At Risk: Correspondent Banking
The Treasury Department and its anti-money laundering unit find themselves on the defensive as bankers say they're cutting ties with entire business sectors as a result of blunt enforcement efforts.November 10
It isn't just payday lenders and money services firms that are being ditched by banks lately. Other banks are getting cut off too.
Wary of violating anti-money-laundering laws, large banks that offer correspondent services are increasingly severing ties with smaller banks that use those services. The objection is that they are accepting deposits and processing transactions for businesses the large banks aren't comfortable banking themselves.
It's yet another unintended consequence of regulators' stepped-up and often uneven enforcement of the Bank Secrecy Act, bankers and other industry experts say.
"If you want to provide a certain service, you have to be aware that your correspondent might drop you," said Maleeka Ali, the director of consulting and education at Banker's Toolbox.
Ali made the comment at an anti-money-laundering conference so jam-packed that some sessions were standing room only. The high turnout underscored just how eager bankers are to get clarity on potential regulatory enforcement landmines at a time when all they seem to be hearing are mixed messages.
Businesses getting shut out of the banking system are just as frustrated. It's well-documented that many banks are severing ties with those considered to be high risk. These check cashers, money-services firms and the like are scrambling to find banks willing to process their transactions and hold their deposits.
But what upsets them most is that they have no way to challenge a bank's decision. Banks rarely, if ever, will take a second look after deciding a business is high risk, and certainly no regulatory process exists that allows a business to formally object and force them to reconsider. As one industry consultant recently put it: "Once a bank decides to exit a relationship, there's really not much you can do about it."
That "tough luck" message came through loud and clear at the conference, co-hosted by the American Bankers Association and the American Bar Association. Even as regulators spoke out against "de-risking" certain types of customers, bankers in attendance were adamant that it is their decision to make.
Sometimes the castoffs can find willing smaller banks, but not always. Many smaller banks don't have the resources to do the monitoring such businesses require. And if they think they can kick certain functions up to their correspondent bank say, clearing transactions for a money-services business they are mistaken, several speakers said.
Brian Wimpling, the head compliance at Capital City Bank in Tallahassee, Florida, said his bank will not do business with money-services business. Others might not be comfortable banking casinos, marijuana dispensaries, payday lenders or others that could be perceived as fronts for money laundering.
"It's a business decision as well as a risk decision," Wimpling said in a panel discussion. "We would have to increase staff and software for a business that isn't going to generate enough return on investment to be worthwhile."
"How do you determine what payment is legal or not?" added Rob Rowe, associate chief counsel for regulatory compliance at the bankers association. Banks "can't make the determination if a transaction is legitimate or not so will err on the side of caution."
Joseph Cutler, a Seattle attorney with Perkins Coie who represents money-services and virtual currency firms, says that several of his clients were let go by their banks without being given a specific reason for the decision. "In vague language, they will say, 'We've reviewed your account and determined that your risk profile doesn't suit our business,'" he says. "They never say, It's because you are a money-services business,' because that will get them in trouble."
Even more concerning, he says, is that banks rarely consider reinstating a business they cut off, no matter how legitimate the business is. He adds that startups in sectors like online payments and virtual currency often can't get in the door to talk to a banker about opening an account even if they are backed by a reputable law firm.
Still, Cutler doesn't entirely fault banks for leaving his clients in the lurch. Considerable blame, he says, should be aimed at regulators and the Financial Crimes Enforcment Network for delivering mixed messages.
Federal agencies have stepped up BSA enforcement in an effort to stamp out fraud in the payments system, and in response, many banks, looking to avoid regulatory trouble, have opted to stop working with the types of businesses that are drawing scrutiny. Though regulators have urged banks to refrain from a blanket ban and evaluate each business individually, such pleas hardly mitigate banks' fear of making a mistake.
Ideally, Cutler would like to see Fincen require banks to accept certain types of customers, rather than merely suggesting they do so. Absent that, he believes there needs to be a review process in place that allows a money-services firm to challenge a decision to close its account.
It's conceivable that small banks could pick up some of the slack if they can find a correspondent bank that's willing to handle functions that they can't. Executives at some correspondent banks acknowledge that they are being more selective about which banks to take on as customers, while others say that they simply won't process certain transactions for downstream banks.
At the very least, small banks can expect to be put through the wringer when shopping for a correspondent. Ali of Banker's Toolbox said one of her bank clients recently received a 10-page checklist from a prospective correspondent wanting to know everything about its BSA program and how it is being monitored.
Still, high-risk does not mean unbankable, and if small banks are willing to accept the risk of working with money-services firms then they need to take the necessary precautions.
Ali says one option is to simply increase the fees being charged to the money-services businesses and use the additional revenue to step up due diligence and provide better reporting to correspondents. She says she doubts money-services firms would balk at paying higher fees because they need banks. "They can't go anywhere else."
Scott Nathan, the BSA officer at BankUnited in Miami Lakes, Florida, agreed that a small bank needs to be prepared to provide "robust data" to its correspondents if it hopes to maintain a strong relationship. Many of BankUnited's clients do business internationally and it relies on its correspondent to handle services like international wire transfers. Nathan said he meets with representatives from his correspondent quarterly to review lists of prohibited customers and where cash is coming from, all to ensure money isn't being laundered through BankUnited or its correspondent. And if an issue crops up at any other time, he calls the correspondent bank immediately.
"You never want to surprise your upstream bank," he said.