WASHINGTON — Bankers are finding themselves trapped between the proverbial rock and a hard place when it comes to complying with anti-money laundering rules.

On the one hand, they are facing enhanced scrutiny from bank examiners, causing them to sever ties with businesses they view as high risk, including online lenders and money services businesses. On the other, top officials at those same regulators are urging banks not to close those accounts, fearing that doing so will cut off vulnerable consumers from much-needed access to credit.

"We are kind of in a Ping-Pong match between financial inclusion and avoiding regulatory scrutiny and we are the ball," said Pamela Dearden, managing director for financial crimes enforcement at JP Morgan Chase, at an American Bankers Association anti-money laundering conference here last week.

Regulators deny they are sending contradictory messages. Jennifer Shasky Calvery, the director of the U.S. Treasury's Financial Crimes Enforcement Network, told bankers at the conference that she expects banks to take a risk-based approach in assessing their customer relationships rather than wholesale exiting businesses lines — a phenomenon known as "de-risking."

Yet as banks are faced with increasing compliance demands — and the potential for a large fine by regulators should they make a mistake — many say it's easier to stay away from some individual business lines.

"It is a risky world for us out there in terms of enforcement actions and other actions," said Julie Copeland, general counsel for JPMorgan Chase. "I think if there is a tipping point — [banks] are probably going to tip to de-risk… At this point, I don't think financial institutions can take their own risk of not making that determination to de-risk."

Amy Rudnick, a partner at Gibson, Dunn & Crutcher, agreed.

"What is really hard is the government wants you to bank these payday lenders but the requirements, the monitoring, is a real challenge," she said on a panel discussion during the conference. "And there is a concern by the banks that they are not going to get it right."

James Richards, an executive vice president and a top Bank Secrecy Act officer at Wells Fargo, said many banks, including his own, have decided not to bank businesses that deal with marijuana or virtual currency because it is too difficult to assess their risk. He said Wells isn't severing ties with such firms — it just isn't banking them in the first place.

"We have been doing it a long-time; we have been pre-risking a lot, just not getting into certain businesses," he said.

Part of the problem is that banking certain businesses that may be high risk comes with a host of compliance costs. Banks have to make sure they have adequate personnel and systems in place to onboard potentially risky clients.

"When you are risk-based, you are going to make a decision based on how much risk you are willing to accept versus how much money are you going to spend to control [the risk]," Dearden said.

As many big banks have exited certain businesses, some smaller institutions have taken up the slack. Still, community bank officials also appear wary of taking on added risk for fear of added compliance costs.

"I think the cost-benefit analysis is something that you really, as a small bank need to think about," said Anna Rentschler, vice president and Bank Secrecy Act officer at Jefferson City, Missouri-based Central Bancompany. "You need to take a look at it and decide, 'is this profitable?'"

Brian Wimpling, a senior vice president at Tallahassee, Florida-based Capital City Bank said he takes a more conservative approach in deciding what kind of businesses they can safely bank. He added he would rather have the larger institutions take the "lumps" and develop a track record before taking on a high risk customer like a marijuana business.

Teresa Pesce, a principal at KPMG, said that the costs go beyond the expenses of bolstering a compliance program.

"It is not just the financial calculus, because costs are reputation risk, costs are human drain, costs are not just dollars," she said.

Another strategy is pricing for the anti-money laundering risk. Wells' Richards said while banks are experts at pricing for credit risk, they often don't do as good of a job pricing for AML risk. He said Wells has had success banking money services businesses — considered high risk and avoided by many banks — because they price for it.

But Richards said he worries about the systemic effects of derisking. As banks become more cautious about who they can safely bank, bad actors will migrate to institutions that are not as well equipped to detect them.

"The ironic result of de-risking is re-risking," Richards said. "You are just spreading it…you are sending them to banks that probably can't handle it."

Similarly, JPMChase's Copeland warned of the "collateral affects" of de-risking. She said as banks decide that the regulatory headache of banking certain business lines is not worth it, the illegal funds they are trying to prevent from entering the financial industry will do so in a less transparent way.

"That is going to be a challenge for us, but I also think it is going to be a challenge for the government to figure out where that money is coming back into the system," Copeland said. "Those are some of the issues we are talking, in terms of our own de-risking."

The issue of de-risking is hardly new. A similar situation arose a decade ago when banks began severing relationships with MSBs in the wake of new anti-money laundering guidelines. Fincen issued a statement in 2005 that emphasized that money services businesses "provide valuable financial services, especially to individuals who may not have ready access to the formal banking sector. It added in a follow-up advisory that "It is essential that banking organizations neither define nor treat all money services businesses as posing the same level of risk."

Fincen made essentially the same statement last week, a point that Shasky Calvery underscored in remarks to reporters at the conference.

"There is actually more that is probably similar than different in many respects," Shasky Calvery said. "We felt it was important and quite frankly, industry told us they thought it would be important for us to come out again, and make this statement. It is an issue that has now been cyclical on two occasions. It was an issue in 2005 and it has become an issue again recently."

She added that "we need to continue to work together... to talk through these issues and figure out how we can focus on actual illicit risk and not just regulatory risk."

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