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Banks ‘de-risking’: a threat to national security?

Posted By on June 23, 2017 @ 12:30

Image courtesy of Flickr user Global Panorama.

De-risking practices initiated by Australia’s financial institutions are inadvertently threatening our national security because they perpetuate high risk unregulated banking channels which allow terrorist groups to move illicit funds without detection. This contemporary phenomenon, also referred to as ‘de-banking’, has been defined [1] by the Financial Action Task Force (FATF) as being:

‘The phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach.’

The increased cost of Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF) compliance coupled with the intensified regulatory scrutiny and strong enforcement actions, has fostered a risk averse mentality and spawned a trend of wholesale de-risking [2] by financial institutions in Australia and overseas.

Confirming this trend through its 2015 global surveys [3], the World Bank highlighted the potential risk of reduced transparency in the global financial system and the consequent forcing of transactions through unregulated channels [4]. The FATF had raised the same concern in 2014 and used the term ‘shadow banking’ [5] to specify that de-risking would undoubtedly drive the development of alternative financial markets and unregulated payment mechanisms. These channels are utilised by terrorist groups reliant on the clandestine movement of funds to facilitate their operations and to establish and sustain groups [6] and networks within Australia and overseas.

Regulatory detection is the most obvious risk [7] faced by terrorists in transferring funds. Indeed, a critical aspect of the effectiveness of these groups is their ability to move funds across national and international borders without detection. It stands to reason that they’ll move funds through the unregulated channels of underground banking, sometimes referred to [8]  as alternative remittance systems, informal funds transfer systems and informal value transfer systems.

As an example, a popular informal alternative remittance system alleged to have been used to finance terrorist activities [9]  is the hawala [10] system. Often referred to as underground banking or hundi, FATF says it plays a role in money laundering and terrorist financing [11]. Along with money remittance businesses, and authorised deposit taking institutions, hawala has been acknowledged by FATF as being a type of ‘financial institution’ in Australia which provides the transfer of money or value in both the formal and informal sectors [12] . A significant attribute of hawala is that it lacks transparency and although most hawala transactions are nonthreatening, it’s those illegal underground banking transactions perpetrated by organised criminal and terrorist groups that pose a threat to national and regional security.

What’s Australia done to address this threat and has it been alleviated? In compliance with the FATF Recommendations [13] , Australia introduced legislation in an attempt to curb underground banking. The alternative remittance industry in Australia is regulated by AUSTRAC [14] under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Provisions include the mandatory requirement of alternative remittance providers to be enrolled as reporting entities and to register with AUSTRAC before providing their services.

Remittance network providers are also subject to the same reporting obligations and AML/CTF program requirements as banks and non-bank financial institutions. This heightened regulation fosters transaction based transparency and improves the detection efforts of law enforcement in identifying suspicious transactions and activity.

Although a positive step in the right direction, AML/CTF efforts have been hamstrung by de-risking strategies adopted by Australian financial institutions. These strategies are forcing transactions through unregulated underground banking channels hampering detection efforts and exacerbating rather than alleviating the threat to national security. By early 2015 the four major banks in Australia, had essentially ‘de-risked’ or ‘de-banked’ the remittance sector, with Westpac being the last to impose a wholesale blanket ban [15] for all remittance company accounts.

Australian Remittance Association representatives in 2014 provided a submission [16]  to the Parliamentary Joint Standing Committee on Law Enforcement, which described the extensive regulatory oversight of the remittance industry by AUSTRAC. The submission stated that de-banking was a barrier to the industry and enforcement based efforts because it would lead to an increase in remittance transactions occurring outside a formalised regulatory framework.

These concerns were justifiably re-iterated at a public hearing [17] with representatives specifying that the Australian Federal Police (AFP) and the Australian Crime Commission (ACC) had concerns about the potential for an increase in underground unregulated remittance transactions.  This view was also expressed in a Reuters article [18] which quoted an AFP employee, who requested anonymity, stating that ‘more hawala (underground operators) are thriving now’.

Despite all the efforts to comply with FATF recommendations to alleviate the national and regional security threats associated with underground banking channels, we seem to have taken a step backwards. The irony lies in the fact that the de-risking actions by Australia’s banks are largely attributed to the regulatory burden of AML/CTF compliance [19].



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URL to article: https://www.aspistrategist.org.au/banks-de-risking-threat-national-security/

URLs in this post:

[1] defined: http://www.fatf-gafi.org/publications/fatfgeneral/documents/rba-and-de-risking.html

[2] trend of wholesale de-risking: https://www.swiftinstitute.org/2016/01/is-a-risk-based-approach-to-aml-paving-the-way-for-wholesale-de-risking/

[3] global surveys : http://www.worldbank.org/en/topic/financialmarketintegrity/publication/world-bank-group-surveys-probe-derisking-practices

[4] forcing of transactions through unregulated channels: http://www.worldbank.org/en/news/press-release/2015/11/20/world-bank-surveys-confirm-concerns-over-reduced-access-to-banking-services

[5] ‘shadow banking’: http://www.fatf-gafi.org/publications/fatfgeneral/documents/danger-illicit-markets-financial-exclusion.html

[6] establish and sustain groups: http://www.austrac.gov.au/publications/corporate-publications-and-reports/terrorism-financing-australia-2014#features

[7] obvious risk: http://www.terrorismanalysts.com/pt/index.php/pot/article/view/279/html

[8] referred to: http://aic.gov.au/media_library/publications/tandi_pdf/tandi300.pdf

[9] alleged to have been used to finance terrorist activities: http://globalsecuritystudies.com/Faith%20Hawala%20FINAL.pdf

[10] hawala: https://www.gdrc.org/icm/hawala.html

[11] role in money laundering and terrorist financing: http://www.fatf-gafi.org/media/fatf/documents/reports/Role-of-hawala-and-similar-in-ml-tf.pdf

[12] transfer of money or value in both the formal and informal sectors: http://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20Australia%20full.pdf

[13] FATF Recommendations: http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf

[14] regulated by AUSTRAC: http://www.austrac.gov.au/businesses/enrolment-and-remitter-registration/enrolment-and-registration

[15] wholesale blanket ban: http://www.smh.com.au/business/banking-and-finance/after-closing-accounts-westpac-targeting-remittance-business-again-20160523-gp1jof.html

[16] submission: http://www.aph.gov.au/DocumentStore.ashx?id=5e57c9ec-e834-4057-b92d-b8f495b4e738&subId=253519

[17] public hearing: http://parlinfo.aph.gov.au/parlInfo/download/committees/commjnt/5d40dc1b-c28b-49fa-8ed2-0244072200c6/toc_pdf/Parliamentary%20Joint%20Committee%20on%20Law%20Enforcement_2014_09_09_2843_Official.pdf;fileType=application%2Fpdf#search=%22committees/commjnt/5d40dc1b-c28b-49fa-8ed2-0244072200c6/0000%22

[18] Reuters article: http://www.reuters.com/article/australia-remittances-banks-idUSL3N1632JD

[19] regulatory burden of AML/CTF compliance: http://www.antimoneylaunderinglaw.com/2014/11/another-australian-bank-de-risks-and-exits-remittance-business-over-terrorist-financing-regulatory-risks-cites-financial-inclusion-as-repercussions.html

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