De-banking is an ugly word, but it’s the focus of a new working group launched by CGD in Europe. Banks in rich countries, under pressure from anti–money laundering and counterterrorism enforcement efforts, are increasingly “de-banking” money transfer organizations that operate in poor countries. In other words, to prevent criminals transferring their ill-gotten gains around the world electronically, they are denying banking services to legitimate companies that are a vital route for millions of people and businesses. And we are talking huge sums of money.
In 2014 migrants sent more than $400 billion home through formal systems and at least an additional $130 billion through informal channels. Remittances are now a much larger source of funds for many developing countries than aid. In addition, businesses in poor countries also engage in cross-border transactions, both to export goods or import key inputs; the value of these transactions also runs in the hundreds of billions of dollars.
For example, in 2013, Barclays decided to close down the UK accounts of nearly 90 percent of the money remitting companies who were relying upon it for financial services. This meant that Dahabshiil, the largest money transfer operator serving the vital UK-Somalia remittance corridor, was left without financial services. Somalis in the UK were left with no formal means to send money home.
De-banking can have unintended consequences. It can prevent money transfers entirely, or raise the cost by obliging users to find alternative, informal (more expensive) routes. This can reduce crucial financial flows to poor countries. It might also worsen the security situation by shifting financial transactions to the informal sector and making them less transparent.
What can be done to make AML/CFT (Anti–Money Laundering and Combating the Financing of Terrorism) rules fairer for poor countries? Our new CGD working group will examine how rich countries might rebalance their policies to continue to protect against money laundering and terrorism financing, without hindering the ability of people from poor countries to conduct business and transfer money across borders.
The group is chaired by Clay Lowery, a former assistant secretary of the US Treasury and a CGD visiting fellow. Members of the group are drawn from academia, policymaking, the private sector, and from NGOs. We held our first meeting at CGD Europe’s offices in London in late January. We aim to come up with a set of recommendations to address this problem, including to the Financial Action Task Force (FATF) which is the lead organization on this issue. The staff secretariat consists of Matt Collin, Matt Juden, and myself; watch out for our blogs on tweets as our work progresses over the coming months. The final report of the working group will be issued in the fall of 2015.
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.
