Thoughts on FinCEN Director’s speech on bank de-risking and the refusal of banking services to MSBs (and by implication, Bitcoin)

By Christine Duhaime | August 12th, 2014

De-risking that results in unbankable businesses 

By Christine Duhaime, B.A., J.D., Financial Crime and Certified Anti-Money Laundering Specialist

In a speech delivered to the anti-money laundering legal and law enforcement community, the Director of FinCEN, Jennifer Shasky Calvery, made some interesting and compelling comments that touch on the economic costs of anti-money laundering (“AML“) law, namely the costs of compliance. As a result of massive AML compliance fines in the US and EU, many global financial institutions have eliminated certain so-called high risk accounts such as money services businesses (“MSBs“) and those belonging to politically exposed persons in a banking practice called “de-risking”.

De-risking from a legal perspective involves advising banks and other financial institutions on minimizing legal risks associated with certain business lines, or in some cases, not adopting a certain business line of services because of heightened legal risks. That advice is normally subject to the caveat that financial institutions may incur legal risks by de-risking decisions if those decisions result in the deprivation of services to certain persons, groups or sectors.

De-risking from the banking perspective involves the decision to de-risk a product, service or business line or the institution itself.

In the past year, de-risking has resulted in the almost wholesale elimination of banking services for certain legitimate business sectors in Canada, Australia and the US that are engaged in providing MSB services, including some digital currency businesses like Bitcoin exchanges, that may be competently managed and legally compliant.

Besides the business problem with that approach from the MSB’s perspective, the denial of services to MSBs is not a desirable outcome from an anti-money laundering and financial crime perspective. That’s because the ultimate purposes of the Bank Secrecy Act and in Canada the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, is to create a reporting mechanism for suspicious transactions to government agencies to: (a) prevent significant financial crimes from continuing; (b) facilitate criminal prosecution; and (c) prevent terrorism before it commences. Those purposes cannot be accomplished when financial institutions de-risk to the point of eliminating an entire business sector, such as MSB services. It may sound counter-intuitive, but the AML/CTF regime could not function without the requisite reporting of suspicious activity transactions. If we created a massive shadow banking regime such as exists in China and Vietnam, we would be more at risk from terrorist financing and other threats to the financial system and, not to be diminished, our democratic way of life generally.

Ms. Shasky Calvery spoke about the issue of de-risking of MSBs and the consequent denial of banking services, which by implication includes Bitcoin exchanges, although she did not mention Bitcoin or digital currencies.

The whole of Ms. Shasky Calvery’s speech is excellent. Relevant excerpts are below:

“I would like to discuss some of the challenges we need to address together as we work to combat … threats. While we might not leave here today with all of the answers, sometimes the hardest part is just starting the dialogue.

We have been hearing about instances of “de-risking,” where money services businesses (MSBs) are losing access to banking services because of perceived risks with this category of customer and concerns about regulatory scrutiny…But just because a particular customer may be considered high risk does not mean that it is “unbankable” and it certainly does not make an entire category of customer unbankable.

It is not the intention of the AML regulations to shut legitimate business out of the financial system. I think we can all agree that it is not possible for financial institutions to eliminate all risk. Rather, the goal is to provide banking services to legitimate businesses by understanding the applicable risks and managing them appropriately.

MSBs play a vital role in our economy and provide valuable financial services, especially to individuals who may not have easy access to the formal banking sector… banking organizations may provide banking services to MSBs that operate lawfully. The guidance [2005 Federal Banking Agencies Joint Guidance] is intended to assist banks in the decision to open and maintain accounts for legitimate businesses by identifying the programs and procedures they should have in place to perform customer due diligence and monitoring of these customers for suspicious activity.

MSBs play an important role in implementing procedures to thwart serious illicit activity that, left unchecked, could jeopardize the U.S. financial system. MSBs also play an important role in providing crucial reporting used to combat a wide range of criminal and security threats.

While we are hearing reports of de-risking, we do not yet know how widespread it is, and we are still working to gauge the impact. FinCEN continues to meet informally with industry representatives and other experts to explore additional ways to gather feedback on the issue.

One idea that has been discussed is the possibility of MSBs, depository institutions, and their respective trade associations coming together and developing a set of industry best practices, which if adopted by an MSB, could provide a depository institution with more comfort in offering banking services.”

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