Heat versus Light: Fact-Checking the Debate over De-Risking
In this article, we examine the evidence for claims about the connection between bank de-risking and anti–money laundering (AML) regulation. Specifically, we examine evidence for the claim that the cost of increased AML compliance and increasing bank fines have led to banks exiting entire sectors or geographical regions and that this de-risking is deeply damaging to economies. We draw on multiple sources of evidence, including financial flow data, discourse and social media analysis, an evidentiary history, elite interviews, and participant observation. In the end, we find that substantial evidence contradicts this simple explanation of de-risking. Current efforts to review and reform the AML regime are overdue, and we need a sustainable answer to the issue of financial exclusion. That said, the evidence we present here suggests that efforts to curb de-risking should not focus primarily on AML, nor should AML reform focus primarily on de-risking.
- Beginning in the mid-2010s, banking experts, nonprofit organizations, and banking policy officials around the world raised the policy profile of "de-risking," which occurs when a financial institution avoids risk by not providing services to entire categories of customers rather than by managing that risk.
- Observers made three key claims: that de-risking was happening, that it would prove costly to the targeted jurisdictions and sectors, and that it was being driven by overzealous anti–money laundering and counterterrorism financing (AML/CFT) regulation. The critique inspired recent efforts to review and reform the AML regime in both the United States and Europe.
- Drawing on social media analyses, elite interviews, participant observation, and financial flow data, we find evidence that de-risking is happening. However, we also find considerable evidence that contradicts the common, simple story that locates the drivers of de-risking in the AML regime. Efforts to curb de-risking should not focus primarily on AML, nor should AML reform focus primarily on de-risking.
Center Affiliation: The Americas Center
JEL classification: O17, O19
Key words: anti-money laundering, AML, counterterrorism financing, CFT, de-risking, Financial Action Task Force, FATF
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