Compliance function at banks continuously strives for improving the compliance environment and minimizing compliance risk for the institutions through independently assessing compliance risk and evaluating banks’ internal controls for adherence to applicable laws, rules and regulations, including identifying compliance issues and independently reporting on the state of compliance activities across the institutions. Banks’ approach towards the management of compliance risk is covered in their Compliance Policy which outlines the requirements of the compliance programs and defines roles and responsibilities related to the implementation, execution and management of the compliance programs. These requirements work together to drive a comprehensive risk-based approach for proactive identification, management and escalation of compliance risk throughout the institutions. Banks in Pakistan are dedicated to creating value for both its external and internal customers while meeting their regulatory obligations. This includes maintaining a fraud and corruption free culture.
Global financial institutions are increasingly terminating or restricting correspondent banking relationships with remittance companies and smaller local banks in many regions of the world — a practice that is called ‘de-risking.’ ‘De-risking’ or ‘de-banking’ refers to the practice of financial institutions exiting relationships with and closing the accounts of clients perceived to be ‘high risk’ such as those with money service businesses (MSBs), foreign embassies, international charities, correspondent banks & MNCs. Rather than manage these risky clients, financial institutions opt to end the relationship altogether, consequently minimizing their own risk exposure while leaving clients bank-less.
De-risking represents a market failure. All invested stakeholders (banks, regulators, and bank customers and clients) appear to be acting rationally and in their own best interest, but in doing so have created unintended consequences for financial inclusion goals. Rather than reducing risk in the global financial sector, de-risking actually contributes to increased vulnerability by pushing high-risk clients to smaller financial institutions that may lack adequate AML/CFT capacity, or even out of the formal financial sector altogether. The goals of financial inclusion, and anti-money laundering and countering the financing of terrorism (AML/CFT), are not inherently in conflict; however, tensions do emerge in practice. Overly restrictive AML/CFT measures may negatively affect access to financial services and lead to adverse humanitarian and security implications.
Closures of above mentioned entities’ bank accounts affect financial access for the individuals and populations those businesses serve. MSBs and other financial service providers often referred to as ‘alternative money transfer services,’ hold accounts with formal financial institutions (banks), which allow them to perform transactions and serve as an access point and gateway for their traditionally underserved client bases. They fill an important gap, particularly in jurisdictions with nascent financial systems where the informal sector is in fact the main provider of formal and traditional banking services. Financial institutions in developing economies often rely on correspondent banking relationships to provide access to the global financial system and underpin trade finance. Charities operating in conflict and other sensitive environments rely on all of these channels to move much needed resources internationally.
Financial exclusion is a huge barrier for marginalized populations. On an individual level, financial exclusion limits the ability of vulnerable populations to manage cash flows, build capital and savings, and mitigate economic shocks. On a macroeconomic level, financial inclusion is linked to economic and social development, and improvements in financial access have been shown to contribute to reductions in extreme poverty and wealth inequality. Additionally, expanded access to the financial sector helps finance small business and microenterprise: a positive correlation has been found between financial inclusion and employment opportunities, and it is generally believed to positively affect economic growth.
De-risking represents a clear instance of market failure. Regulators are scrambling to catch up with the current money laundering and terrorist financing landscape. As a result, they are increasingly shifting monitoring burdens to financial institutions, and the customer base is feeling the brunt of this shift. Financial institutions have been thrust into a policing role, which they refuse to take on in light of a dispassionate cost-benefit analysis that determines the risk is not worth the reward of banking high-risk clients. Threatened with the loss of access to financial services, the customer base is calling for increased clarity about compliance standards and the streamlining of regulatory burdens in an effort to decrease the perception of risk within their sectors.
However, regulatory authorities appear hesitant to move beyond the general ambiguity of the risk-based approach, particularly given the complex and dynamic regulatory landscape. All invested stakeholders are understandably acting in their own best interests in order to protect themselves and their profits, but this has served to limit financial access. De-risking has significant economic, humanitarian, and security implications, and in many ways, undermined the goal of reducing risk in the global financial system. In instances of market failure, there are precedents for regulatory intervention, but addressing the issue will require a comprehensive response involving regulators, policymakers, banks and other stakeholders.