Islamabad High Court Judges wrote a letter to Supreme Judicial Council.pdf
De risking
1. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The 5th Annual Forum for
HEADS OF AML/CFT UNITS AT ARAB BANKS AND FINANCIAL INSTITUTIONS
November 10th & 11th of 2015
Movenpick Hotel
De‐Risking
2. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
mifheili@gmail.com
+(961) 3 337175
Over 30 Years of Experience in Banking . . .
Mohammad Fheili has successfully delivered over 1,500
hours of training to professional bankers.
He served as an Economist at ABL, and Senior Manager at
BankMed and Fransabank: and he currently serves in the
capacity of an Executive at JTB Bank in Lebanon.
In addition, He worked as an Advisor to the Union of Arab
Banks.
Mohammad also served as Basel II Project Implementation
Advisor to CAB and HBTF Banks in Jordan.
Mohammad received his college education (undergraduate
& graduate) at Louisiana State University (LSU), and has
been teaching Economics and Finance for over 25
continuous years at reputable universities in the USA (LSU)
and Lebanon (LAU).
Finally, Mohammad published over 25 articles, of those
many are in refereed Journals (e.g., Journal of Money
Laundering & Control; Journal of Operational Risk; Journal
of Law & Economics; etc.) and Bulletins.”
Mohammad Fheili / AGM Jammal Trust Bank
3. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
De‐
Risking
Understand Your
Risk Before You
De‐Risk!
Risking
Re‐
4. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Increasing & More Complex
Money Laundering
Greater Global Regulatory
Focus on AML & KYC
Hyper Competitive Financial
Services Industry
Decreasing Customer Loyalty
and Product Differentiation
Changing Business
Environment
Rising Cost Of
Compliance
Significant Risk Of
Non‐Compliance
Challenging to Acquire and
Retain “Right” Customers
Industry Challenges
Increasing Focus on AML &
KYC Initiatives
Emerging Priorities
The Compliance Environment
5. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Compliance is NO LONGER only About The
Bank and Its Clients; It’s About Certain
Activities and How They’re Being
Financed!
6. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Legal Obligation
• The Public at Large has the
Right to Know! Where its
impact on the Financial
Institution’s Reputation and
Performance is often severe.
Profitability suffers, and it
triggers immediate additional
expenses for Damage Control.
Regulator Obligation
Issues of non‐compliance
are handled inside closed
doors Regulators.
The Changing Face of Regulatory Compliance
The
Issue of
Jurisdiction
7. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
De-Risking
__________ is a way of “Muting or Shifting The Risk” NOT
Managing it; and it would have the effect of driving the
development of alternative financial markets and payment
mechanism…. It drives the funds into Opaque Banking
In This Environment Of Unprecedented Regulatory
Scrutiny, Huge Penalties And The Recent Threat Of
Individual Prosecutions, Banks And Other Financial
Institutions Resorted To
The Emerging Trend . . .
The Legitimate but
Unregulated Shadow Banking
>>>>> 2008 Fin Crisis
Intentionally concealing the identity of the client to avoid being
de‐risked >>>>> a worst Money Laundering Problem.
8. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
What’s Driving De‐Risking?
• Reputational Risk
• Compliance Risk
• Complexity of Financial Products, and
Complexity of Sanction & AML Compliance
Rules
• Hefty Fines
• Change in Policy and/or Risk Appetite
• Perceived Risk is greater than the expected
value of the business
• Inadequate Budget to Support Increased
Due Diligence and Monitoring Activities
• Unfavorable Remarks from Regulatory
Examination
• High‐Risk Categories Designated by
Regulatory and Government Agencies.
?
9. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Level Of Maturity in AML Compliance
Nature & Extent of Efforts Deployed
Where the FI is on this Continuum
of AML Compliance Maturity has
to do with:
• Profile of its Portfolio of Clients
• The FI’s Geographical Spread
• Management Sensitivity to
rising Cost of Compliance (Cost
is Real)
• Perceived Benefits (hard to relate
to the Benefits of Compliance
outside the scope of Avoiding hefty
Penalties)
• Resource Availability
• Tolerance for Risk
• Fear (of Penalty)
• Etc.
DD
EDD
RBA
Due Diligence
Enhanced Due Diligence
Risk‐Based Approach to AML Compliance
Enhancing Compliance Capabilities …
AML Cost
Skills Needs
Know‐How
AML Analytics
Moving in this direction is a clear indication that there is a desire on the
part of the FI to continue on serving the client. Otherwise, the FI would
be engaged in De‐Risking
Data
Data
Data
10. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
1. Reporting
2. Descriptive
Analytics
3. Predictive
Analytics
4. Prescriptive
Analytics
OFAC check and reporting
Senior Public Figures (SPF) Account Monitoring
SAR Filing Documentation
Developing Case Summaries.
Transaction red flags and exception management to handle false positive
Distribution analysis of historical transactions below threshold to detect
any systematic money laundering activity and adjusting thresholds
accordingly
Customer segmentation by behaviors and attributes to set thresholds at a
group level versus at global level
Suspicious Activity Monitoring
Customer Profiling and Risk Scoring
Account validation Against Watch Lists and Other Third‐Party Information
Simulation of Thresholds to Identify Improper Thresholds that are
Causing Over Alerting.
Analyzing and Scoring Alerts to Enable Smart Decisions on Which Alerts
to Prioritize and Reduce Reliance on In‐House Specialist
DATA … DATA … DATA … DATA … DATA … DATA
Otherwise, Ambiguity, Ignorance, or Uncertainty
Heavy Pressure on Data Collection, Analysis, and Reporting
12. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Increasing Our Understanding of
Potential Outcomes
Increasing Evidence on Probability of
occurrence
RiskManagement Ambiguity
Uncertainty
Data‐Rich, Information‐Driven
Decision‐Making Process:
KYC, CIP, DD, EDD, RBA, Etc..
Ignorance
A Data warehouse is a
good idea, but a
warehouse only works
when Staff bother to
make deliveries into it –
and that’s where Compliance
Officers need some sharp Inter‐
Personal skills, to convince others
to share their data. Without the
Right/Complete/Timely Data,
Compliance Decisions are
Ambiguous, Ignorant, or
Uncertain!
Put Your “Compliance” in Order
13. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Low
High
Low
High
Accept
Mitigate
Transfer
Avoid
Frequency of Occurrence of Mistakes in Serving the
Client
Severity ofLosses Resulting From These
Mistakes
High‐Frequency / High‐Impact
Client Account (Or Transaction)
Behavior
Low‐Frequency / High‐Impact
Client Account (Or
Transaction) Behavior
High‐Frequency / Low‐Impact
Client Account (Or Transaction)
Behavior
Low‐Frequency / Low‐Impact
Client Account (Or
Transaction) Behavior
In terms of operational losses,
the result may be a transition
from High‐Frequency, Low‐
Impact losses TO Low‐
Frequency, High‐Impact
losses. The event type will
change as well.
Risk‐Culture
Awareness maybe
a superior solution
to Automation
Compliance is turning Time
Consuming
14. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Low
High
Low
High
Accept
Mitigate
Transfer
Avoid
De‐Risking
Business As Usual:
KYC/CIP Update
• Transaction
Monitoring
• AML Control Staff
Training
WHY DE‐RISKING?
There is a heavy cost associated
with enhanced Due Diligence
and/or Risk Based Approach.
Otherwise, there could be a
problem in resource availability.
One Easy & Possible way to
Mitigate AML Compliance Risk is
De‐Risking
Frequency of Occurrence
Severity ofLosses
De‐Risking
De‐Risking
The De‐Risked
Universe
15. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Client is Engaged
Compliance Cycle
Service Cycle
st1Client
Interface
Start
Interface
End
CIP, KYC
AML Compliance (Regulator Decides)
Client Engagement is Constrained by: The Bank is
Deemed AML‐Compliance Responsible & Accountable
Customer Satisfaction (Customer Decides)
Client Engagement is Driven by: The Potential for
Revenue: Interest Income, Commissions & Charges;
and a Word‐of‐Mouth Free Marketing
Branch
De‐Risking Means The Bank
“Expects” To Receive A Greater
Value From Disengaging With The
Client than from Maintaining The
Engagement!
16. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The De‐Risking Dilemma . . .
Be alert for customers
who could be engaged
in illegal activities
Continue providing banking
services to legal but potentially
high‐risk businesses.
Banks are often caught between Conflicting
Mandates, with Regulators instructing them at
once to …
17. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Compliance By Fear …
Higher Probability of De‐
Risking
Non‐Compliance By
Mistake… Due to lack of
understanding … De‐Risking
is a more likely outcome.
Compliance
Since De‐Risking has been on the rise, it must
be that most of us have been complying ’By
Fear’.
We’re becoming increasingly good at COMPLIANCE
BUT not in Assessing & Addressing the RISK of:
• Compliance AND
• that of Non‐Compliance
Moving Risks to Opaque Banking has proven
Very Risky (e.g., Last Financial Crisis)
The Biggest sanctions challenge is
the complexity of screening all
dimensions of financial transactions.
The Completeness of
Screening is a
nagging concern!
19. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
• Lost Revenue
• Compromised Relationships with
Clients (Existing and/or Potential)
• Respectable Clients within a De‐
Risked groups may end up being
penalized unnecessarily
• It is indeed a Transfer of Risk (and Re‐
Risk) instead of Risk Mitigation
• De‐risking will drive the development
of Opaque Banking
• De‐risking could potentially limit
access to correspondent banking and
hinder Trade
• Etc.
The Cost of De‐Risking …
The trend continues globally for
institutions to exit relationships with
entire categories or groups of customers
because they believe that is the easiest
and least expensive way to manage risks
within a high‐risk category.
The Banking Industry observes sanctions,
anti‐money laundering measures and
moves to combat terrorism financing as
falling foul of these rules risks BALANCE
SHEET ALTERING FINES. These penalties
are imposed by jurisdictions beyond our
own . . .
Re-Risking
20. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
• Strained remittance corridors
• Frustration for legal businesses struggling to get by without reliable banking services.
• Growing lack of transparency between some businesses and their banking service providers
now directly threatens banks’ ability to effectively manage money laundering and terrorist
financing risk … Hide The Risk.
• While some businesses will close up shop if they can’t work with financial institutions, many
others will take a different approach.
• A bank with a policy that prohibits certain businesses from holding accounts instead winds up
dealing with businesses that have gone to great lengths to conceal the true nature of their
activities.
The Unintended Consequences of De‐Risking …
Re-Risking
So who wins in the De‐Risking Game? …
The Criminal Organizations Do!
21. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Nine Countries Where Banks have to be Extra Cautious. Why? Because the
U.S. Treasury says so.
• Somalia (Money Laundering)
• Iran (State Sponsor Terrorism)
• Cuba (Old affairs)
• Sudan (Money Laundering)
• Russia (Because of Ukraine)
• Syria (State Sponsor Terrorism)
• North Korea (State Sponsor Terrorism)
• Venezuela (Politically Connected People)
• Greece (Corruption)
Banks have been De‐
Risking in most, if not
all, these countries.
Otherwise, they face a
hefty fine.
22. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
A Growing Desperation By Policymakers To Solve The
Derisking Problem …
• The UK Financial Conduct Authority (FCA):
will no longer recognize heightened regulatory risk as a legitimate reason to drop customer
relationships.
will pursue banks that do drop business lines …. Wholesale De‐Risking.
Now consider during our AML work whether firms’ De‐Risking strategies give rise to
consumer protection and/or competition issues.
• Regulators have been trying to stem the tide of De‐Risking emphasizing that they do not want
banks to drop entire business lines or cut off whole countries from remittance activities.
• De‐Risking will eventually push high‐risk and high‐volume customers to Shadow Banking.
• US Regulators and FATF have already said that banks should take a risk‐based approach, and
that they expect there to be a legitimate reason behind a bank’s decision to end the customer
relationship!
The Emerging Trend . . . Again
Wouldn’t it be ironic if we start seeing banks being fined
for De‐Risking!
23. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
• Regulators may question banks’ decisions to hold accounts for customers in cases where a
Suspicious Activity Report has been filed.
• Regulators encourage a relatively low threshold at which banks have “reasonable grounds” to
suspect customers.
• Regulators acknowledged the inherent conflict that banks face and suggested that the Financial
Action Task Force may not be the best venue for the De‐Risking debates.
• Regulators admit that De‐risking is not only an Anti‐Money Laundering issue but affects broad
bands of the global economy.
• The World Bank continues to express concerns over De‐risking and its implications on global
remittance payments.
• Regulators identify “Correspondent Banking Relationships” as a Vulnerability. Many banks are
re‐assessing these relationships. Community banks and credit unions are already finding it
difficult to obtain and maintain the correspondent banking relationships necessary to serve
their customers.
The Emerging Trend . . . Again & Again
“If the Regulator wants to run a BANK to bank the clients we’re De‐
risking, they’re welcome to do it. We’re not a public utility. We have
responsibilities to our shareholders.” one Banker said.
24. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Ironic Result of
De‐Risking is
Re‐Risking.