WASHINGTON – Treasury Secretary Jacob Lew on Friday sought to reassure banks they would not be penalized for the unforeseeable consequences of their presence in certain foreign areas, a fear that has driven a trend called de-risking.
In a discussion with top foreign officials at the International Monetary Fund and World Bank annual meetings, Lew emphasized that de-risking itself could hurt anti-money-laundering and terrorism financing efforts by leaving certain regions disconnected from the financial system.
"Financial institutions around the world have to adhere to high standards to stop the flow of illicit funds. That means anti-money-laundering rules really matter," Lew said. "On the other hand, if the burden is so high … that people withdraw from the financial system or are excluded from it, it ultimately raises the risk of illicit transactions."
Treasury had made efforts to communicate with banks that they would not be punished by regulators simply for engaging in riskier parts of the world, Lew said. This included clarifying "areas of activity that banks are not prohibited from going into" and making clear "that you don't have a responsibility to know your client's client," if unforeseeable accidents involving illicit funds happen.
"We've tried to communicate in a much clearer way what is and is not required, what is and is not allowed," Lew said.
The Treasury chief said he hoped such measures would encourage banks to avoid de-risking, but acknowledged that the ultimate decision was up to them.
"We can't change the economic calculus on all levels," Lew said. "But what we can do is eliminate the excuse that a knowing, willful violation of the law will be treated the same way as an unavoidable, accidental error that's corrected."
Lew also said that fintech, properly regulated, could help bring more people into the financial system – and thus promote its safety.
"Brick-and-mortar banks are more expensive on a per-depositor, per-borrower basis than a lot of the modern technologies are," Lew said. "That still puts on us the burden of making sure that we protect people against fraud, that we have the ability to see what is going on – like we do with brick-and-mortar transactions."
Lew added, "We just have to make sure that we don't treat new technologies as if they are exempt from the rules that govern traditional business."
The Treasury's Office of the Comptroller of the Currency on Wednesday released a long-awaited guidance for banks encouraging them to cut off correspondent banking ties only once they had evaluated the risk of a partner institution through systematic evaluation procedures.
Efforts to curb the flow of illicit funds worldwide and to promote financial inclusion should not be antithetical, Lew said. "This is not a conflict of interest, it is a need to bring together two parallel interests."