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The EU stalwart problem of de-risking keeps on raging as new refugees stream in from bordering Ukraine and national regulators press the need for better collaboration with the private sector.
De-risking has become one of the EU’s thornier issues to deal with.
Often, it leaves EU citizens financially excluded but a relaxation of rules could prompt money laundering scandals to surface, which is something both the EU’s regulators and financial institutions will want to avoid.
It is causing issues throughout the EU, said Amandine Scherrer, AML policy expert at the European Banking Authority (EBA), during a webinar streamed on Friday (March 11) by the institution.
“Banks who operate as respondent banks indicated to us that they have seen their correspondent banking relationship terminated because of money laundering and terrorist financing concerns,” she said.
Payment institutions have also faced setbacks due to de-risking activities: “We have also heard from payment institutions who told us that they thought that they were disproportionately affected by de-risking.”
“Many actually suggested that AML concerns were used by banks as a pretence to reduce competition in the market,” Scherrer continued, pointing out that the issue presents a wide lens of situations, claims and experiences to deal with.
The EBA’s webinar also touched on how national competent authorities are dealing with the issue, focusing on Malta, which has recently been greylisted by the Financial Action Task Force (FATF), and Lithuania, which has become a hub for electronic money institutions and payments institutions in recent years.
Malta is a small jurisdiction and we are mainly facing two types of de-risking, said Kenneth Farrugia, director at Malta’s financial intelligence unit. “Our local banking institutions are finding difficulties in keeping and maintaining correspondent banking relationships, and we’re also experiencing de-risking by local institutions,” he pointed out.
In 2020, for example, seven banks terminated more than 30,000 relationships in Malta, he said. “We have a company register of 50,000 companies, half of them are owned by internationals and, as well as that, half of the companies registered here in Malta do not possess a bank account here.”
Only two banks are providing correspondent banking services, he said, while several banks in Malta have lost some of their correspondent banking services.
He pointed out that improvements in Malta’s anti-money laundering (AML) regime mean that local institutions are incentivised to “take a shortcut” in implementing a risk-based approach. This can mean that they take the decision to de-risk certain types of entities or individuals, such as politically exposed persons and non-profit organisations.
De-risking is an issue that the Bank of Lithuania is taking steps to tackle, said Dovilė Arlauskaitė, head of payment market supervision at the central bank.
“While supervising EMIs and PIs, a few years ago, what we saw was that the number of companies who are experiencing difficulties in opening a bank account was growing,” she pointed out.
This was not related to just one company but more and more companies, she said. “We decided to start using the possibilities and tools as stipulated in PSD2, especially the opportunity to monitor and collect the data in relation to declined bank accounts.”
Arlauskaitė said that to tackle the issue, the Bank of Lithuania set about establishing its position that PIs and EMIs have the right to a bank account, while also developing educational resources for banks that the institution supervises, pointing to the differences between different types of accounts.
“After that, we collected the data and this led us to choose and decide how to respond to the certain types of rejection notification,” she pointed out. “We saw that the majority of notifications related to risk appetite of the credit institution. The main reason reported by credit institutions is that they reject because of the PI or EMI doesn’t comply with the credit institution risk appetite.”
The importance of collaborative work was advocated by both Arlauskaitė and Ferrugia.
Ferrugia, for example, underlined the importance of public-private partnership initiatives, sharing experiences in setting up of AML/CTF clinics for banks’ money laundering reporting officers (MLROs).
Here, the MLROs are able to present case studies of scenarios they have encountered on the regulator’s training, and outreach teams can provide them with insights of what would have been expected from their end in terms of undertaking AML/CTF controls.
Are Ukrainian refugees at risk of financial exclusion?
The issue of de-risking has become even more topical, considering the Russia-Ukraine conflict, whereby national competent authorities and private institutions are grappling with not only implementing a wide-ranging sanctions regime but also aiding new refugees in accessing financial services.
More than 2m people have now fled Ukraine because of the Russian invasion, according to the United Nations (UN), and the EU has largely opened its borders for people to temporarily settle.
In the specific context of Ukraine, the EBA confirmed that the temporary protections that have been put in place to help asylum seekers coming from Ukraine do offer the right of residence, and therefore access to financial services.
“This is the first time that such a temporary order has applied, and while this order does not specifically mention access to financial services, it does give the clear legal residency status to these refugees and in that instance, the Payment Account Directive fully applies,” she said.
This matches with a supervisory statement made by Germany’s banking watchdog, BaFin, which said on Friday that, in support of the current humanitarian efforts to accept refugees from the Ukrainian war zone, credit institutions subject to its supervision will not face any legal consequences under supervisory law when a valid Ukrainian identity card is used to validate the data collected under AML laws when a basic payment account is opened.
“In such times and cases as what we have today, it really shows why compliance is important, what it’s about,” said Arlauskaitė.
After the conflict began, the Bank of Lithuania contacted the biggest companies it supervises and is having daily communication with them, she said. “What we know from the companies so far is that there are no significant changes or obstacles in the provision of payment services and no difficulties known to us from correspondent banking, for example.”
The thing that needs to be tackled, however, is sanctions and compliance with the sanctions, she added. “We are providing guidance and information for companies on how to implement the sanctions.”
Can the EBA get a grip on de-risking?
Earlier this year, the EBA published a report that sets out the banking watchdog’s findings on the scale, drivers and impact of de-risking in the EU.
Meanwhile, it also issued recommendations to competent authorities and the European Commission on the basis of these findings.
In particular, the EBA concluded that competent authorities should engage more actively with institutions and with users of financial services that are particularly affected by de-risking, raising awareness of their respective rights and responsibilities.
The Paris-based institution also advised the European Commission to clarify the interaction between AML/CTF requirements and the right to access financial services in several pieces of EU legislation, including the upcoming PSD2 review.
