EBA Alerts On The Detrimental Impact Of Unwarranted De-Risking And Ineffective AML/CFT Management

Unwarranted de-risking can cause the financial exclusion of legitimate customers, affect competition and financial stability, according to the EBA, in an Opinion on the 5th Feb, listing 3 key drivers of bank de-risking:

1) ML/TF risks in banks exceed their risk appetite. This causes legal as well as reputational risk.

2) Banks lack expertise and efficient operational models in relation to specific customer segments.

3) The cost of compliance – The drivers are not mutually exclusive, and in practice very often interrelated. Levels of de-risking can amount to sound risk management, provided it is properly measured and appropriately implemented.

Establishing risk appetite and effectively achieving sound risk management takes time, and management may face board expectations on quick turnarounds. Boards want to see results and be able to rest assured that operations are in line with set risk tolerance levels.  Failing to reconcile with the fact that effective measures to reduce risk in complex processes takes years is not unusual. Five to seven years to achieve expected results is quite common.

It is a balancing act of ensuring better process controls on the one hand, and reducing inherent risks on the other hand. Waiving specific business or customer segments through de-risking, is as EBA reports detrimental.

An objective of the EBA is to play an active role in building a common Union supervisory culture and consistent supervisory practices, as well as in ensuring uniform procedures and consistent approaches throughout the Union in relation to financial and credit institutions’ approach to AML/CF risks, in particular to de-risking, under Directive (EU) 2015/849.

Rating institutes (with noticeable examples of banks being down-graded due to AML deficiencies) and stakeholders regard AML compliance with increasing importance.

These developments will certainly continue to drive attention to this area, by the same token it constitutes a significant challenge, in terms of the availability of expertise on board level capacity development to bridge the gap between resource-intensive compliance-driven objectives and practices, towards industry-driven, truly value-adding best practice. Possible components of the solution ahead, may involve: 

  • Active and well-functioning processes in place to evaluate risks, including the capability to measure and relate KPIs and KRIs respectively, avoiding resorting to quick fixes.
  • A solid process to put risk assessment in the context of risk appetite, using the different levels of defence and incorporating appropriate and tailored risk indicators.
  • Ensuring availability of AML/CFT expertise on board level. 

The EBA opinion points towards a paradigm shift, where compliance risk management is brought one step closer to core business and customer strategy. De-risking is only a temporary solution. Fundamental processes must work effectively, there is no option in the long run.

Read the EBA comment here

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EBA Alerts On The Detrimental Impact Of Unwarranted De-Risking And Ineffective AML/CFT Management EBA Alerts On The Detrimental Impact Of Unwarranted De-Risking And Ineffective AML/CFT Management
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