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AML drive pushing businesses out of banking system

Anti-money laundering (AML) regulatory concerns are causing large banks to reduce ties with banks in other countries, inadvertently shutting thousands of small businesses out of the global financial system, according to software provider Accuity.10 May 2017

Accuity's research has shown a 25% drop in global correspondent banking relationships since 2009 due to 'de-risking'. This re-disking is being driven by US and European banks, and has left businesses in some geographic regions without access to the international financial community, the financial crime compliance and payments solutions provider said.

Global correspondent relationships are where one financial institution provides services on behalf of another in a different location on cross border payments.

Since the financial crisis of 2008 regulators have imposed greater transparency and liquidity requirements as well as increasing enforcement of AML regulations. Fines peaked at $10 billion in 2014, "compounding the challenges banks face in high-risk geographies", the company said.

"In this climate, the threat to banks of doing business in these geographies potentially outweighs the benefits of services to their clients, even if there may be good business opportunities to pursue," it said.

This has led many banks to withdraw from correspondent relationships, leaving businesses in the affected regions struggling to finance their operations. Local banks are forced to use non-regulated, higher cost sources of finance, exposing them to "nefarious actors and shadow banking", Accuity said.

"Actions from US and European regulators have resulted in banks shunning higher risk economies while missing out on the potentially profitable use of their currencies for correspondent banking, in the process," it said.

Henry Balani, head of strategic affairs at Accuity said: "A number of factors have contributed to de-risking, the most important being that the risk / reward balance has become unfavourable for large clearing banks and in response they have taken a country / region risk view in deciding who they can do business with. If we want to reverse this trend and begin to ‘re-risk’, then the antidote will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low risk businesses in high risk jurisdictions."

Most of the decline in correspondent banking is in US dollar based relationships, the company said. Chinese RMB-based relationships continue to grow and China is now the region with the highest growth in correspondent banking relationships, Accuity said.

"There are two explanations for this decline in US dollar relationships when compared to the RMB. Either there is a concentration in US dollar relationships, with more transactions settled through fewer relationships, or there is a decline in the dominance of US dollar," it said.