World Finance: Financial inclusion is at the top of the agenda for emerging economies;
but banks in the west are actively disconnecting from some of these regions, putting further
development at risk.
Joining me is Tom Golding from financial crime compliance experts Accuity.
This de-risking is an unintended consequence of some very important regulations around
money laundering and terrorism financing; what's gone wrong?
Tom Golding: Well I think it would be unfair to say de-risking decisions were based solely
on those regulations you mentioned.
I think there are many factors that come into play – why banks would make certain decisions
to remove either products or whole services from regions.
But the top two are going to be around commercial viability – are they doing good business
within that region?
And the second side really is their risk appetite, of conducting that type of business within
that region.
But if we look at the actual commercial viability – clearly the cost of complying with international
regulations does have an impact on that.
Certain jurisdictions, certain products, the actual obligations are heavier, and therefore
the cost of actually complying is going to be much larger, reducing that profitability side.
World Finance: Give me a sense of those costs; what is the weight of responsibility on compliance
officers' shoulders at the moment?
Tom Golding: Well compliance officers sit in a very challenging position.
They've got to do two things: they've got to protect the reputation of their bank, but
they've also got to make sure that good business is still being done.
Regulation itself is changing, and there's an extra level of detail they're going to
have to adhere to, around things like know your customer.
So, if I'm looking at trade finance for example, I might be underwriting a financial transaction
that's looking at export of vehicles into a certain region.
I've got to understand all of the regulatory obligations that adhere to that type of activity.
Such as dual-use goods, where goods are used either for civilian or military purposes.
Or are they open to export controls.
Are any of the parties behind that sanctioned or heightened risk.
Do I know the counter-parties behind that trade?
You know – that's just one example.
If I'm doing a high volume of that, I've got to be able to understand
all of that information to be able to feel confident that is a trade I'm underwriting
that actually represents good business, and doesn't harm the reputation of the bank.
World Finance: This de-risking; what actually is the effect on the ground for businesses
and for people?
Tom Golding: So, if you're a regional bank within a country that's wanting to be able
to offer to its clients things such as microfinancing or products that are all about financial inclusion,
then that bank also has to have access to the international financial banking systems.
You know, we need that fast efficient financial services to conduct that activity.
And if we pull back from some of those, then it's going to be harder
for people to get access to those products, and therefore, as a regional bank,
they've got to be able to demonstrate
that they've got those effective controls in place.
That actually the due diligence they're conducting on their own clients
is a standard that's recognised by other banks in that chain.
Because if it's not, people won't have that trust and confidence, and therefore they will
start to pull back and say, my risk is too high, I don't think this is business I want
to do, and therefore I'll look somewhere else.
World Finance: What's the solution? How can regional banks demonstrate
the high levels of compliance necessary?
Tom Golding: Many different ways.
One very big area which is harder to prove is around the culture:
have you got the right compliance culture in place?
So that's looking at the maturity of your compliance function, the size of your function.
Looking at your policies, what regulations are you following,
how have you updated those?
I'm also going to be looking at the systems and controls you actually have in place.
It's about access to good, automated systems that are looking at things like screening
of every transaction, looking at heightened risk individuals.
Looking for risk, so you're not passing on that risk.
If you've got a very manual operation, not only are you going to introduce human
error, but also there are individuals that might be compromising your operation.
So again, as a bank looking to do a correspondent relationship with you, I'm going to make a
risk assessment on all of those factors to say, actually this bank has got those in place,
got a good culture.
I think the risk is lower from that.
We've worked with clients in both Angola and Myanmar who are trying to say,
'We understand!'
A bank has to get that confidence, and therefore we have got to demonstrate that through things
like the systems, our approach, our policies in place.
And really effective regime that verifies and validates that what I'm passing through to
the other banks is something they can use, and they can do their own due diligence on.
We've moved past the kind of, tick-box compliance, and that area of culture and understanding.
That kind of spirit of what we're trying to achieve is very important.
World Finance: Tom, thank you. Tom Golding: Thanks very much for having me.
Thanks for watching.
You can find out more about challenges to financial inclusion at www.worldfinance.com
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