In May 2018, I traveled to Asunción, Paraguay to present on the implications of de-risking on the financial sector, especially in Latin America. I highlighted what de-risking is, its impact, regional and international groups working on de-risking and some of the potential steps that the industry can take to address the thorny issue of de-risking. Let me now your thoughts.

1. THE IMPLICATIONS OF
DE-RISKING ON THE
FINANCIAL SYSTEM IN LATIN
AMERICA
JOHN V OWENS
PRÓXIMOS RETOS DE LA INDUSTRIA FINANCIERA
8 DE MAYO EN ASUNCIÓN - PARAGUAY

2. DE-RISKING: WHAT IS IT?
• A global trend where financial institutions are terminating
or restricting business relationships with categories of
customers that are deemed high risk.
• This trend includes the withdrawal of services from
countries that are under geopolitical sanctions.
• “High Risk” customers are often non-governmental
organizations, politically exposed persons, correspondent
banks and money transfer businesses.

3. WHAT IS DRIVING DE-RISKING?
• Since the financial crisis, banks in most countries have
faced a combination of challenges that have changed
their decision-making.
• Banks have had to adapt to a surge of regulatory activity
in a compressed time period and de-risking is an
increasing concern.
• Greater efforts to combat money laundering and terrorism
financing.
• While banks have more flexibility to develop their own
risk assessment and response processes and procedures,

4. WHAT IS DRIVING DE-RISKING?
• Financial institutions have reported that the risk of AML- and
CFT-related sanctions are a growing concern.
• The shifts in the AML/CFT compliance landscape may help
combat money laundering and terrorism, but they also
increase costs for banks in multiple ways.
• Surveys of banks conducted since 2014 show a clear trend of
rising spending on compliance.
• With the regulatory changes highlighted above, the typically-
lower-margin correspondent banking business line is more
vulnerable to supply pressure.

5. IMPACT OF DE-RISKING
• Data from multiple sources suggests that some
correspondent banks are de-risking from certain markets
and customers.
• SWIFT data shows a decrease in active correspondents
between 2011 and 2016, with all regions experiencing a
continuous decline since 2013.
• Emerging market respondent banks do not receive clear
explanations for being de-risked and many find recent
regulatory complexity challenging.

6. Financial Stability Board’s
Correspondent Banking Data
Report found that every region
of the world has been affected
by de-risking: Eastern Europe
(-16%), Latin America (-15%),
Asia (-12%) and the Africa (-
8%), being the most affected
The FSB report follows the
International Monetary Fund’s
report “The Withdrawal of
Correspondent Banking
Relationships: A Case for
Policy Action” which reports

7. ABSA 2016 Survey
“Compliance/Regulatory
Risk in
Financial Activity (De-
Risking) in the
Americas”
Greatest Impact of De-
Risking in Latin
America:
• Remittance services
60%
• Correspondent
Banking 40%
• Trade Finance 28%

8. REGIONAL ACTIONS TO ADDRESS DE-RISKING:
CIASEFIM
• An international commission formed by associations of
financial services providers in Brazil, Argentina, Uruguay
and Paraguay to look for solutions to the “de-risking.”
• CIASEFIM has been very active meeting with heads of
Central Banks, FATF-GAFI representatives in the region,
local regulators, to make them aware of the critical
situation their members are facing and come up with
feasible solutions.

9. GLOBAL ACTIONS TO ADDRESS DE-
RISKING
• Concerned about de-risking the G-20 and the Financial
Stability Board (FSB) requested that the World Bank study
the reduction of CBRs, which was ultimately translated into
an FSB action plan.
• Multilateral efforts are part of a broad effort supported by
the G-20 to mitigate the potentially detrimental
consequences of de-risking on financial inclusion among
the world’s poor.
• Changes under consideration by European regulators, as
well as some proposed in the United States, have the

10. GLOBAL ACTIONS TO ADDRESS DE-
RISKING
THE ALLIANCE FOR FINANCIAL INCLUSION (AFI) 2016 Report
“Stemming the tide of De-Risking through Innovative
Technologies and Partnerships” Lists Nine Practical Solutions:
1. Ensuring the most impacted countries have a voice
2. Global dialogue on constructing a supportive regulatory
environment
3. Overcoming the Risk-Reward Dilemma
4. Broader understanding of how impacted countries address
de-risking concerns

11. GLOBAL ACTIONS TO ADDRESS DE-
RISKING
THE ALLIANCE FOR FINANCIAL INCLUSION (AFI) 2016 Report :
5. Supporting innovation
6. Global policy work/ guidelines advanced to clarify cross-
border regulatory expectations
7. Impacted countries to improve standards/provide risk
information and reassurance
8. Guidance and policy for identifying/managing risk in
correspondent banking relationships
9. Putting in place customer due diligence (CDD) requirements
and KYC utilities

12. CREATIVE APPROACHES TO DE-RISKING
• NBFIs new use of ancient settlement mechanisms, hawala-
type schemes, where funds are compensated on both sides
of a transaction, without the need to move funds across
borders.
• Foreign Exchange companies are becoming large players
providing international money transfer solutions to MTOs
and other firms by providing better-than-bank rates on
local currency made available in remittance-receiving
markets.
• Aggregators are providing services to local MTOs whose
banks do not allow them to send international wire transfer

13. CREATIVE APPROACHES TO DE-RISKING
• Regulators need more information on de-risking in
their own jurisdictions in order to act on facts and not
information they hear or read in reports or articles.
• Technology developments not only for the KYC, AML &
CTF sectors but also in the operational and business
development sides.
• Regulators and policy makers are looking at NBFIs,
alternative financial service providers, especially fintech
firms, Digital Financial Services Providers (DFSPs) and
Mobile Money Operators (MMOs) as well as promoting
partnerships with banks to support financial inclusion.

14. CREATIVE APPROACHES TO DE-RISKING
This more inclusive financial world is mainly fueled by
the change that mobile is bringing into the financial
services landscape.
• TechFin firms, notably Google, Apple, Facebook,
Amazon, Microsoft, Alibaba and Tencent)
companies, have begun to compete in the finance
industry and offer their own FinTech solutions.
• MMOs are dominating the mobile financial services
landscape in Africa & Asia and starting to impact
Latin America including Paraguay with several now
offering transactional accounts that exceed the

15. NEXT STEPS ON A REGIONAL LEVEL
Ensure active representation in all global forums in order to
influence decisions that may impact the region.
Committee of Central Bank Governors to be more vocal and
proactive on the issue.
Develop and implement a communication strategy to
redefine the image of the region from that of “High Risk” to a
more positive one.
Collaborate within the region to create a harmonized
regulatory system in order to reduce information gathering
costs.

16. NEXT STEPS ON A COUNTRY LEVEL
Ensure that up to date AML/CTF Legislation is in place
and is continuously monitored and enforced.
Support training for banks and other financial
institutions.
Provide close monitoring of the offshore sector to
certify that high compliance standards are maintained.
Provide sufficient compliance monitoring resources
within the Superintendencia and ensure that proactive
measures are taken to identify and address AML/CFT
deficiencies.

17. NEXT STEPS ON A COUNTRY LEVEL
Maintaining appropriate regulatory capital requirements for
short-term, low-risk lending supported by correspondent banking
and adjusting Basel liquidity standards (take into account the
operational nature of correspondent banking) .
Supporting the development of central registries for respondent
customer data and reconsider current liability standards for those
who use it.
Supporting the development of national identity registries for KYC
due diligence and use of legal entity identifiers (LEI).
Promoting focused adoption of emerging technology-based
solutions where relevant and secure including standardization of

18. USE OF NEW TECHNOLOGIES TO ADDRESS DE-
RISKING
•Harness new financial and regulatory technologies (fintech
and regtech) to reduce compliance costs and an increase
risk assessments.
•Focus on customer-centric infrastructure to enhance
identity verification such as
•biometric technology and LEIs;
•transparency (for example, Distributed Ledger
Technology (DLT));
•interoperability (open-sourced, real-time global

19. USE OF NEW TECHNOLOGIES TO ADDRESS DE-
RISKING
•Joint KYC utilities to reduce KYC costs, improve due
diligence and CFT/AML efforts.
•Big data – improving the capacity for transmitting, storing
and analyzing data sets.
•Deployment of more advanced analytics and automatic
learning capability (such as artificial intelligence).
•Multilateral and national regulatory understanding of and
engagement with advanced technology is also important.

20. NEXT STEPS AT AN INSTITUTIONAL LEVEL
FOR BANKS
ENSURE THAT
Policies and Procedures are monitored and enforced
Independent Compliance Unit or Officer is in place
Staff are well trained and Know Your Employee (KYE) is in
place
Invest in a risk based automated compliance monitoring
systems to facilitate AML/CTF compliance

21. NEXT STEPS AT AN INSTITUTIONAL LEVEL
FOR BANKS
ENSURE THAT
Create a culture of compliance throughout the
organization ensuring that the Board of Directors are fully
involved
Enterprise Risk Management Framework
Ongoing client education programs
URGENTLY address deficiencies in AML-CFT framework
Work with regulators

22. NEXT STEPS FOR CORRESPONDENT BANKS
Implement measures to mitigate risk rather than de-
risk
Work with clients to enhance greater collaboration,
trust and transparency
Provide timely communication of compliance gaps
enabling the client to address issues
Consider the position of the independent international
authorities in their risk-rating assessments
Monitor ongoing global policy standards &
developments

23. Gracias!
John V Owens
Follow me on Twitter @jvowens
johnvowens@me.com