De-risking and non-profits: how do you solve a problem that no-one wants to take responsibility for?
1 Palestine Pound 1939 Obverse. Wikicommons. Public domain.‘De-risking’ is shorthand for
business practices designed to make something – an activity or an investment
portfolio, for example – less risky and, crucially, less likely to involve a
financial loss.
Over the past few years
‘de-risking’ has taken on a more specific meaning within the banking and
financial services sector where it is used to describe the practice of financial
institutions exiting relationships with and closing the accounts of clients
considered ‘high risk’.
This kind of de-risking effects
different organisations in different ways and its impact varies geographically;
but correspondent banking relationships, where a large financial institution
provides international financial services to a smaller one, appear to have been
hit hardest.
There are lots of concerns about
de-risking. Most money transfer organisations, for example, are wholly
dependent on correspondent banking relationships (hereafter: CBRs), so the
termination of those relationships has a direct impact on the flow of
remittances. More broadly, because the wider banking sector in less developed
countries has been heavily dependent on CBRs with established multinational
banks, de-risking is seen to reduce the ability of those countries to
participate in the global economy, threatening global trade and economic
development.
There is now a growing body of
evidence showing that the non-profit sector may have been as heavily impacted
by de-risking as CBRs (see for example here,
here,
and here).
But it is concerns about the latter that have seen de-risking placed firmly on
the agenda of a growing number of intergovernmental organisations (IGOs), from
the IMF to the G20, which will for the third year running note concerns about
de-risking when it meets this week.
Why is de-risking happening?
Analysts have put forward various
explanations for de-risking but almost all agree that international rules
designed to combat money laundering and terrorist financing are the most significant.
These ‘AML-CFT’ rules require
financial service providers to conduct extensive ‘due diligence’ on their
customers and transactions to ensure that they do not facilitate such criminal
activity. They must also ensure that they do not inadvertently breach any of
the national and international sanctions regimes or financial ‘blacklists’ that
now span the globe in their hundreds.
AML-CFT compliance is subject to intense
scrutiny by regulators and bank examiners, and is underscored by substantial
criminal or civil penalties for failures or lapses, and the reputational
damage this brings.
The rising cost of compliance
with these requirements, which in practice
require financial institutions to profile all their customers and subject them
to ongoing surveillance, coupled with the relatively small profits that may be
gained from correspondent banking relationships, is widely seen as the key
driver of de-risking.
Conversely, high net worth
clients, who may also pose a high risk in the context of stricter AML/CFT
rules, do not appear to appear to be adversely affected by de-risking.
De-risking and
non-profits
The research suggests that it is
international non-profit organizations (NPOs)
working in or around conflict zones and the more ‘political’ (or politicised)
causes within the non-profit sector that have been hardest hit by de-risking.
Just as the termination of
correspondent banking relationships is seen to undermine economic development,
the de-risking of NPOs jeopardises the ability of human rights activists,
humanitarian organisations and many others to implement their mandates. This
undermines the capacity of civil society to hold governments to account,
provide much-needed aid and relief, and to advocate for political and social
change. As with CBRs, the lack of profit that banks make from the non-profits is
believed to be among the key drivers behind the de-risking of NPOs, but other
factors such as the banks’ perception of the sector and the de-legitimisation
of specific organisations and activities are also relevant. International
bodies with a counter-terrorism mandate have asserted that NPOs were “particularly
vulnerable” to terrorist financing and although they have now rowed back
from this position, the proverbial mud has stuck.
Kafka at the bank
We have spent the last few years meeting with non-profits
affected by de-risking all over the world. Here is a sample of the kinds of
stories we are by now all too familiar with.
A small campaign group working
nationally to raise awareness about the plight of Palestinians is staffed mostly
by volunteers and funded by the monthly donations of its members. It has had
the same bank account for nigh on 20 years and does not fund any political
activities in the Occupied Palestinian Territories. Out of the blue it receives
a letter from its bank saying that it has two months to find an alternative
financial service provider; its accounts are to be closed because it no longer
falls within the “risk appetite” of the bank.
The bank refuses to negotiate and
offers no further explanation. Other commercial banks refuse to take on the
organisation. Instead of campaigning for Palestine, the organisation is now embroiled
in a legal and administrative nightmare. Although it is ultimately able to open
an account with a not for profit bank, it has by then lost a sizeable chunk of
its income, because many of its supporters do not amend their standing order
mandates.
Consider also the large international
relief and development organisation with programmes all over the world and an annual
budget in the hundreds of millions of dollars. Over the past two years,
transferring money to its offices and implementing partners around the world has
become increasingly onerous. Transfers are delayed for weeks, additional
documentation of internal vetting and due diligence procedures are more and
more onerous.
It is by now impossible to get
funds into some of the countries where the organisation’s activities are most
urgently needed, so they send it to a neighbouring state and use local
(informal) money changers to get the funds to their final destination.
Sometimes transactions are executed but the recipient bank refuses to release
the funds to the beneficiary. Local police have intimidated the partners, and
lawyers have been instructed to secure the return of the funds. Eventually the
bank requests the organisation to sign a document effectively indemnifying it
against any AML-CFT fines it might incur as a result of providing financial
services to the humanitarians. They part company.
These are examples of how de-risking
is affecting long-established organisations based in western countries. Imagine
what is happening to groups in less democratic regions, where de-risking and
financial surveillance is playing out in much more politicised and repressive ways.
We have encountered non-profits as
diverse as reproductive health clinics, progressive theologians, medical
researchers, environmental campaigners and animal rights groups from all
corners of the world – all with similar tales to tell. The biggest irony of these
sorry stories is that rules that were designed to allow law enforcement to
“follow the money” now appear to be pushing that money into unregulated
channels, as frustrated organisations are left with no other option to dispense
their funds.
A problem of perspective: through the looking glasses
As noted above, more and more
IGOs are taking an interest in de-risking, though relatively few are
particularly concerned about the impact on non-profits. The most powerful
actors, like the G20, view de-risking primarily as a “financial stability”
issue that – because of the impacts on correspondent banking, the arteries of the
global financial system – threatens to
derail economic development and trade financing.
Others, like the World Bank, have
widened the frame to encompass financial integrity and financial inclusion,
reminding us that the banks are supposed to be good global citizens providing a
public service, not simply protecting their profit margins at any cost.
It is important to stress here that
not all banks are behaving the same; a minority at least are clearly doing
their best to help non-profits deal with the brave new world of
hyper-transparency and excessive risk aversion. Nevertheless the banking
associations, quite understandably, prefer to point toward to the reality of
the AML-CFT frameworks and the huge fines they face for getting things wrong.
From the perspective of a global compliance
industry already worth $80 billion annually and straddled by the much-hyped “fintech”
and now “regtech” sectors, the disruption caused by de-risking is little more
than an opportunity for “disruptive” innovation.
Meanwhile, the architects of the
AML-CFT framework deny that the problems described are caused by their regulations,
asserting instead that the banks are misinterpreting and/or misapplying the
requirements, all the while lamenting the disappearance of clean money into “shadow
banking” channels.
Despite “financial inclusion”
being repeatedly referenced as a key enabler of various Sustainable Development
Goals, the mechanisms actually designed to ensure financial inclusion, like the
G20’s global partnership, are yet to take a
position on de-risking. Several of the UN Human Rights Council’s Special
Rapporteurs have called for non-profit-friendly reform of the AML-CFT regimes
and suggested that arbitrary decision-making by the banks risks manifest breaches
of non-discrimination laws, but none of the stakeholders want to talk about public
law remedies or mechanisms for redress.
Finally, the vast majority of
non-profits we speak to see the problems they are newly encountering with their
banks squarely within the worldwide trend that is now widely known as the “shrinking
space” for civil society. Restrictions on foreign funding and political
activities, over-regulation via national non-profit laws, increased attention
from law enforcement – for already squeezed civil society organisations in many
parts of the world, it’s as if the banks are simply sticking the boot in.
Elephants in the room
The wider problems facing non-profit
organisations are among several fundamental issues that no-one with a shred of responsibility
for de-risking wants to talk about. Also off-the-table is the democratic legitimacy
of a global system for countering terrorist financing that was quickly drawn-up
by US officials in the wake of 9/11 and railroaded through the intergovernmental
decision-making system in just six weeks.
So too are questions as to the ultimate
effectiveness of a system whose “negative externalities” are piling-up, but
whose impact in terms of actually stopping the flow of funds to terrorist
groups and their supporters is at best disputed and at worst rejected
outright.
Neither is there any current appetite
for critical reflection on the implications of effectively turning our banks
into police stations and having them, or outsourced compliance services, stockpile
data on individuals and organisations, which can in many states be accessed at
will by national “Financial
Intelligence Units”.
Because these rules apply
globally, including in countries where there are no meaningful “checks-and-balances”
or separation of powers – never mind data protection – data collected under the
auspices of “due diligence” is now being used to repress activists and non-profits
from Hungary to India, Russia to Sudan, Egypt to Mexico. Yet the international community
has failed to provide a forum in which these trends and their consequences can
be properly discussed.
Ownership and accountability
It is not tenable to leave these
issues to the banks and their customers to sort out. By avoiding the difficult conversations
we will only sustain an environment in which powerful states and IGOs can evade
responsibility for the situation they have created.
As long as there is no ownership of
these problems, there will be no mandate to develop the comprehensive solutions
that are now clearly required. The longer this situation persists, the more
deeply embedded in the intergovernmental order, national law and banking practice
the core problems become.
In seeking to find work-arounds
rather than reforms, non-profits are forced to internalise the problem and put
pragmatism before principle. While this is perfectly understandable given the
urgent need to access financial services, we are concerned that the rush to
find practical solutions for certain types of organisations, sectors or regions
actually risks reinforcing or compounding the problems facing others.
Further harmonisation and
standard-setting; kite marks, self-certification and better risk management
practices; new technologies and dedicated non-profit compliance services may
all have a part to play in arresting the de-risking of non-profits, but all
have consequences for the sector that require careful reflection from the
outset.
Bottom-up approaches tailored to
specific countries and regions, using a mix of policy, financial and legal solutions,
may be more appropriate than the top-down decision-making that has created
these problems. But they are no substitute for the decisive action that could
and should be taken by the G20 to assess the impact, legitimacy and
effectiveness of the AML-CFT system as a whole, paving the way for the
corrective action that the situation demands.