On 30 May, the Member of the European Parliament (MEP) Dorien Rookmaker (ECR, NL) hosted a roundtable that gathered representatives from the European Commission, national regulators and Permanent Representations, financial and payment institutions, money transfer industries, non-profit organisations (NPOs), the diamond industry as well as the gaming and betting sectors to discuss the issues of financial inclusion and de-risking. The discussion was moderated by Florence Ranson, Founder of REDComms.
MEP Dorien Rookmaker opened the discussion by pointing out that first and foremost criminal investigation and prosecution is the responsibility of authorities. Before 9-11 nobody thought authorities would delegate these tasks to banks. It is necessary to think of a more effective and efficient approach.
"Unwarranted de-risking practices cause discrimination among the most affected sectors and additional administrative burden." - Dorien Rookmaker
MEP Rookmaker pointed out that the right balance should be found in terms of efficiency and effectiveness between ensuring Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT) compliance for financial institutions and organisations including due diligence and Know Your Customer (KYC) requirements, in particular, when it comes to everyday and essential economic functions like opening a bank account; and fighting serious and organised financial crime at Europol level.
Raluca Prună, Head of the Financial Crime Unit at the European Commission’s (EC) Directorate-General for Financial Stability and Financial Services (DG FISMA), highlighted that the EU is not regulating in a void but that the EU legislation on duties of financial institutions and other obliged entities follows international standards set by the Financial Action Task Force (FATF).
Ms. Prună said that the European Commission and o other institutional actors are well aware of the de-risking issue and that initiatives are being taken on the topic, with new EBA guidelines recently released, as well as a workflow in the FATF. Ms. Prună also reminded that in the EU there is legislation ensuring the right to a basic payment account for every person residing in an EU Member State.
"When we speak to banks, they tell us that de-risking is a business decision, whenever the cost-benefit is not balanced, instead of investing too much money to see where the client is coming from and where the source of the money is. This is partly true as de-risking should be proportionate, should respect the rights for individuals’ basic payment accounts and justified." - Raluca Prună
The new AML package, which is currently being negotiated between the Council of the EU, the European Commission, and the Parliament, introduces for the first-time stricter rules and the requirement for the obliged entities (financial institutions) to keep record of the actions undertaken and the information obtained during the customer due diligence process including the grounds for refusing to establish a business relationship with customers. These records should be made available to supervisory authorities.
Jo Swyngedouw, Head of Financial Stability, AML supervision and Banking Prudential Policy at the National Bank of Belgium (NBB) and Vice Chairman of the European Banking Authority (EBA), listed the actions that the National Bank of Belgium took in addition to those by EBA / EC:
The NBB issued a very clear Circular letter / Guidelines (February 2022) expecting financial institutions to take great care in defining and implementing balanced policies which, while ensuring effective implementation of the AML obligations, also enable them to comply with all their other legal public-order or mandatory obligations and to fulfil all their specific societal responsibilities.
The NBB conducted site inspections in all major financial institutions to raise awareness unwarranted de-risking and to clarify NBB’s expectations in that respect.
The NBB facilitated negotiations between the private and public sector in order to develop a protocol as a reference on how to deal with the Embassies and diplomatic Missions.
"There is no silver bullet to address de-risking. The best way forward is a combination of clear rulemaking and guidelines at EU level, transposition at national level into clear expectations and coupled with effective supervision. Also, legal instruments as minimum banking services can facilitate combatting unwarranted de-risking." - Jo Swyngedouw
Geert van Reisen, Global Head of Diamond & Jewellery Clients at ABN AMRO, stressed that the reluctance of banks in general to open bank accounts for sectors with increased risk profile from an AML/CFT perspective is not just because of the additional compliance work as part of their gatekeeper role but also the fear of potential punitive fines or other measures taken by the regulator and to the related reputational risk.
He recommended that the regulator and the banks should work more shoulder to shoulder to increase the effectiveness of the gatekeeper role instead of the fear of the stick.
"The regulatory environment is increasingly moving from principle-based to a rule-based one which makes the whole AML framework more ineffective." - Geert van Reisen
Dr. Ekaterina Hartmann, Director of Legal and Regulatory Affairs at the European Gaming and Betting Association (EGBA), explained the paradox that while the gaming and betting industry is highly regulated at national level, licensed and supervised gambling operators and even the gambling associations, are being subject to de-risking in certain member states, including Belgium.
A wide range of businesses affected by de- risking could potentially be left with no choice but using payment service providers or financial institutions with less stringent standards, which ultimately lead to less secure transactions. EGBA therefore welcomes EBA Guidelines and the new AMLR that calls financial institutions to record grounds for refusal.
"The online gambling sector is active in the fight against money laundering. EGBA has developed sector-specific guidelines for our industry on how to combat money laundering more efficiently and is committed to work together with industry, regulators and other stakeholders. Such discussions like the one organised by AME are the start for better cooperation between all actors." - Dr. Ekaterina Hartmann
Hanna Surmatz, Head of Policy at Philea, member of the Global NPO Coalition on FATF, stated that bank de-risking is heavily impacting on the NPO including the philanthropy sector and that the de-risking is de-facto creating new risks because if/when formal banking channels are unavailable, affected actors will use informal channels and services with higher ML risks. Research undertaken by Philea in 2021, revealed that our sector faces cases where banks are not providing services (not opening a bank account or not maintaining a bank account; not transferring funds across borders or funding into certain regions). The sector is already quite regulated with framework laws and tax laws and anti-money and anti-terrorism financing policies. When it comes to legally requested beneficial ownership information for the NPO sector, she further emphasised that the beneficial owner should be the one directing and controlling the organisation.
In addition to hard law, the NPO sector is engaging in self-regulation, putting in place risk mitigation issues and making efforts to ensure good governance to lower any potential risks of abuse.
"Often the response to de-risking is sharing the risk, finding a trust-based approach on how to share the risk related to certain transactions and raising awareness. More guidance and information sharing and exchange among NPOs and banks could help creating more trust." - Hanna Surmatz
Trisevgeni Stavropoulos, Head of Compliance at the Antwerp World Diamond Center (AWDC), gave an overview of the Diamond industry in Antwerp, a sector body that represents 1.600 companies which are obliged entities under the AML legislation and highly regulated.
AWDC has tried with no success to negotiate with banks for the last seven to eight years, including mediation sessions together with the NBB and the Belgian government.
In addition, AWDC developed a sectorial risk assessment, a tool to help banks to detect and mitigate risks and provided the financial institutions with know-how on the industry.
Having said that, the Belgian Act of 8 November 2020 introduced provisions on the basic banking service for companies, which stipulates that after three refusals the Ministry of Economy appoints a financial institution which is obliged to open a bank account.
"Blanket de-risking of the diamond sector has led to the sudden termination of long-standing client relationships or the refusal to engage with diamonds with a detrimental impact. It’s impossible for a diamond trader to open a bank account with a Belgian bank. Consequently, diamond businesses have been forced to leave the country, face closure or be dependent on foreign banks." - Trisevgeni Stavropoulos
Ms Stavropoulos argued that the AML Regulation is a great opportunity to address de- risking. EBA and the national banks must keep the issue of de-risking on top of their agenda and monitor closely the developments as there is a trend for the financial institutions to increasingly refuse customers on new grounds such as their commercial policy and sustainability issues, which would not necessarily fall within EBA’s or national banks’ mandates.
Aamir Hanif, Regional Vice President of AML Compliance: EU / CIS / Africa at Western Union, highlighted the crucial role of financial institutions in fighting financial crime and explained that, in his view, AML/CFT risk is a significant reason behind de-risking and that better understanding of, and mitigation of, AML/CFT risk can help reduce de-risking.
The solution to de-risking in his view lies in closer collaboration between the banks, regulators and the different entities that comprise the payments eco-system. For example, banks adopting a risk-based approach, sharing specific reasons for de-risking and allowing firms in the sector to address any deficiencies and updating risk controls will help the entire industry collectively address and solve the de-risking challenges.
"Payment rails are controlled by a limited number of entities. While there are a lot of payment services companies, non-profits and money transmitting services, the actual transmission of the funds is through the payment rails that are controlled by banks. It is important for everyone in the payment services sector to work with banks so that those who don’t have access to the financial services system, can get access to this system. Business will always happen, and blanket de-risking prevents an entire payments ecosystem from conducting business through legitimate and regulated means." - Aamir Hanif
Dr. Hartwig Gerhartinger, Senior Vice-President and Global Head of Regulatory and Government Affairs at Paysafe Group, presented Paysafe, a global provider of payment services which among others enables customers to use cash for online payments which is increasingly relevant for financial inclusion. E-money institutions and payment institutions are heavily reliant on the banking sector, for operational accounts and for safeguarding accounts as insolvency proof and therefore as a condition to keep their licences.
"We are experiencing a sort of gold plating by banks. The bar for getting a bank account is higher than the standard to get a license to provide your payment services. Smaller banks, tier two and three banks are often more willing to engage and have a sectorial focus. At the same time a potential failure of those banks could potentially have a systemic impact on the non-bank payment sector as it happened with Silicon Valley Bank and crypto companies. In Europe, we, therefore, need a better regulatory framework around access to bank accounts by the non-bank payments sector." - Dr. Hartwig Gerhartinger
An overarching consensus was reached on the need for continuous monitoring of the progress achieved in relation to de-risking and these were the recommendations put forward:
1. Become better at defining risks and follow a risk-based, proportionate approach when it comes to de-risking. The use of technology and public-private partnerships can highly contribute to mitigate ML risks.
2. Integrate de-risking in the new Regulation on AML/CFT and the 6th Directive on AML/CFT and focus equally on regulation as well as supervision of the financial institutions and their obligation to keep documented records of their decision to de- risk. The new EU AML Authority (AMLA) could have a pivotal role ensuring that the private sector correctly and consistently applies EU rules and the de-risking provisions.
3. Establish a European Framework with clear guidelines to incentivise all partners to enter into multi-stakeholder structured dialogue with the aim to create through mediation the right protocols and to give the opportunity to affected sectors to address those issues and possibly reverse the de-risking decisions.
4. Build trust and share knowledge with sectorial risk assessments and detailed sectorial inputs to the Supranational Risk Assessment Reports.
5. Take political action at national level, when mediation fails or in addition to mediation, with measures like the Belgian Act introducing the right to basic bank accounts for companies.