Financial crime crackdown curbs emerging markets
IFC says cut in bank ties has depressed legitimate growth
Global regulators’ assault on terrorists, tax dodgers and money launderers is sapping vitality from a host of emerging market economies, according to the private-sector arm of the World Bank, as big banks cut ties that could expose them to sanctions. Over the past few years banks such as HSBC, BNP Paribas and JPMorgan Chase have paid billions of dollars of fines for failing to keep tabs on criminal activity, while spending heavily to increase their routine flagging of suspicious transactions.
Global regulators’ assault on terrorists, tax dodgers and money launderers is sapping vitality from a host of emerging market economies, according to the private-sector arm of the World Bank, as big banks cut ties that could expose them to sanctions.
Over the past few years banks such as HSBC, BNP Paribas and JPMorgan Chase have paid billions of dollars of fines for failing to keep tabs on criminal activity, while spending heavily to increase their routine flagging of suspicious transactions. As a result, many of them have trimmed their networks of relationships with banks in other countries, fearing that such connections may be more trouble than they are worth.
But according to the International Finance Corporation, these cuts to so-called correspondent banking relationships — bilateral agreements to handle basic services such as remittances or letters of credit — are having the effect of shutting out households and small businesses from the global financial system.
In a new survey of more than 300 of its banking clients around the world, the IFC found that more than one in four reported a decline in their CBRs. In seven countries — including Kenya, Lebanon, Pakistan, Paraguay and Vietnam — the banks said that a lack of CBRs, or tightened terms on the ties that remain, were their sole obstacle to growth.
Marcos Brujis, Washington-based global industry director of the financial institutions group at the IFC, noted that the cutting had spread well beyond regions such as the Pacific Islands and some Caribbean countries, where declines in CBRs have been widely reported. In sub-Saharan Africa, in particular, he said, the declines have been particularly acute, forcing some lenders into unregulated networks.
“As a result of all these additional costs, emerging-market banks have less capacity to serve their countries, which affects jobs, economic growth, decisions to migrate and so on,” he said. “The effects of ‘de-risking’ are very subtle, complex and pervasive.”
The survey adds to a growing body of work on the unintended consequences of efforts to enlist banks in the global fight against crime. The International Monetary Fund flagged concerns earlier this year, warning that a steady decline in CBRs has exacerbated fragilities in the financial system by concentrating flows of money across borders. The Financial Stability Board took a similar line in July, arguing that falls in CBRs had slowed global trade by lengthening chains of payments, while increasing dependence on smaller groups of lenders.
Lobbyists for the big banks, meanwhile, have long complained of unreasonable expectations heaped upon them. A report issued in February by The Clearing House, a powerful Washington-based lobby group, claimed that big financial firms were spending at least $8bn on anti-money laundering compliance each year — not much less than the $9.5bn budget of the FBI.
The Clearing House is at the forefront of a loose collection of bodies trying to create some kind of shared global depository of knowyour-customer information, which could lower compliance costs for banks all over the world.
Regulators including the Federal Reserve and the Office of the Comptroller of the Currency, and FinCEN, the US Treasury’s Financial Crimes Enforcement Network, have shown an interest in supporting such an initiative, according to people familiar with the situation.
The IFC is pushing in that direction too, says Susan Starnes, head of trade and commodity finance strategy. “None of us feels we can do this on our own. We’re trying to find a way where there is protection in numbers.”
Rodgin Cohen, senior chairman at Sullivan & Cromwell, the law firm, said the project “could be the ultimate win/win. Costs are cut but more importantly, the potential for catching bad actors is sharply increased.”
The Federal Reserve’s plans to shrink iits balance sheet are likely to impact upon emerging markets © FT montage; Bloomberg