The Optimal Level of Anti-Money Laundering Regulation for the UK Banking Sector. Banks’ Cost of Compliance, De-risking Problem and How to Implement Effective AML Systems and Controls

Lax regulation and weak legislation in respect to Anti Money Laundering (AML) and Counter Terrorism Financing (CTF) will almost certainly result in increased money laundering (ML) and terrorist financing (TF) at national and global levels. However, more stringent regulation and legislation is not the panacea for solving the complex AML/CTF related issues. In fact, excessive legislation and regulatory pressure can have a range of negative consequences for the general public. One of the collateral damages is de-risking, a practice referring to banks’ strategies when exiting or refusing to enter into business relationships with certain categories of customers perceived as a high risk and high cost maintenance, or where banks are withdrawing their services from some jurisdictions or whole regions, or when withdrawing from entire business sectors.

De-risking adversely impacts society at two levels. First, a population left without banking services is forced to use underground methods for cross-border transactions, for example, sometimes whole regions in some parts of the world depend on the funds sent by their relatives who reside in countries with higher living standards, therefore cutting off or minimising this aid reduces the spending power of the local population, often directly affecting even basic living expenses such as food and medicines. The second aspect is that contrary to the regulators’ fundamental goal for reducing the financial crime, excessive regulatory pressure on banks can ultimately generate undesired outcomes and, in fact, increase global ML and TF by inadvertently strengthening unregulated underground money transfer markets.

A logical response to the de-risking problem would be for the banks to implement a flexible AML/CTF strategy reinforced with effective AML/CTF systems and controls that support efficient Risk Based Approach (RBA) and proportionate allocation of their resources. This method will allow for implementing tailored risk assessment and risks management on individual basis, rather than opting for ‘one size fits all’ approach vis-à-vis whole categories of customers. However, in practice, the combination of the banks’ high compliance costs and hefty non-compliance fines imposed by regulators directly impede the RBA and the shift away from blanket approach. Therefore, a more extreme regulation and excessive financial penalties strategy would appear to be counterproductive. Instead, close cooperation between the regulators and banking sector is required in order to challenge the status quo position and to finally arrive at a mutually acceptable solution for reducing the global ML/ TF levels, also accounting for the general public interest.