“De-risking” – or the action of banks dropping accounts from “money services business” (MSBs) and other funds-transfer or remittances groups – is blocking or eliminating financial services to “entire classes of legally operating businesses,” a house subcommittee was told Thursday.
The House financial institutions subcommittee heard testimony on “de-risking” from four witnesses, representing state financial regulatory agencies and payments systems groups, including remittance organizations. Brian Schneider, secretary of the Illinois Department of Financial & Professional Regulation, told the committee that banks are “indiscriminately terminating the accounts of MSBs or refusing to open accounts for any MSBs.”
“De-risking is the result of concerns about regulatory scrutiny, the perceived risks presented by MSB accounts, and/or the costs and burdens associated with maintaining such accounts,” Schneider said. “Such wholesale rejections of MSBs run counter to our expectation as bank regulators that banks can and should assess the risks of customers on a case-by-case basis.”
The Illinois bank regulator (testifying on behalf of the Conference of State Bank Supervisors (CSBS), a professional association of state regulators) said states are concerned that “indiscriminate de-risking” resulting in the elimination of MSB bank accounts may unintentionally increase BSA/AML risks. “Banks and customers should know and understand the MSBs with which they transact, including the supervisory structures designed to authorize and regulate the industry and make decisions based on the individual risk profile of each MSB,” he said.
Jason Oxman, CEO of the Electronic Transactions Association (ETA), pointed a finger at the (now-ended) “Operation Choke Point” – the federal law enforcement program meant to block access of “fraudsters” to the financial system – as responsible for promoting “de-risking.”
“In particular, the blunt force of Operation Choke Point discouraged banks and other financial service providers from forming relationships with merchants or other businesses deemed high-risk, leading to the ‘de-risking’ of entire industries. De-risking can undermine financial inclusion, financial transparency, and financial activity,” Oxman testified.
Timothy W. Baxter, president of SwypCo, LLC, for The National ATM Council, Inc., asserted that “de-risking” has seeped into the automated teller machine market as well. “Unfortunately for the independent ATM industry, it has become all too clear, especially over about the past 18 to 24 months, that a growing number of the banks that historically have served our industry by holding the deposit accounts that provide ATM operators access to the national payments system, through which virtually all ATM transactions must be conducted, have sought to ‘de-risk’ their institutions by ordering closure of the deposit accounts of any customer engaged in the ATM industry, and refusing to open any new accounts for any person or firm in the industry,” he said.
Remittances (the practice of sending money from one person to another, typically internationally) has also seen the impact of “de-risking,” said Manuel Orozco, director, migration, remittances and development, Inter-American Dialogue (a group that addresses issues throughout Latin America and the Caribbean).
“As banking institutions, and global banks in particular, increasingly handle money indirectly through non-banking financial institutions or the corresponding banking entities servicing these NBFIs (non-bank financial institutions), many banks deemed and perceived the handling of third party funds from these institutions a financial risk. The reasons given have not been entirely clear,” he said.