Remarks at the Caribbean-Central American Action Event on Financial Inclusion and De-risking
Deputy Assistant Secretary for Counter Threat Finance and Sanctions, Bureau of Economic and Business Affairs
Thanks to Sally Yearwood and the Caribbean-Central American Action, and the Inter-American Development Bank for putting on this event and for the opportunity to speak to you this morning. It’s a pleasure to be here.
I sit in the State Department’s Bureau of Economic and Business Affairs. We focus on promoting U.S. economic interests around the world through trade promotion, commercial advocacy, investment climate reports, and a number of other tools. As Secretary Kerry has said on numerous occasions, foreign policy is economic policy, and economic policy is foreign policy. It is our responsibility in the Bureau of Economic and Business Affairs to make that a reality. This also involves exploring ways to promote financial inclusion and assess and address de-risking.
In that vein, I have been asked to provide remarks on why financial inclusion is a global priority for the State Department and to discuss challenges posed by de-risking.
Let’s start with financial inclusion.
Importance of Financial Inclusion
Financial inclusion is a key diplomatic and economic priority. The State Department works to promote sustainable and inclusive economic development around the world, and financial inclusion is an essential ingredient for success.
As Secretary Kerry has said, “Our goal is to foster the sustained prosperity worldwide that will create new jobs, grow the middle class, reduce income disparities, promote gender equality, and give young people a stake in building their societies up…[I]nclusive growth abroad is central to our security, values and economy here at home.”
I couldn’t agree more. Among the steps we have taken on the global stage, is negotiating, this past summer, the Addis Ababa Action Agenda, which represents the international community’s policy framework for economic growth and emphasizes the importance of financial inclusion. It was endorsed by the UN General Assembly, and together with new Sustainable Development Goals, has helped elevate financial inclusion to a new level on the global development agenda.
Additionally, in 2014, we worked with the Organization of American States to organize the Partnerships for Financial Inclusion conference in New York, which was attended by ministers and senior government officials, as well as the private sector from more than 25 countries in Latin America and the Caribbean.
But we know that achieving financial inclusion remains a challenge, especially as potential obstacles emerge. One such potential obstacle is de-risking.
The Challenge of De-risking
Many banks are re-evaluating the Bank Secrecy Act/anti-money laundering (BSA/AML) risks posed by their customer relationships, and deciding in some cases to terminate, restrict, or deny services to broad classes of clients, often apparently without case-by-case analysis or consideration of mitigation options.
There are several reasons for this trend. The gradual strengthening of global AML/CFT regulations, new prudential requirements, and more stringent oversight by federal regulators since the 2008 financial crisis have all played a role.
An upsurge of high profile and costly enforcement actions against banks for willful lapses in their AML/CFT safeguards has galvanized banks’ attention.
Commercial considerations also play a part. Compliance costs are rising yet the margins on correspondent accounts are thin. The risk-to-reward ratio is often not favorable to maintaining existing relationships with customers that pose even a small risk.
Some banks are also refocusing on core markets and trying to re-align their businesses with strategic priorities.
Caribbean Countries’ Concerns about De-risking
The closure of correspondent accounts and delays in processing transactions are raising concerns among many countries, especially in the Caribbean. The fear of lost access to the U.S. financial system, which could impact trade, investment and remittances, is understandable.
Even those countries in the Caribbean that have not been impacted by the loss of correspondent relationships have voiced their concerns in solidarity.
The CARICOM Heads of Government Summit in Guyana this past July highlighted the potential consequences of de-risking on the region. Caribbean leaders pledged “robust and unrelenting advocacy on the issue” and, I can assure you, they have been as good as their word.
The State Department has met with several Caribbean delegations this past year regarding de-risking. One common theme in these meetings is that the de-risking trend is a major challenge to developing countries in terms of financial access and economic development.
I can assure you that the State Department takes these concerns seriously.
Broader Concerns about De-risking
We share these concerns not only from a regional perspective but from a broader foreign policy perspective.
We have seen many instances where U.S. financial institutions have cut international correspondent relationships, exited entire jurisdictions, and closed the accounts of certain categories of clients.
No doubt, many decisions by U.S. financial institutions labeled as de-risking are legitimate examples of a risk-based approach to meeting anti-money laundering and countering the financing of terrorism standards and regulations. But these difficult decisions should be taken only after a financial institution has closely considered the risk profile of the individual or entity in question and determined it cannot manage the identified risk.
Risk re-evaluation is a necessary and ongoing process. And it is critical that financial institutions refrain from terminations or restricting business relationships to avoid perceived regulatory risk rather than in response to an assessment of the actual risk of illicit activity.
We want to avoid situations where countries are cut-off from the U.S. financial system, individuals struggle to transmit funds to family members in remittance-reliant countries, or humanitarian organizations have to scramble to find a way to deliver aid to global hot spots.
We also have to face the stark reality that funds will continue to flow no matter how many people and institutions are de-risked from U.S. financial institutions. Unfortunately, these funds will flow underground, making it harder for us to identify bad actors and illicit transactions.
In an age when money laundering and terrorism finance pose a clear and present danger, we have a strong interest in maximizing transparency.
How is the International Community Addressing De-risking?
Addressing concerns about de-risking requires all of us to do our part. Much of that work is being done at the international level.
Groups such as the World Bank, the Financial Stability Board (FSB), the FATF and the G-20 have conducted surveys of the financial industry on potential de-risking. While these surveys have revealed no evidence of a threat to global financial stability, we should not dismiss the concerns about reduced access to the U.S. financial system. We still need a more complete picture of the scope of de-risking, and better data to understand its drivers.
The FSB also established in March 2016 the Correspondent Banking Coordination Group (CBCG) which is coordinating the FSB’s four-part action plan on de-risking. This plan focuses on: (1) further examining and understanding the scale of the de-risking problem, (2) clarifying regulatory expectations, including through the Financial Action Task Force (FATF), (3) building capacity in affected jurisdictions, and (4) strengthening the due diligence tools needed by correspondent banks.
FATF, the international standard setting body for AML/CFT requirements, has stated that the implementation of such standards “should be aimed at managing (not avoiding) risks.” That means that financial institutions should be vigilant as they identify potential risks that different clients present, but design and implement effective AML/CFT programs that assess and address those risks.
Earlier this year, the FATF also published guidance on a risk-based approach for Money and Value Transfer Systems and it is currently finalizing guidance on correspondent banking services, which looks at the risk-based approach in the context of correspondent banking.
We welcome and encourage these and other efforts to better understand and address the de-risking phenomenon.
How is the U.S. Government Addressing De-risking?
We are also tackling this issue at a national level.
To be clear, the U.S. Government, including the State Department, cannot mandate that financial institutions open or maintain accounts with specific customers, and the decision to exit a line of business or terminate a banking relationship with a customer resides solely with banks. Nonetheless, the United States government is doing its part.
Deficiencies in AML/CFT compliance are one of the few drivers of de-risking that jurisdictions can address directly. So, in our dialogues with Caribbean countries as with jurisdictions in other parts of the world, we’ve encouraged them to strengthen their AML/CFT controls and publicize these efforts.
We have gone beyond mere encouragement by funding the delivery of technical assistance around the world to develop AML/CFT capacity and improve regulatory oversight of financial sectors. Working through the Treasury Department’s Office of Technical Assistance and other partners, the State Department provides upwards of $10 million annually in bilateral and multilateral program funds to assist countries around the world to enhance their AML/CFT programs.
Our technical assistance strengthens legal frameworks, assists financial regulatory systems to meet international standards, strengthens financial intelligence units, improves the skills of police to investigate financial crimes, and trains lawyers, prosecutors and judges on how to adjudicate these crimes.
We also support initiatives that can facilitate the transparent flow of international remittances. For example, the Federal Reserve of Atlanta is supporting international remittances by allowing financial institutions to transfer funds through the FedGlobal Automated Clearing House. Under this system, remittances are channeled through the U.S. domestic payment system linked to foreign financial institutions and regulated Money Transfer Services in receiving countries. This program also allows financial institutions to maintain compliance with all relevant regulatory and AML/CFT requirements.
How Can You Address De-risking?
Our technical assistance alone will not make de-risking go away. Individual institutions and jurisdictions must also be proactive.
It is vital that jurisdictions demonstrate effective supervision and robust AML/CFT regimes in order for their financial institutions to maintain relationships with global banks. We encourage every country to prioritize the enhancement of its AML/CFT framework and take the tough measures necessary to demonstrate that these regimes translate into action.
While there are no short cuts to increasing the confidence of U.S. banks in their partners, there are other steps institutions and jurisdictions can take.
Some foreign banking institutions have used outside audits and roadshows to highlight the strength of their internal AML/CFT controls. This has helped provide U.S. banks with greater confidence about maintaining correspondent banking relationships.
We have also seen foreign correspondents improve their information sharing with U.S. banks so that risk calculations can be based on real data rather than perceptions.
We have established specific bilateral arrangements with some jurisdictions to facilitate information sharing among financial institutions for AML/CFT purposes. The U.S. and Mexico, for example, have worked together to increase financial transparency and prevent money laundering and other illicit financial flows.
Mexican banks were previously unable to respond to U.S. banks’ requests for information which resulted in U.S banks filing suspicious transaction reports and potentially terminating correspondent accounts. The Mexican government amended its Bank Secrecy Law, Data Privacy Law, and AML/CFT laws and has set in place a legal mechanism by which Mexican banks can share information of their customers, as well as of their transactions.
Effective information sharing is one of the cornerstones of a well-functioning AML/CFT framework. In a correspondent banking relationship, the respondent institution needs to fully understand the AML/CFT policies and expectations, and correspondent institutions need to engage their respondents to help them improve their AML/CFT controls and processes.
Finally, we have also seen signs that members of the Caribbean community are working to provide mutual support. I understand that the Caribbean Development Bank (CDB) and the Jamaica National Building Society (JNBS) will provide technical assistance to advance CARICOM’s advocacy efforts and work with CARICOM to identify solutions to the de-risking challenge. They will also help CARICOM coordinate implementation efforts and strengthen monitoring mechanisms.
As part of its contribution, the CDB will continue to work with the Caribbean Financial Action Task Force to build capacity of member countries.
We expect such measures will enhance and complement other efforts in this area.
In conclusion, I will emphasize that the State Department is not a financial regulator, nor do we aspire to be. However, we have a clear interest in contributing to the discussion about de-risking and what potential solutions might be. Secretary Kerry has directed us to explore potential solutions with interested stakeholders.
While we must vigorously protect our financial system from abuse, we must also ensure that we protect our track record of inclusiveness and cooperation. We cannot walk away from our commitment to protecting the global financial sector from illicit financial flows. Nor can we afford to turn a blind eye to the economic imperatives of financial inclusion.
Armed with better data and, I hope, innovative solutions, we must ensure that de-risking does not create unintended consequences that damage regional economies.
We appreciate your engaging in this discussion and for helping us think through how we can prevent de-risking from becoming a bigger and more destructive trend.
Our collaboration will remain critical as we seek to better understand the de-risking trend and formulate policy approaches to address it. I welcome your ideas and feedback.
Thank you again for your interest in this important issue.