De-risking in the remittance marketplace: issues and alternatives

Speakers

Dianne Nguyen, Director, Australian Remittance and Currency Providers Association

Robert Bell, Chairman, KlickEx

Ceu Pereira, Senior Financial Sector Specialist, World Bank Group

George Inocencio, First Vice President and Head of Remittance Marketing Department, Development Bank of the Philippines


Moderator:

Louis de Koker, Professor of Law, La Trobe Law School, Australia
De-risking is a practice by which financial institutions terminate or restrict business relationships with clients in order to avoid risk, rather than to manage it. It is particularly common with accounts that banks consider “high risk,” which are typically ones that are deemed as low profit, might carry reputational concerns, or might face increased AML/CFT scrutiny. Tellingly, a 2014 survey by the World Bank Group showed that actual AML/CFT sanctions and violations were not among the primary reasons that accounts were closed. Unfortunately, de-risking policies have been increasing; and they are locking out “good” players and thus contributing to financial exclusion.

Remittance services in particular have been negatively impacted by de-risking policies. RSPs have had to resort to unconventional methods to carry on business—sometimes moving large amounts of currency in cash. As for migrants, they are pushed to find alternative remittance services—sometimes finding them outside the formal economic system. So while de-risking tends to have a negative impact on remittance providers and users, there is little evidence that it actually reduces risk.


Highlights

Although de-risking is a serious threat to the remittance market, there are steps that the public and private sector can take to limit its negative consequences.
First, better communication between financial institutions (FIs) and non-bank RSPs is imperative in particular to address the FI’s concerns before closing accounts. At a minimum, the institution should be able to give thorough justification for why an account was closed or denied.

Second, the public sector needs to better understand the risks in remittance market in order to foster better regulations. By collecting and analyzing data on transfers, the true threat posed by remittances could be better understood. Alongside these efforts, licensing of FSPs should be streamlined, while making oversight a bigger priority.
Third, encourage the adoption of technological solutions. Digital IDs, distributed technologies, bitcoin and other cryptocurrencies, and blockchain services (a more transparent method of moving monies electronically that is not reliant on any single entity) – will likely be key to addressing the issue. In order to facilitate technological advancement, the public sector should support FinTech companies through more enabling regulatory environment.

Ultimately, a cultural shift will also be necessary. Access to banking services must be seen as a human right, and finding a way to differentiate between benign remittances and illicit channeling of monies is the next step.


Conclusions

Mitigating de-risking practices will involve:

  • Promoting dialogue between respondents and correspondents;
  • Modifying AML/CFT measures so they are scaled to actual risk; and determining actual risk based on transparent national assessments;
  • Streamlining the certification process for MTOs while also improving oversight; and
  • Leveraging fintech to improve identification methods (e-KYC and electronic identification) and bypass correspondent banking (through blockchain and distributed ledger technologies).

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