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Rules to name, shame, and punish banks, whose clients may funnel money to terror groups, are denying much-needed funds to developing countries. It’s a clash of two sets of sound policies, says Clay Lowery, former assistant secretary for international affairs at the US Treasury and the chair of a CGD working group on this problem of “de-banking.” “Those two policies are in conflict with each other,” Lowery says, “and that’s a very difficult thing to overcome.”

The first set of policies was designed to curb money laundering and the financing of terrorism, especially in the wake of the 9/11 attacks on the United States, Lowery told me in a new CGD podcast. Faced with the obligation of trying to track the final destination of money flows they service — and the reputational risk involved if their clients are less than law-abiding — a string of big-name financial institutions have simply been closing down the accounts of legitimate businesses that offer remittance services to millions of people working in different countries. 

One of the primary aims of those rules, Lowery says, “was to hurt the reputation of financial institutions: so if they were going to be doing business with bad people we were going to ‘out’ [them]. So that reputational risk became something that banks worried about a lot.” 

CGD Working Group Chair Clay Lowery discusses de-banking

The second set of policies was focused on how to facilitate finance flows into developing countries in an efficient way that aids economic growth and development. Remittances — money sent home by workers overseas — are estimated to total $400bn annually through formal channels and another $130bn through informal channels. They have become a huge source of revenue for developing countries — far greater than official aid. Money transfer organizations are often the only route available to send funds to poor countries. De-banking may deny revenue to some criminal or terror groups but it also stops innocent people sending much-needed money to their families.

As Lowery and I discussed, central banks in the United States and United Kingdom, as well as regulators and policymakers are among many key players examining these unintended consequences of rich countries’ anti–money laundering policies, along with CGD’s working group which aims to report later this year.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.