US-MENA Private Sector Dialogue (PSD)

Speech by David Lewis
FATF Executive Secretary

Washington, 16 October 2017

“Combating Terrorism and Enhancing Relations with Correspondent Banks”

 Good morning and salam

FATF and its current priorities

• The FATF was created in 1989, in order to deprive the cartels of the proceeds of drug trafficking. Our remit was then extended to counter terrorist financing and the financing of the proliferation of weapons of mass destruction. The core of FATF’s approach is simple: money drives crime and enables terrorism, FATF provides a forum for countries to understand the ML/TF threats and the risks; set firm and clear standards to combat these; assess and enforce implementation; and do all this at a global level so there are no weak links.
• Right from the start financial integrity and financial inclusion has been and remains at the heart of our mission at FATF. I wholly endorse the importance Juan placed on this in his remarks this morning. The financial system shines a light on and enables the prevention and detection of all illicit flows – whether we are talking about ml or tf, tax evasion, corruption and sanctions evasion by rogue regimes such as Iran and North Korea.
• Today the global network of FATF comprises 37 members, one of which is the Gulf Cooperation Council, the IMF, World Bank, United Nations and 9 regional bodies, including MENAFATF. As a result, today 203 jurisdictions have committed at the highest level to implement the FATF standards and to be assessed by their peers against these standards.
• We have regular exchanges and a constructive dialogue with the private sector, and the banking sector in particular. We are pleased that the Union of Arab Banks is closely involved in our Private Sector Consultative Forum.
• As a result of our work over 27 years, most countries now have the legal, regulatory and operational frameworks in place to be able to prevent and detect money laundering and terrorist financing. We are now seeing successful investigations and prosecutions every day in countries all around the world. Indeed much – though far from all - de-risking is a result of the AML/CFT regime working effectively. Regulators and law enforcement agencies have done their jobs – that wasn’t always the case. As a result they have found many global banks wanting, failing to apply proper checks. The banks are now well into the process of fixing this and as they do our hope and expectation is that their confidence in effectively managing risk will return and we will start to see the banking system re-connect with its respondents and customers.
• We are now focused on assessing how effectively countries are using these measures and it will come as no surprise that our top priority is counter terrorist financing.

FATF and decline in correspondent relationships due to de-risking

• The decline in correspondent banking relationships due to de-risking has been a major concern to the FATF for some time. We have been working hard to understand the nature of the problem, and to make sure that the over-zealous application of AML/CFT rules is not contributing to de-risking.
• The loss of correspondent banking services is bad news for all of us. It undermines financial system resilience; hinders competition; creates obstacles to trade; causes financial exclusion; and promotes underground financial channels which will be misused by criminals or terrorists.
• We have been particularly concerned at the possible loss of access to banking services for particular regions and types of customers who are often wrongly seen as uniformly high-risk - including charities and money remitters. To this end I strongly endorse the remarks of the US Assistant Secretary this morning.
• There is nothing in the FATF Standards which requires or encourages de-risking:

-   The FATF standards do not envisage financial institutions cutting-off entire classes of customer without taking into account, on a case-by-case basis, an individual customer’s level of risk or applicable risk mitigation measures. Such behaviour has the potential to force financial transactions underground which, in turn, introduces higher risk and less transparency into the global financial system.

-   Under the risk-based approach, financial institutions are expected to identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them. Financial institutions are required to terminate customer relationships, on a case-by-case basis, only where the money laundering and terrorist financing risks cannot be mitigated.

• But there are concerns that the FATF standards might be mis-applied, and this could be a driver of de-risking. There has been a lot of research into the causes and drivers of de-risking - by the FATF, the World Bank, the Centre for Payments and Markets Infrastructure, and others. 
• The picture that emerges from the research is complex:

-   Overall we are seeing a fall in the number of correspondent relationships, but at the same time an increase in the volume of correspondent banking business (i.e. consolidation in the correspondent banking market).

-   But the picture is different in each region – from the recent study, it seems that 39% of banks in the Arab region have been significantly affected. Overall, the Caribbean region has been impacted more than others.

-   The underlying reason why banks are exiting correspondent relationships is a combination of profitability, at times due to increased costs associated with capital requirements and compliance costs. The results of the survey conducted in the Arab region confirm many causes for the termination of correspondent banking relationships. Banks are looking to increase profitability, which has been hit since the financial crisis by the requirements to increase capital and reserves and the low-interest rate environment.

• One of the main strands of FATF’s work at the moment is to clarify the requirements of the FATF standards in this area, and clarify the expectations regulators have when applying them at national level. We believe that more precise guidance from regulators or increased compliance comfort could make banks re-evaluate their decision to exit relationships. The FATF is working hard to promote this :

-   In February last year, we published guidance on a risk based approach for money and value transfer services (MVTS). It is intended to assist, among other, the practitioners in the MTVS sector and in the banking sector that have or are considering MVTS providers as customers, to apply the risk-based approach associated to MVTS.

-   In October last year we published guidance on correspondent banking services, which looks at the risk-based approach in the context of correspondent banking, including the expectations concerning customer due diligence and processing of wire transfers. We have consulted with the private sector on this, including the banks from the Arab region - Egypt, Jordan, Oman and Saudi Arabia. In short, banks are not required to know their customer’s customer. There will however be occasions where correspondent banks need more information from their respondents on their customer base. Indeed the Wolfsburg Group has just published guidance building on our own to reinforce this and describe best practice in more detail. All this should help. As mentioned, addressing the risk stemming from remittances poses particular challenges, notably de-risking.

‒       As we’ve heard this morning, the remittances sector is vulnerable to potential misuse for terrorist financing and other criminal activities. We can only deal with this through building trust and collaboration, not by cutting off these vital actors. The dialogue with the remittance and the banking sectors in March 2017 together with the FSB, GPFI, and G20 highlighted that de-risking is continuing within the remittance sector, and could reduce the availability of affordable, safe, regulated channels for remittances.

‒       FATF is supporting further work on this issue by the FSB, through its Remittance Task Force to understand the extent of the problem and identify potential responses. Separately, the FATF will conduct further work to better understand how FATF guidance is being used in the national context by national supervisors and the private sector, and to identify ways to improve its traction. This initiative will be conducted with Basel Committee on Banking Supervision.

• Our engagement with forums like this is essential, to help us understand the dimensions of the challenge and to address them. We will continue to work with the private sector, and the Union of Arab Banks in particular, to make sure that we provide adequate support and clarification on the applicable standards.

Thank you again for this initiative and the opportunity to join you today.