HOPEFUL NEWS FROM THE DE-RISKING FRONT

The good news is that de-risking and other impacts of greater compliance pressures are perceived as manageable by banks across the Arab world. A recently released joint study by the Union of Arab Banks and the International Monetary Fund shows that the region’s bankers noted increased costs related to correspondent banking due to stricter AML/CFT enforcement. However, “wholesale de-risking by global banks does not appear to have taken place so far,” the report said. On the other hand, regional banks did not indicate that they had taken several measures to improve their immunity to ML/FT risks.

The study was conducted in spring 2015 via a survey sent to 471 banks in 20 MENA countries. The response rate of about 25 percent was not very high and further research is warranted according to the study’s authors, but the exercise provided useful indications on the business impacts of AML/CFT measures, Foreign Account Tax Compliance Act (FATCA) and Basel 3.

The highest impact was perceived in the area of correspondent banking where 40 percent of responding banks indicated that these relationships were becoming “more demanding, more time-consuming, more complex, and expensive to maintain.” Impacts on remittance flows were seen as minor, and so were business impediments related to FATCA and Basel 3.

Impacts were more pronounced for banks in countries classified by the Financial Action Task Force (FATF) as having strategic deficiencies in AML/ CFT regimes that are however in the process of being addressed under “highlevel political commitment”. In the four MENA countries in this category – Iraq, Sudan, Syria and Yemen – banks’ responses indicated higher negative impacts on business due to the introduction of FATCA and significantly higher impediments of remittances but lower cost impacts due to the stricter AML/CFT regimes.

When compared with banks in the non FATF designated countries, banks in the four designated countries showed significantly less eagerness to take measures that would reduce ML/FT risks or to enhance their FATCA compliance. The study pointed to a possible reason for this underwhelming implementation of new compliance measures – a paltry 3 percent of banks in sanctioned countries enhanced their customer due diligence to lower ML/FT risks versus 33 percent in the other countries – in the fact that their nation’s inclusion on the sanction list nullified any individual efforts for achieving greater compliance. Over one third of the banks that responded to the survey – 41 out of 117 – were based in sanctioned countries.

Also a counter-intuitive result of the study was the situation of regional de-risking. Whilst the study did not directly identify the countries whose banks undertook regional de-risking, it said that about 10 percent of the survey respondents had closed some correspondent banking relationships with banks in sanctioned countries and/or weak AML/CFT policies – meaning that “de-risking of regional correspondent banking relations by MENA banks”, as the study termed it, is a subject which warrants attention. of doing business with individuals and institutions with the cost of compliance attached to having those relationships. This positively implies that decisions on correspondent banking are non-ideological for the vast majority of commercial banks and financial institutions, supporting the assumption that current occurrences of de-risking are a temporary phenomena and will not impede global financial structures in the longer term.

However, Fattouh is concerned that the region’s bankers could lose something much more precious than correspondent banking relations or even licenses: their risk cultures. “My impression is that law enforcement is changing the hearts and minds of bankers, which is very dangerous,” he says. “Banks are by themselves conservative. When they feel the pressure of law enforcement upon them, it changes the spirit and this is my worry, as it could impact the role of banking negatively.”

Practical tools for making the burdens of AML-CFT compliance less costly for Arab banks could include an authoritative regional entity empowered to carry out compliance checking as intermediary for all banks in the region, Fattouh suggests, noting that such an initiative is not currently feasible for the UAB and could be initiated