On January 5th, 2022, the European Banking Authority (EBA) published an “opinion” on the phenomenon called “de-risking”. This publication was transposed locally by the National Bank of Belgium (NBB) and led the issuance of a circular on February 1st, 2022.
This goal of this document is to present the phenomenon of de-risking, and to summarize the EBA’s and NBB’s observations and recommendations on this subject.
Where a financial institution takes a decision to refuse to enter into, or to terminate, business relationships with individual customers or categories of customers associated with higher ML/TF risks, or to refuse to carry out higher ML/TF risk transactions, this is referred to as “de-risking”.
Key drivers of financial institutions (FIs)’ decisions to de-risk customers
- ML/TF risks exceed institutions’ risk appetite: specific sectors or categories of customers have been identified as giving rise to higher ML/TF risks by default. The risks associated customers falling into these categories exceed institutions’ ML/TF risks risk appetite and give rise to legal and reputational risks that institutions are not prepared to accept. Institutions appear to adopt a conservative approach and may de-risk customers with common characteristics without taking into account risk mitigating
- Lack of expertise by institutions in specific customers’ business models: some institutions refuse to enter into or maintain a business relationship with customers with business models they do not understand as this may make it difficult to determine whose identity should be established and verified, and where the ML/TF risks
- Cost of compliance: dealing with high-risk customers will entail a requirement for enhanced steps in the monitoring of cross-border transactions, including enhanced scrutiny of customers’ relationships and their network of transactions. It requires more resources and more time.
Key drivers 1 and 3 are considered as unwarranted by the NBB.
Impacts of de-risking
1. De-risking may impact correspondent banking’s capacity in processing international payments, thus affecting the economy of entire regions.
2. Losing access to banking services may lead to severe business disruption and ultimately to business closures of certain clients.
3. Legitimate customers can become financially excluded when they are prevented from accessing financial services, thus affecting market integrity but also consumer protection. In the current world, more and more transactions are digitalized and the acceptance of cash declines, the need to access a bank account is essential to participate in modern economic and social
4. De-risking hampers the capacity of the EU to efficiently fight against ML/TF. Without access to basic financial services, some customers may resort to alternative payment channels in the As a result, transactions may no longer be monitored, making the detection and reporting of suspicious transactions more difficult.
Observations & recommendations
1. Overall risk assessment (ORA) and client acceptance policy (CAP).
FIs justify their refusal to enter into relationships with certain categories of clients based on their CAP.
The NBB reminds all FIs that they are bound to perform an ORA, as stipulated by the article 16 of the AML law. Based on this ORA, FIs must then proceed to the categorization of their clients based on their general characteristics and ML/TF risks. The risk categorization based on the ORA must serve as a basis for the implementation of policies, procedures, process, and internal control measures (such as the CAP) that are appropriate to the risks identified.
The NBB also reminds that the decisions that motivate the acceptance of a client, “cannot only result automatically from the CAP, but also require an individual risk assessment (…) taking into account the potential specificities of each case”.
To be in line with the legal and regulatory requirements of AML/CTF, FIs cannot invoke their CAP to justify the exclusion of customers based on general characteristics. The NBB invites all FIs whose CAP includes such arrangements to revoke them in the shortest delays.
2. Individual risk assessment (IRA) and refusal to enter into, or to maintain a relationship with customers based on ML/FT reasons.
FIs justify their refusal to enter into relationships with certain categories of clients based on the AML law itself which would forbid them to have such relationships if the ML/TF risks are too high.
The NBB reminds that the AM low does not express such a prohibition but insist on the necessity of applying enhanced due diligence measures when high ML/TF risks are identifies. Performing an ORA must all FIs to determine the scale and the degree of enforcements of due diligence measures for each client, considering the characteristics associated with the client, the product/service offered, the distribution channel, and potential high risk geographic areas.
The prohibition of establishing a business relationship can only apply to a limited number of cases, for instances when it is not possible to identify and verify the identity of a customer.
The AML law can be invoked to justify the refusal to enter into a relationship only when the FI is legitimately unable to enforce its enhanced due diligence requirements. Moreover, such a situation must be analyzed, documented, and accessible.
3. The cost of due diligence
FIs justify their refusal to enter into relationships with certain categories of clients based on the fact that the compliance costs outweigh the benefits.
Even though enhanced due diligence measures aim at reducing future potential costs linked to ML/TF if they concretely happen, the NBB is aware that an increase in ML/TF risks go along an increase in compliance costs. The NBB would therefore recommend increasing their tariffs to cover their needs in compliance. However, it is unwarranted to de-risk categories of customers because the current tariffs of products and services do not cover sufficiently the costs associated with the enforcement of due diligence measures.
The NBB thinks legitimate to apply differentiated tariffs depending on the nature and the level of required due diligence. However, this differentiation must be objectively justified so that it is not considered as discriminatory.
To go further:
« FATF clarifies risk-based approach: case-by-case, not wholesale de-risking » Paris, 23 October 2014
“EBA Report On de-risking in the EU and its impact on access to financial services” (extract) Paris, 5 January 2022
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