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De-risking: A primer on one of the hottest topics in the BSA/AML industry

By Naomi Glass, BSA/AML/OFAC Compliance Manager

Last month, I had the pleasure of attending the Association of Certified Anti-Money Laundering Specialists (ACAMS) 15th Annual AML & Financial Crimes Conference in Las Vegas with over 2,500 other attendees. The conference addressed a wide array of BSA/AML hot topics, one of which relates to the popular, yet controversial, practice of de-risking.

The term “de-risking” refers to when financial institutions refuse to do business with whole categories of higher-risk client types as a means to lessen their overall exposure to AML risk and compliance costs. While there are various high-risk client types, the move to de-risk has disproportionally impacted money service businesses, nonprofit organizations, and foreign correspondent banks.

Financial institutions have largely instituted de-risking policies in response to the pressures imposed by regulators that they tighten up AML controls. Financial institutions are justifiably concerned that failure to implement strong AML programs can result in significant fines and reputational damage. This can be especially devastating to smaller financial institutions, especially credit unions.

De-risking is viewed by financial institutions as a viable compliance solution because it is both inexpensive and easy to implement. In today’s regulatory environment, financial institutions are already saddled with heavy compliance costs; doing business with higher-risk client types can result in the need to expend additional resources on ramping up AML/BSA staffing levels, providing specialized training to personnel, and enhancing outdated technology platforms. Financial institutions are well aware of the added requirement that high-risk customers undergo enhanced due diligence and ongoing monitoring. The loss in revenue by refusing to bank high-risk client types is viewed as a financial “drop in the bucket” by comparison.

So, what’s the controversy all about? The practice of de-risking has become so popular and so widespread throughout the industry that it has resulted in social and economic consequences, which now have the regulators concerned.

  • For example, one of the problems with de-risking is that when high-risk clients are exited by a financial institution or refused onboarding altogether, they establish banking relationships with institutions that have lesser controls, or, worse yet, they begin to operate underground, which prevents any visibility into their financial dealings.
  • Another criticism of de-risking is that it constitutes “financial exclusion,” which can unfairly impact vulnerable and underserved populations both here in the United States and abroad. As one presenter at the ACAMS conference poignantly stated in regards to the impact of de-risking: “When charities do not have access to accounts, people die.”

The keynote speaker at the ACAMS conference, Thomas J. Curry, Comptroller of the Currency, focused much of his address on the topic of de-risking given its considerable significance. He urged financial institutions to refrain from severing banking relationships with entire segments of its customer-base simply because the entities represent an inherently higher level of AML/BSA risk. Rather, he encouraged financial institutions to take a “risk-based approach” to AML/BSA compliance by performing periodic “risk re-evaluations” of its clientele at the entity level. A financial institution is then better equipped to make informed decisions on which clients to keep and which clients to terminate.

Because there is little consensus as to whether financial institutions should employ the controversial practice of de-risking, it will no doubt continue to be a hot- button topic within the industry. Ultimately, credit unions will need to assess the pros and cons associated with the implementation of de-risking and decide what is best for them, their membership, and their communities.