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United States strengthening AML/CFT regime to safeguard international financial systems

      • US Under Secretary for Terrorism and Financial Intelligence Brian Nelson at the Pacific Banking Forum

The offices I [Brian Nelson] lead deploy the United States’ financial intelligence, regulatory, enforcement, and accountability tools to combat terrorist financing, money laundering, and other urgent illicit finance threats. This work is critical to safeguarding the US and international financial systems from those who misuse it and undermine US national security. It is one of the Treasury Department’s core missions, along with advancing a strong economy that promotes growth, fairness, and opportunity for all. 

I am joining you here today to discuss how these two missions intersect, and how we can collectively take steps to safeguard our financial systems while also promoting greater financial inclusion and integration. 

As we will discuss over the next two days, the importance of advancing these two missions is apparent in the Pacific, where the evolution of certain correspondent banking relationships has undermined financial access and stability among some Pacific Island countries.  

This worrying trend of financial sector de-risking was a key theme of Prime Minister Albanese’s visit to Washington last October, and it is one that we are committed to working with partners to address. 

We recognize the economic and strategic significance of the Pacific region, and we are committed to deepening our engagement and collaboration with our allies and partners to bolster financial connectivity, investment, and integration. 

That is why we have gathered here this week: to convene government and the private sector in order to advance creative, collective solutions for combatting de-risking in the Pacific.  

I will offer a few reflections on how the Treasury Department understands and is working to address this challenge, before describing steps we are taking at home to strengthen our AML/CFT regime in order to safeguard the US and international financial systems.  

By Brian Nelson

Financial integration

International financial integration is a key driver of economic development, opportunity, and stability. Across countries and regions, we have seen over decades the varied ways in which this integration – often enabled by correspondent banking relationships has created the conditions for strong, sustainable, and inclusive economies.

By linking countries’ economies to the global financial system and in particular the US financial system, which remains the world’s largest correspondent banking has contributed to healthy market competition in the financial services sector.

Correspondent banking has helped to bolster international trade by reducing financial friction and allowing for quick and low-cost transactions across borders.

At the macro-level, correspondent banking has facilitated large-scale foreign investment, including financing for infrastructure and development projects, while also helping countries make their financial systems more resilient. And, at the micro-level, correspondent banking has helped individuals more easily and affordably send funds including remittances across borders.

Beyond the economic benefits, correspondent banking relationships help funnel cross-border financial activity through regulated banking channels decreasing AML/CFT risk and putting downward pressure on the unregulated money transfer market. There is a lot to be gained by promoting financial integration around the world. But conversely, when correspondent banking relationships dwindle, the consequences can be substantial.

Last year, Treasury released its De-Risking Strategy, which studied the phenomenon of financial institutions terminating or restricting business relationships indiscriminately with broad categories of customers rather than analyzing and managing the risk of those customers, in line with their regulatory obligations. The strategy highlights some of the serious harms that can come when de-risking occurs.

De-risking and the weakening of international financial ties more broadly can impede financial access and inclusion for significant populations, drive financial activity into unregulated financial systems, inhibit investment and trade, and undermine financial stability and resilience.

De-Risking in the Pacific

I know that many of the people and countries represented in this room are no strangers to the damage done by de-risking.  In line with the principles set out by president Biden and prime minister Albanese, we recognize and are committed to addressing bank de-risking across the Pacific.

We share the concerns that Pacific Island countries are experiencing among the most serious declines in correspondent banking relationships in the world. The vast and dispersed geography of the region makes correspondent banking even more critical for clearing foreign exchange payments, promoting trade and development, and facilitating remittance flows. This geography can also, however, make it difficult and expensive for banks to offer services to each island.

As the leaders here know, data suggests that, over the past decade, the number of correspondent banking relationships in the Pacific has declined at twice the rate of the global average. These terminations of correspondent banking relationships can be calamitous, given that many Pacific Island countries receive approximately 10 percent of their collective GDP in the form of personal remittances.

This trend has undermined the resilience of certain Pacific Island financial systems, with some countries having only one correspondent bank.  In cases like these, de-risking can become a critical macro-economic issue, with jurisdictions hanging by a single financial thread.

Strengthening AML/CFT frameworks

We understand that the story of de-risking in the Pacific is not only about AML/CFT risk. Even so, one of the key ways that countries can work to prevent de-risking is by taking steps to strengthen their AML/CFT frameworks, in line with international standards.

Doing so can help increase banks’ willingness to provide services in certain markets, while also making countries’ financial systems more attractive to foreign investment, development financing, and trade.

In Washington, we recognize that we have significant vulnerabilities in our own AML/CFT system that illicit actors exploit to launder or move illicit proceeds, and we are undertaking a historic set of reforms not only to safeguard our financial system, but also to clarify AML/CFT regulatory obligations for US banks and other businesses operating in the United States.

While the Treasury team will speak at greater length over the next few days about some of the substantial initiatives that we’re undertaking, I will highlight a few efforts in particular:

First, in January, Treasury’s Financial Crimes Enforcement Network, or FinCEN, operationalized our new beneficial ownership e-filing system and began accepting reports. This new reporting framework requires many companies doing business in the United States to report information to FinCEN about the individuals who ultimately own or control them.  By increasing corporate transparency, we are addressing the single-largest deficiency in our AML/CFT regime and working to prevent the misuse of anonymous companies in the United States.

Second, we are advancing a series of vital reforms aimed at increasing the transparency of the residential real estate market and the investment adviser sector, both of which have been exploited by bad actors to launder and hide the proceeds of corruption, fraud, sanctions evasion, and other illicit activities in the United States. We published proposed rules relating to these sectors back in February and are working hard to finalize them.

Third, and most importantly for the purposes of this forum the proposed rule that FinCEN published earlier last week includes proposed revisions to financial institutions’ AML/CFT program requirements. This rulemaking aims to help financial institutions be more flexible in managing and mitigating their risks, including by helping them to focus their resources and attention accordingly prioritizing their highest-risk services and customer activities.

FinCEN, the US federal banking agencies, and others have long encouraged financial institutions to carry out their AML/CFT obligations in line with their risks. This proposed rule, however, would formalize this expectation by explicitly requiring financial institutions to conduct risk assessments, which would serve as the basis for their broader AML/CFT programs.

This is an important first step in a multi-year effort to that aims to make the United States’ AML/CFT framework more effective, risk-based, and flexible.

Taken together, these initiatives represent among the most significant updates to the United States’ AML/CFT regime in decades, aimed at making our financial system safer and our AML/CFT obligations more flexible and effective. Throughout this forum, we’ll explain these initiatives further to help clarify some of the regulatory obligations that we are proposing or have put in place.  We hope these efforts can give banks and other financial institutions greater confidence about their efforts to manage, rather than avoid risk.

The Pacific banking forum

While countries’ efforts to strengthen AML/CFT regimes are important for combatting de-risking, there are no easy or straightforward solutions to addressing this challenge, especially in a region as vast and diverse as the Pacific.

As our de-risking strategy from last year notes, collaboration and collective action among public and private stakeholders remains the most effective path to prevent the categorical termination of banking relationships.

This logic informs this week’s Pacific Banking Forum bringing together representatives from government, the private sector, international financial institutions, regulators, central banks, and others, in order to approach this issue from different perspectives and discuss creative solutions for addressing it.

We all share the same goal: to advance an architecture that allows for broad, inclusive, and frictionless financial access across the region. This week, we will work to forge new partnerships and frameworks to deliver on this vision.



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