From CompliNEWS | Financial Service Intelligence Watch
Anti-money laundering and de-risking
Anti-Money Laundering (AML) regulations and de-risking practices are both essential components of financial crime prevention. AML regulations are put in place to detect and prevent the use of the financial system for illegal purposes, while de-risking is a strategy used by financial institutions to reduce the risk of exposure to financial crime. Although both are important, there can be a tension between the two, as overreliance on de-risking measures can lead to financial exclusion, particularly for those who are considered high risk, such as small businesses and individuals in developing countries.
AML regulations require financial institutions to identify and verify their customers’ identities, monitor transactions for suspicious activity, and report any suspicious activity to the appropriate regulatory authorities. These regulations aim to prevent criminals from using the financial system to launder money, finance terrorism, or engage in other illegal activities. AML regulations are enforced through penalties and fines, and in some cases, criminal prosecution.
De-risking, on the other hand, is a strategy used by financial institutions to reduce their exposure to financial crime. Financial institutions may choose to de-risk by terminating relationships with high-risk customers, reducing the services offered to certain customer segments, or increasing the compliance requirements for high-risk customers. De-risking measures are implemented to avoid the risk of regulatory enforcement, reputational damage, or financial loss.
However, de-risking measures can also have unintended consequences, particularly for those who are considered high risk, such as small businesses and individuals in developing countries. De-risking measures can lead to financial exclusion, as financial institutions may choose to terminate relationships with these customers rather than implement the additional compliance requirements needed to manage their risk. This can make it difficult for these customers to access financial services, which can have negative impacts on their ability to conduct business and participate in the economy.
Therefore, finding the right balance between AML regulations and de-risking practices is crucial. Financial institutions need to ensure that they are complying with AML regulations while also considering the impact of de-risking measures on their customers. This requires a risk-based approach that takes into account the level of risk posed by each customer and implements appropriate measures to manage that risk. For example, financial institutions could implement enhanced due diligence measures for high-risk customers rather than terminating their relationships altogether.
In summary, AML regulations and de-risking practices are both essential components of financial crime prevention. While de-risking measures are important to reduce the risk of exposure to financial crime, overreliance on them can lead to financial exclusion. Financial institutions need to find the right balance between AML regulations and de-risking measures, taking into account the level of risk posed by each customer and implementing appropriate measures to manage that risk without excluding customers from accessing financial services. By doing so, financial institutions can effectively combat financial crime while also promoting financial inclusion.