asked between institutions, that is exactly where the criminals will try to penetrate the system.
Obliged entities have a responsibility to perform due diligence on their customers. If the entity reviewed is deemed to not have appropriate controls in place, its partner has the right not to enter that relationship in the first place, or to exit such a relationship. Mass exiting of relationships, more specifically exiting of relationships with remittance companies or smaller local banks in certain regions of the world is a practice called de-risking. Surveys performed by the World Bank Group indicate that de-risking is happening in various pockets around the world, and unfortunately it is unevenly distributed. This leaves some regions more affected than others.
De-risking affects smaller countries with limited financial markets. In the world where we aim for financial inclusion, such practice is dangerous – we risk leaving out whole regions unbanked. Regardless, money will find its way to move, but in such cases, it will most likely end up being moved illicitly, amplifying another issue for our society. AML and CFT objectives will be impacted, and we will lose effective ways to fight financial crime and terrorism financing.
In order to manage risks effectively and avoid opaque money movements, financial institutions have a responsibility to ensure the following:
- Establish policies and procedures internally, which allow for effective risk management
- Ensure that you have trained your staff and aligned them with those policies set
- Deploy a risk-based approach to your CDD measurements. Where necessary perform EDD to the best of your ability. Visits on sight to your prospect partner’s business may help provide confidence in their systems of AML management, allowing you to continue doing business with them
- Ensure that you assign an appropriate risk level to the entity in question, and that you monitor them on an ongoing basis dependent of that risk level.
Whilst there are positives that could come out of de-risking, such as less relationships to manage, a lack of empirical data about the reasons behind relationships being exited impedes an assessment of the scale of the problem we are facing. Ultimately, de-risking presents a market failure. Whilst it is a responsibility of obliged entities to help financial inclusion, it is governments and the public sector who should ensure that the whole regions or sectors are not de-risked, by offering effective regulatory guidance. We should expect to see regulatory authorities across jurisdictions cooperating more in order to align requirements of those obliged entities in each region – only then can we effectively fight financial crime while not leaving room for financial exclusion.