de risking

Mohammad Fheili ⌂⌂⌂ [email protected]

The 5th Annual Forum for

HEADS OF AML/CFT UNITS AT ARAB BANKS AND FINANCIAL INSTITUTIONS

November 10th & 11th of 2015Movenpick Hotel

De‐Risking


[email protected]+(961) 3 337175

Over 30 Years of Experience in Banking . . .Mohammad Fheili has successfully delivered over 1,500hours of training to professional bankers.He served as an Economist at ABL, and Senior Manager atBankMed and Fransabank: and he currently serves in thecapacity of an Executive at JTB Bank in Lebanon.In addition, He worked as an Advisor to the Union of ArabBanks.Mohammad also served as Basel II Project ImplementationAdvisor to CAB and HBTF Banks in Jordan.Mohammad received his college education (undergraduate& graduate) at Louisiana State University (LSU), and hasbeen teaching Economics and Finance for over 25continuous years at reputable universities in the USA (LSU)and Lebanon (LAU).Finally, Mohammad published over 25 articles, of thosemany are in refereed Journals (e.g., Journal of MoneyLaundering & Control; Journal of Operational Risk; Journalof Law & Economics; etc.) and Bulletins.”

Mohammad Fheili / AGM Jammal Trust Bank


De‐RiskingUnderstand Your Risk Before You

De‐Risk!

RiskingRe‐


Increasing & More ComplexMoney Laundering

Greater Global RegulatoryFocus on AML & KYC

Hyper Competitive FinancialServices Industry

Decreasing Customer Loyaltyand Product Differentiation

Changing Business Environment

Rising Cost Of Compliance

Significant Risk Of Non‐Compliance

Challenging to Acquire and Retain “Right” Customers

Industry Challenges

Increasing Focus on AML & KYC InitiativesEmerging Priorities

The Compliance Environment


Compliance is NO LONGER only About The Bank and Its Clients; It’s About Certain

Activities and How They’re Being Financed!


Legal Obligation• The Public at Large has theRight to Know! Where itsimpact on the FinancialInstitution’s Reputation andPerformance is often severe.Profitability suffers, and ittriggers immediate additionalexpenses for Damage Control.

Regulator ObligationIssues of non‐complianceare handled inside closeddoors Regulators.

The Changing Face of Regulatory Compliance

The Issue of

Jurisdiction


De-Risking__________ is a way of “Muting or Shifting The Risk” NOTManaging it; and it would have the effect of driving thedevelopment of alternative financial markets and paymentmechanism…. It drives the funds into Opaque Banking

In This Environment Of Unprecedented RegulatoryScrutiny, Huge Penalties And The Recent Threat OfIndividual Prosecutions, Banks And Other FinancialInstitutions Resorted To

The Emerging Trend . . .

The Legitimate but Unregulated Shadow Banking >>>>> 2008 Fin Crisis

Intentionally concealing the identity of the client to avoid being de‐risked >>>>> a worst Money Laundering Problem.


What’s Driving De‐Risking?• Reputational Risk• Compliance Risk• Complexity of Financial Products, andComplexity of Sanction & AML ComplianceRules

• Hefty Fines• Change in Policy and/or Risk Appetite• Perceived Risk is greater than the expectedvalue of the business

• Inadequate Budget to Support IncreasedDue Diligence and Monitoring Activities

• Unfavorable Remarks from RegulatoryExamination

• High‐Risk Categories Designated byRegulatory and Government Agencies.

?


Level Of Maturity in AML Compliance

Nature & Extent o

f Efforts Dep

loyed Where the FI is on this Continuum

of AML Compliance Maturity hasto do with:• Profile of its Portfolio of Clients• The FI’s Geographical Spread• Management Sensitivity to

rising Cost of Compliance (Costis Real)

• Perceived Benefits (hard to relateto the Benefits of Complianceoutside the scope of Avoiding heftyPenalties)

• Resource Availability• Tolerance for Risk• Fear (of Penalty)• Etc.

DD

EDD

RBA

Due Diligence

Enhanced Due Diligence

Risk‐Based Approach to AML Compliance

Enhancing Compliance Capabilities …

AML Cost

Skills Needs

Know‐How

AML Analytics

Moving in this direction is a clear indication that there is a desire on thepart of the FI to continue on serving the client. Otherwise, the FI wouldbe engaged in De‐Risking

Data

Data

Data


1. Reporting

2. Descriptive Analytics

3. Predictive Analytics

4. Prescriptive Analytics

OFAC check and reporting Senior Public Figures (SPF) Account Monitoring SAR Filing Documentation Developing Case Summaries.

Transaction red flags and exception management to handle false positive Distribution analysis of historical transactions below threshold to detect

any systematic money laundering activity and adjusting thresholdsaccordingly

Customer segmentation by behaviors and attributes to set thresholds at agroup level versus at global level

Suspicious Activity Monitoring Customer Profiling and Risk Scoring Account validation Against Watch Lists and Other Third‐Party Information

Simulation of Thresholds to Identify Improper Thresholds that areCausing Over Alerting.

Analyzing and Scoring Alerts to Enable Smart Decisions on Which Alertsto Prioritize and Reduce Reliance on In‐House Specialist

DATA … DATA …

DATA … DATA …

DATA … DATA

Otherw

ise, Ambiguity, Ignorance, or U

ncertainty

Heavy Pressure on Data Collection, Analysis, and Reporting


Increasing Our Understanding of Potential Outcomes

Increa

sing

Evide

nce on

Proba

bility of

occurren

ce

RiskManagement Ambiguity

Unc

erta

inty

Data‐Rich, Information‐Driven Decision‐Making Process: KYC, CIP, DD, EDD, RBA, Etc..

Ignorance

A Data warehouse is agood idea, but awarehouse only workswhen Staff bother tomake deliveries into it –and that’s where ComplianceOfficers need some sharp Inter‐Personal skills, to convince othersto share their data. Without theRight/Complete/Timely Data,Compliance Decisions areAmbiguous, Ignorant, orUncertain!

Put Your “Compliance” in Order


LowHighLo

wHigh

Accept

Mitigate

Transfer

Avoid

Frequency of Occurrence of Mistakes in Serving the Client

Severity of

Losses Resultin

g From

The

se

Mistakes

High‐Frequency / High‐Impact Client Account (Or Transaction)

Behavior

Low‐Frequency / High‐Impact Client Account (Or

Transaction) Behavior

High‐Frequency / Low‐Impact Client Account (Or Transaction)

Behavior

Low‐Frequency / Low‐Impact Client Account (Or

Transaction) Behavior

In terms of operational losses,the result may be a transitionfrom High‐Frequency, Low‐Impact losses TO Low‐Frequency, High‐Impactlosses. The event type willchange as well.

Risk‐Culture Awareness maybe a superior solution to Automation

Compliance is turning Time Consuming


LowHighLo

wHigh

Accept

Mitigate

Transfer

Avoid

De‐Risking

Business As Usual:KYC/CIP Update• Transaction

Monitoring• AML Control Staff

Training

WHY DE‐RISKING? There is a heavy cost associated

with enhanced Due Diligenceand/or Risk Based Approach.

Otherwise, there could be aproblem in resource availability.

One Easy & Possible way toMitigate AML Compliance Risk isDe‐Risking

Frequency of Occurrence

Severity of

Losses

De‐Risking

De‐Risking

The De‐Risked Universe


Client is Engaged

Compliance Cycle

Service Cycle

st1Client Interface

Start

Interface

End

CIP, KYC

AML Compliance (Regulator Decides)Client Engagement is Constrained by: The Bank isDeemed AML‐Compliance Responsible & Accountable

Customer Satisfaction (Customer Decides)Client Engagement is Driven by: The Potential forRevenue: Interest Income, Commissions & Charges;and a Word‐of‐Mouth Free Marketing

Branch

De‐Risking Means The Bank“Expects” To Receive A GreaterValue From Disengaging With TheClient than from Maintaining TheEngagement!


The De‐Risking Dilemma . . .

Be alert for customerswho could be engagedin illegal activities

Continue providing bankingservices to legal but potentiallyhigh‐risk businesses.

Banks are often caught between ConflictingMandates, with Regulators instructing them atonce to …


Compliance By Fear … Higher Probability of De‐Risking

Non‐Com

pliance By Mistake

… Due to lack of

understanding … De‐Risking

is a more likely outcom

e.

Compliance

Since De‐Risking has been on the rise, it mustbe that most of us have been complying ’ByFear’.

We’re becoming increasingly good at COMPLIANCE BUT not in Assessing & Addressing the RISK of:

• Compliance AND • that of Non‐Compliance

Moving Risks to Opaque Banking has proven Very Risky (e.g., Last Financial Crisis)

The Biggest sanctions challenge is the complexity of screening all

dimensions of financial transactions.

The Completeness of Screening is a

nagging concern!


Implications of DE‐RISKING


• Lost Revenue• Compromised Relationships withClients (Existing and/or Potential)

• Respectable Clients within a De‐Risked groups may end up beingpenalized unnecessarily

• It is indeed a Transfer of Risk (and Re‐Risk) instead of Risk Mitigation

• De‐risking will drive the developmentof Opaque Banking

• De‐risking could potentially limitaccess to correspondent banking andhinder Trade

• Etc.

The Cost of De‐Risking …

The trend continues globally forinstitutions to exit relationships withentire categories or groups of customersbecause they believe that is the easiestand least expensive way to manage riskswithin a high‐risk category.

The Banking Industry observes sanctions,anti‐money laundering measures andmoves to combat terrorism financing asfalling foul of these rules risks BALANCESHEET ALTERING FINES. These penaltiesare imposed by jurisdictions beyond ourown . . .

Re-Risking


• Strained remittance corridors

• Frustration for legal businesses struggling to get by without reliable banking services.

• Growing lack of transparency between some businesses and their banking service providersnow directly threatens banks’ ability to effectively manage money laundering and terroristfinancing risk … Hide The Risk.

• While some businesses will close up shop if they can’t work with financial institutions, manyothers will take a different approach.

• A bank with a policy that prohibits certain businesses from holding accounts instead winds updealing with businesses that have gone to great lengths to conceal the true nature of theiractivities.

The Unintended Consequences of De‐Risking … Re-Risking

So who wins in the De‐Risking Game? …The Criminal Organizations Do!


Nine Countries Where Banks have to be Extra Cautious. Why? Because theU.S. Treasury says so.

• Somalia (Money Laundering)• Iran (State Sponsor Terrorism)• Cuba (Old affairs) • Sudan (Money Laundering) • Russia (Because of Ukraine)• Syria (State Sponsor Terrorism)• North Korea (State Sponsor Terrorism)• Venezuela (Politically Connected People)• Greece (Corruption)

Banks have been De‐Risking in most, if not all, these countries.

Otherwise, they face a hefty fine.


A Growing Desperation By Policymakers To Solve TheDerisking Problem …• The UK Financial Conduct Authority (FCA):

will no longer recognize heightened regulatory risk as a legitimate reason to drop customerrelationships.

will pursue banks that do drop business lines …. Wholesale De‐Risking.Now consider during our AML work whether firms’ De‐Risking strategies give rise toconsumer protection and/or competition issues.

• Regulators have been trying to stem the tide of De‐Risking emphasizing that they do not wantbanks to drop entire business lines or cut off whole countries from remittance activities.

• De‐Risking will eventually push high‐risk and high‐volume customers to Shadow Banking.

• US Regulators and FATF have already said that banks should take a risk‐based approach, andthat they expect there to be a legitimate reason behind a bank’s decision to end the customerrelationship!

The Emerging Trend . . . Again

Wouldn’t it be ironic if we start seeing banks being finedfor De‐Risking!


• Regulators may question banks’ decisions to hold accounts for customers in cases where aSuspicious Activity Report has been filed.

• Regulators encourage a relatively low threshold at which banks have “reasonable grounds” tosuspect customers.

• Regulators acknowledged the inherent conflict that banks face and suggested that the FinancialAction Task Force may not be the best venue for the De‐Risking debates.

• Regulators admit that De‐risking is not only an Anti‐Money Laundering issue but affects broadbands of the global economy.

• The World Bank continues to express concerns over De‐risking and its implications on globalremittance payments.

• Regulators identify “Correspondent Banking Relationships” as a Vulnerability. Many banks arere‐assessing these relationships. Community banks and credit unions are already finding itdifficult to obtain and maintain the correspondent banking relationships necessary to servetheir customers.

The Emerging Trend . . . Again & Again

“If the Regulator wants to run a BANK to bank the clients we’re De‐risking, they’re welcome to do it. We’re not a public utility. We haveresponsibilities to our shareholders.” one Banker said.


The Ironic Result of De‐Risking is Re‐Risking.