WASHINGTON A statement by a foreign regulator that it might penalize banks that drop businesses due to heightened supervisory risk has spooked U.S. institutions who worry domestic agencies could follow suit.
The United Kingdom's Financial Conduct Authority said late last month that it will no longer recognize heightened regulatory risk as a legitimate reason to drop customer relationships. It also suggested that it may pursue banks that do drop business lines if it causes consumer protection issues or other problems.
"While the decision to accept or maintain a business relationship is ultimately a commercial one for the bank, we think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements," the FCA said in a statement. "As a result, we now consider during our AML work whether firms' derisking strategies give rise to consumer protection and/or competition issues."
Many in the industry saw the statement as a thinly veiled threat to banks that regulators may take a more iron-fisted approach to the problem.
"There has been an insinuation that the FCA may be compelled to enact competition law or proceed with regulation to compel banks to stop derisking, which I think is a new departure," said Chrisol Correia, a director at LexisNexis Risk Solutions.
Banks have been exiting customer relationships that are viewed as being more vulnerable to money laundering and terrorist financing in a process that's become known as derisking. Banks fear that in a time of heightened expectations and potential reputational damage, the costs of these relationships outweigh the benefits.
Regulators have been trying to stem the tide of derisking, however, emphasizing that they do not want banks to drop entire business lines or cut off whole countries, like Somalia, from remittance activity.
But the FCA statement is arguably the most aggressive statement yet by regulators.
"The first thing they did in this [statement], as a matter of bank regulatory policy, is say that the FCA is going to examine the basis on which a bank makes these decisions, and it cannot just be AML," said Edward Wilson, a partner at Venable LLP.
U.S. regulators and the Financial Action Task Force, an intergovernmental authority on money laundering and terrorist financing, have already said that banks should take a risk-based approach, and that they expect there to be a legitimate reason behind a bank's decision to end the customer relationship.
But the FCA appears to up the ante, saying regulatory criticism is not a good enough reason and implying banks could be penalized as a result.
"The FCA is saying that the failure to exercise what it considers to be appropriate due diligence resulting in classes of potential bank customers being turned away is a consumer protection issue, in much the same way the law has developed in the U.S. with regard to credit decisions," Wilson said.
Consumer protection is a term not often invoked in the anti-money laundering and Bank Secrecy Act space, although it has been on regulators' radar.
David Cohen, deputy director at the Central Intelligence Agency and former Under Secretary for Terrorism and Financial Intelligence, said in a November speech that "We are keenly engaged with this issue because we recognize that 'derisking' can undermine financial inclusion, financial transparency and financial activity, with associated political, regulatory, economic and social consequences."
But adding the potential for consumer protection penalties to the de-risking dilemma muddies up an already challenging situation.
"Consumer protection usually refers to how consumers are affirmatively treated or mistreated by a bank or some other kind of business; here they are not being treated at all," said Teresa Pesce, global leader of anti-money-laundering services at KPMG LLP.
"The U.S. regulators that have spoken to date really speak more about pushing higher risk customers to shadow banking," rather than consumer protection, Pesce added.
But the FCA is stepping into a new area, saying "you are harming the consumer somehow if you don't bank this type of particular client, if you don't bank this category of client."
There are no signs so far that U.S. regulators are taking the same view, but the FCA's actions speak to a growing desperation by policymakers to solve the derisking problem.
But a spokesperson for the British Bankers' Association essentially pointed the finger at U.S. regulators for causing the derisking problem in the first place.
"The industry keenly observes sanctions, anti-money laundering measures and moves to combat terrorism financing as falling foul of these rules risks balance sheet altering fines," the spokesperson said. "These penalties are often meted out by jurisdictions beyond the U.K. and Europe, including regulators in the U.S. In some cases adherence to these strict global rules has caused banks to exit long-standing relationships with their customers and retreat from markets where British businesses, charities and other institutions operate."
Asked if her agency was considering steps similar to the FCA's, Barbara Hagenbaugh, deputy to the chairman for communications at the Federal Deposit Insurance Corp., said, "The FDIC encourages supervised institutions to take a risk-based approach in assessing customer relationships, rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution's ability to manage the risk."
LexisNexis' Correia said the atmosphere at a recent Association of Certified Anti-Money Laundering Specialists conference he attended in Hong Kong was grim.
"The mood was have we reached the point now where regulators are going to tell us who we can and cannot do business with?" he said.
But some said there is still optimism that such a situation can be avoided.
"That other shoe hasn't dropped and I am hopeful the derisking issue will be resolved without such a heavy-handed approach," said Robert Axelrod, a director in Deloitte's anti-money laundering practice.
The Office of the Comptroller of the Currency and the Federal Reserve Board declined to comment for this story.