A crackdown on money laundering and the financing of terrorism through regulations worldwide is impacting banks and money service providers by driving up compliance costs. At the same time, banks have been hit with anti-money laundering probes and hefty fines.
In 2012, HSBC paid $1.9 billion in fines to U.S. authorities to settle an investigation into its anti-money laundering controls and admitted that it processed drug-trafficking proceeds through Mexico and transmitted funds from sanctioned countries such as Iran. The bank later closed all money transfer business accounts, leaving money service companies with only 30 days to find a new banking provider.
Money transmitters accept payments and bundle them together, but they need a bank to handle the international wire transfer. The threat of large fines and higher compliance costs led other banks to weigh the financial and reputational risks of operating or serving the remittance business against its profitability.
In May 2013, Barclays closed about 250 accounts that did not meet its anti-money laundering criteria, a move that affected 70 percent of U.K. money transfer firms. Barclays was in fact one of the last banks in the U.K. to offer services to remittance service providers. In Australia, Westpac shut down the accounts of money transfer operators in November 2014 as a result of growing fears of breaching strict terrorism financing and anti-money laundering laws.
Westpac’s CEO Gail Kelly said regulations pose a real problem for banks that accept money transfer businesses as customers.
“The regulatory requirements for anti-money laundering are you need to know your customer, and in the case of remitters, you need to know your customer’s customers. That’s quite a responsibility. You do millions of these transactions and if one goes wrong, and is connected with terrorism financing, that’s a real problem,” she said.
Westpac was one of four banks in Australia that withdrew from servicing remitters, leaving legitimate remitters without any options for clearing their fund transfers. Similar developments played out in the U.S. and are now playing out in Cayman.
As a result, the World Bank concluded that remittance prices are rising and competition is reduced.
Another concern is that the lack of alternatives will force cross-border money transfers into the informal channels of the shadow banking sector and effectively out of reach of banking regulators.