Banking Regulators, Facing Criticism, Seek to Dispel Myths on Money-Laundering Rules

Banking Regulators, Facing Criticism, Seek to Dispel Myths on Money-Laundering Rules
Banking Regulators, Facing Criticism, Seek to Dispel Myths on Money-Laundering Rules

U.S. banking regulators sought Tuesday to “dispel certain myths” around anti-money-laundering rules that critics contend have inadvertently cut off access to the U.S. financial system for some countries, businesses and individuals.

The Treasury Department, along with four bank regulators, published an unusual, four-page “fact sheet” along with a lengthy blog post to clarify regulatory expectations related to the rules.

While the statements didn’t change the rules, they emphasized that the government doesn’t take a “zero-tolerance” approach to enforcing anti-money-laundering laws and reserves enforcement action for the most egregious instances of widespread or intentional wrongdoing, such as recent fines related to movement of drug-cartel money. Regulators resolve about 95% of compliance failures without penalties, three senior Treasury officials said in the blog post, in which they also said that banks don’t have to vet the customers of their foreign-bank customers.

The problem, argue critics of the U.S. government’s approach, is that anti-money-laundering enforcement has caused banks to pull back from some customers who aren’t suspected of illegal activity. That has become a challenge recently along the southwestern U.S. border with Mexico, as well as for island nations and emerging-market economies.

It is often harder to track the movement of cash in those areas, and banks don’t want to risk getting caught up in money tied to drug or human trafficking. For banks, the risk has grown particularly prominent given multibillion-dollar penalties levied in recent years on several banks that failed to keep dirty money out of the U.S. financial system or didn’t appropriately alert authorities to suspicious transactions.

The Treasury’s statements, which were issued ahead of next week’s Group of 20 summit in China, come in the wake of vocal criticism from the International Monetary Fund. IMF head Christine Lagarde warned in a July speech that many emerging markets could face systemic disruptions if the “derisking” trend isn’t reversed. She also voiced concerns to U.S. President Barack Obama in recent weeks, and further critique is expected in a World Bank report due in October, people briefed on the matter said.

Besides the IMF criticisms, officials from affected countries have made repeated visits to the U.S. to press the issue. And in the U.S., politicians have prompted two new government inquiries, from the Government Accountability Office and the Treasury Inspector General’s office, into the loss of access to the U.S. financial system and the role of regulators.

The most recent tension centers on “correspondent banking.” This is an obscure piece of international financial plumbing that allows foreign banks to process U.S. dollar transactions for customers through “correspondent” relationships with U.S.-based banks.


Many foreign banks have had multiple such relationships over the years. But those numbers have dropped in the past year as some U.S. banks have stopped offering some of the services in regions seen as riskier, including Latin America, the Middle East and Africa.

Some countries, including Belize, have had access curtailed to the point that central banks have explored taking on the business themselves. U.S. banks also have cut off a growing number of customers in Mexico, deciding that business south of the border might not be worth the risks in the wake of mounting regulatory warnings.

In the statement Tuesday, the regulators said there “is no general expectation” for banks to vet individual customers of foreign financial institutions with whom they have correspondent banking relationships. That doesn’t represent a change from prior guidance, although banks say they have understood requirements to include such due diligence.

The regulators added that banks “should consider the extent to which” they need information about a foreign bank’s markets or types of customers to assess the risks the relationship could pose, and “request additional information” about transactions in line with suspicious activity reporting rules.

Banks, though, have believed that regulators have expected them to know their customers’ customer base, especially when it pertains to money-servicing businesses, third-party payment processors and global correspondent banks, according to a bank executive familiar with anti-money-laundering issues.

For instance, if a bank works with a third-party payment processor, it needs to assess the risk of the customer, including payments, for anything ranging from countries deemed more risky to arms dealers to politically connected people, this person added.

And banks are keenly aware of the potential consequences. In January 2013, J.P. Morgan Chase & Co. received a public consent order for failures in its Bank Secrecy Act program and a year later received a $2.6 billion fine for failing to report suspicions about convicted Ponzi schemer Bernard Madoff.
In 2014, BNP Paribas SA paid $8.9 billion to resolve U.S. charges that it provided dollar-clearing services to sanctioned parties in Sudan and Iran. And in 2012, HSBC Holdings PLC received a $1.9 billion sanction for failing to keep hundreds of millions of dollars in drug proceeds out of the U.S. financial system.

Such penalties are reserved for instances of “intentional evasion of U.S. sanctions over a period of years” or the failure of senior management to respond to warning signs, Tuesday’s statement said.

In addition to the Treasury, the regulators who joined in the new statement included the Federal Reserve, Federal Deposit Insurance Corp., National Credit Union Administration and the Office of the Comptroller of the Currency. The statement accompanying the agencies’ fact sheet was from Nathan Sheets, Treasury undersecretary for international affairs; Adam Szubin, who runs the Treasury’s unit aimed at combating terrorism and other national security threats; and Amias Gerety, who handles Treasury policy affecting financial institutions.

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