Will blocking international money transfers really prevent organised crime?
Wednesday, August 14, 2013/
Recently a petition signed by 25,000 people was handed in to UK’s 10 Downing Street urging British bank Barclays to reconsider its decision to close the bank accounts of scores of money remitters.
A remitter that loses access to a bank account struggles to find a new banker. If it fails to secure a new bank account it is unable to continue its business legitimately.
Money remittance – money sent by the more than 200 million migrant workers internationally to family members in their countries of origin – is a huge and important industry. The World Bank estimate global remittance flows in 2012 at US$530 billion. These funds are vital to the recipients and recipient countries.
In the case of Somalia, remittance receipts may amount to a quarter of its GDP, providing a lifeline to more than 40% of its population.
Barclays’ action is not confined to small remitters. They are also closing the account of Dahabshiil, the largest Somali money transfer business. Dahabshiil is headquartered in Dubai and reportedly employs more than 2,000 people in 144 countries, with 130 branches in Somalia, a further 130 branches in the UK and 400 branches globally.
The closure of remitter accounts undermines important government policies. Internationally governments are committed to increasing access to formal financial services to combat poverty and increase social inclusion. Disruption of global remittance flows threatens international anti-poverty goals of governments. Account closures furthermore undermine crime-combating objectives by driving remittance flows underground, rendering them even more vulnerable to criminal abuse.
In an era of big government with silo-ed and conflicting policies it should however come as no surprise the Barclays decision is the result of government policy on financial regulation.
The step by Barclays should be viewed in context. Barclays’ actions elicited a public response as it was the last big UK bank that was not reluctant to deal with money remitters. The other large banks backed off earlier.
HSBC, for example, had a wholesale closure of their money service and remitter accounts in 2012. This trend is not confined to the UK either. US institutions started to close such accounts in the mid-2000s, mainly as a consequence of terrorist financing concerns. The same has been happening in Australia.
What is behind this trend? In essence, regulatory pressure on banks to manage their risks. In the past decade increasing regulatory and supervisory emphasis has been placed on banks to manage their risks, including the risks of being abused by clients for money laundering or terror financing purposes.
These expectations were formed by national regulators and driven by international standards set by the bodies such as the Basel Committee and the Financial Action Task Force (FATF), the intergovernmental global anti-money laundering and terrorist financing standard-setting body. After 2001, terror financing risk was a priority risk for banks. But they have struggled to understand how best to assess and effectively mitigate terror financing risks and best practice has not yet emerged.
At the same time governments have been quite vocal about the crime and terror financing risks posed by money remitters. The Australian Crime Commission’s reports on organised crime in Australia warn for instance that organised crime is abusing money remitters to launder money. AUSTRAC’s first enforcement action was taken against a small money remitter in 2009. US government agencies are also very vocal about the crime risks posed by money remitters.
Another important piece of the puzzle is the increasing penalties levied by regulators for money laundering and terror financing breaches. Barclays appear to have been spooked by the US$1.9 billion fine levied on HSBC by the US government in 2012 for failures in its money laundering and terrorism financing risk controls.
Unfortunately appropriate controls cost money. For banks it translates into a fairly simple commercial decision: If the risk they run and the measures they need to employ in relation to specific accounts are not justified by profits generated by those accounts, the accounts should be closed. In essence, such risks are best managed by avoiding them altogether.
Governments, realising the social implications of these decisions, would like to paint this as a purely commercial decisions that lie beyond their control. According to African Arguments, the UK Minister for Africa, Mark Simmonds, indicated he will not intervene directly in Barclays Bank’s decision, as it was ultimately a private commercial matter.
The matter is, however, not that simple. Governments created the framework for the commercial decision that Barclays took. They cannot distance themselves from these decisions. Neither can they deny that driving remittances underground will undermine the law enforcement objectives of anti-terrorism financing frameworks. The negative impact on their international development goals is also evident.
There are some indications that the UK government recognises this responsibility. Mr Simmonds reportedly indicated that government officials are working with regulators, trade associations and industry to look at all options for a sustainable market-based solution.
Action taken by HSBC in August 2013 may also raise government interest in finding appropriate solutions fast. HSBC informed up to 40 embassies, high commissions and consulates in London – including those of Papua New Guinea and the Holy See – that their accounts will be closed within 60 days and that they need to find other bankers. The reasons for this extraordinary step are not clear, but they seem to be linked to the same profit/risk consideration.
Government representatives in London shopping for new bankers are apparently experiencing some difficulty in convincing new bankers to take on their accounts. They and their governments may start thinking about ways to advance debate about the impact of the new risk management requirements on banks, regulatory action to prevent over-cautious decisions and the importance of protecting clients when banks refuse to provide them with basic services. Serious thought will also need to be given to the challenges of combating terror financing and other crimes when remittance flows are driven underground.
Louis de Koker holds a chair in law at the School of Law of Deakin University.
This piece was first published on The Conversation.
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