Ua bmay2015 aml.fheili

Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Compliance‐Induced
De‐Risking or Re‐Risking
"‫اإلرھاب‬ ‫تمويل‬ ‫منابع‬ ‫تجفيف‬ ‫آليات‬"
Mohammad Fheili / AGM Jammal Trust Bank s.a.l.

Where there’s Demand & Supply, there is a market. Where there’s a
market, there’s an Economic Activity. … And where there’s an Economic
Activity, there’s Financing to sustain that economic activity.
Irrespective of the nature of the Economic Activity: legal or
Illegal; desirable or not desirable; ethical or unethical; …
This Is Where
Banks/FIs
Are, BUT
MUST NOT
Be!

The Roads Banks Have
Been Traveling On…!
Risks, Regulations, Complexity, Compliance, Sanctions, Tax
Evasion, Law Enforcement, … !

In the Universe of Compliance, we will look at ….
• The Headlines
• The Trends
• The Regulations
• The Banking Model
• The Penalties
• Whistleblowers
• The Changing Compliance Landscape
• The New Face of Regulations
De‐Risking as a Plausible alternative to
managing Compliance Risk.
Or Re‐Risking!
Has De‐Risking
Been a Solution or
a Problem?
The Presentation Landscape

The Headlines . . .
• Globally, Corporations and financial institutions are changing their approach to compliance,
which has evolved from a standalone task to an integrated and complex function that
incorporates legal, risk, operations and tax.
• With growing economic integration, financial firms are being increasingly exposed to the risk of
financial crime and regulatory criticism.
• Regulatory fines have increased dramatically and now run into billions of dollars.
• Personal liabilities of Senior Executives has also increased.
• Not ‘Due Diligence’ BUT ‘Enhanced Due Diligence’ is now firmly entrenched in customer
onboarding processes.
• Compliance Units are being overwhelmed by the increasing ‘Speed’ and ‘Complexity’ of
Regulatory Change. BUT more of the spending is being allocated to Technology and Processes
rather then People (building people’s capacity).
• Data Availability, Data Materiality, Data Security, … and more Data. …. And Modeling the Data.
• Whistleblowers …!
• Regulatory Reliefs …!

The Trends . . .
Senior Management Engagement in AML
Efforts
AML Cost grew beyond Expectations
A Global Approach for Managing AML and
Sanctions Risk
More Focus on Politically Exposed Persons …
The PEPs!
KYC Continues to be an Area of Concerns driven
by Compliance NOT understanding.
Sanction Compliance remains a Challenge as
new issues emerge
Transaction Monitoring continues to represent
the greatest area of AML Spending
Regulatory Approach was ranked as the Top
AML Concerns
Has senior management and the Board of Directors
taken active roles in AML Compliance?
The Cost of AML Compliance has increased Sharply
on all fronts: People, Systems, etc.
Establishing a global AML Policy was a major
challenge for FIs with global presence.
Enhanced  due diligence on PEPs at account
opening or on an ongoing basis!
Banks continue to use remediation programs to
“backfill” customer data.
Sanctions Compliance is now a major challenge and
a source of AML Investment.
People are still the first line of defense in the fight
against money laundering, but … !
Some called it “Regulatory Burden”; others labeled
it “Regulatory Collaboration”; … !

The Regulations . . .
Basel I Basel I½ Basel II
Credit Risk
Credit Risk
Market Risk
Credit Risk
Market Risk
Operational Risk
1986
proposed
1993
proposed
1999
proposed
1988 effective 1996 effective 2007 effective
Consultative Paper (CP1)
in Nov 18, 1999, and CP3
in July 2003
Response Quality:
Reactive
Response Quality:
Reactive
More and More Risks are being identified, and more Regulatory Guidelines to
Comply With: Financial Regulations, Risk Regulations; Legal Regulations; AML &
Sanctions Compliance; Etc.
Basel III
Credit Risk
Market Risk
Operational Risk
Capital Quality
Capital Buffers
Liquidity: LCR, NSFR
2009
proposed
In response to Financial Crisis
which dawned on us in 2007:
Sub-Prime Real Estate Lending
Kick Off in 2011
Basel IV
Credit Risk
Market Risk
Operational Risk
Shadow Banking
Additional Buffers
(Primary response: increase
capital requirements)
2015
Anticipated
In response to the growth
of Shadow Banking and its
implications on Financial
Stability
Kick Off in 20__
?

The Banking Model
 MAXIMIZE PROFIT subject to:
RISK Constraints
REGULATORY Constraints
RISK .  . .
 Default
 Liquidity
 Maturity
 Other Types of Risks
REGULATORY . . .
 Basel I
 Basel II
 Basel III
 Other Types of
Regulations
 Sanctions Rules
 FATCA Requirements
 AML, Etc.
Uses of
Funds
Sources of
Funds
 Reserves
 Loans
 Securities
 Other
Investments
 Fixed Assets
 .  .  .
 All Types of
Deposits
 Borrowings
 Other
Sources
 Equity
Capital
 .  .  .
. . . and Off-Balance Sheet . . .
With every Dollar in
Profit a Bank
Makes, it MUST
satisfy all these
Regulatory
Constraints!

The Penalties
The FI The Amount The Sanctions [Countries]
$8.9 Billions Sudan, Iran, Cuba
$1.3 Billions and $665
millions in Civil Penalties
Cuba, Iran, Libya, Sudan, Burma
$619 millions Cuba, Iran
$536 millions Iran, Sudan
$350 millions Iran
$298 millions Cuba, Iran
$227 millions Iran, Sudan, Libya, Burma
No criminal
intent but hefty
fines… Thus the
element of
Fear.
Not to mention
the implications
on Reputation.

The Whistleblowers
• In September of 2014, the SEC awarded more than to a whistleblower. …. With such
potential payouts it’s easy to imagine a long line of employees waiting to turn snitch.
• It’s NOT a reach to question whistleblowers motivations!
• Aside from the hard money costs, the damage a single regulatory inquiry can cause is
significant, regardless of whether or not the claim ends up being substantiated. The sheer cost
of time and labor required to produce documents alone is staggering, not to mention hiring
additional legal support, reputational costs, etc.
• Data shows that Whistleblowers include: Disgruntled employees, actively engaged and well
performing employees, supervisors, high‐level managers, …. Consultants and Contractors.
• Whistleblowers represent a real risk and that risk needs to be addressed: Deny, Confront,
Retaliate, or Embrace? … Embrace the idea of whistleblower as the motivator for making your
ethics an compliance program as strong as it can be, rather than as an enemy out for revenge.
$30 Millions

The Changing Compliance Landscape
The Biggest sanctions
challenge is the
complexity of
screening all
dimensions of financial
transactions.
The Completeness of
Screening is a
nagging concern!
Compliance By Fear
Non‐Compliance
By Mistake

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 New Face of Regulation
The
Issue of
Jurisdiction

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.

De_Risking
Rather than to engage in the comprehensive Know
Your Customer (KYC) and Enhanced Due Diligence
(EDD) requirements that make these customers very
costly to maintain, banks and other financial
institutions are reacting to heightened regulatory
scrutiny and record‐breaking fines by De‐Risking.

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 …

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.
?

• 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

• 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!

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.

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!

• 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.

Compliance & The Risk‐
Based Approach
Show Me The Data … KYC, DD, EDD ….

Assessment of The Magnitude of AML Risk
 International Wires
 Internet Banking
 High cash Users
 Suspicious Transactions Report
 Politically Exposed Persons
 Industry / Occupation
 Nationality
 Account Maturity
Compliance
Risk
Bank Clients
Bank Services
Bank Products
Geographies
 Private Banking
 International Correspondent
Banking
 Offshore International Activity
 Account Data
 Transaction Data
 Economic Sanctions
 Non‐Non Cooperative Country
Territories
 Country Watch List
Examples of Risk Measures

Assessment of Inherent AML Risk
Inherent
AML Risk
Customer
Base
Product /
Account
Transactional
Business
Strategy
Geography
Portfolio of Product Offerings:
• Sales Finance, Mortgages, Life Insurance,
Anonymous Saving Accounts, ….
• Maturity / Stability; Domicile /
Residency; PEP Status
• E‐Banking; Indirect Customers
Portfolio of Transaction Types:
• Domestic transfers, Cash deposits,
International Checks, International
transfers, …
• Mergers & Acquisition activity
• Business Strategy changes
• Expected growth; product portfolio
expansion; …
• Staff Turnovers
Examples of Risk Factors
Country Risk Rating Models
• Positive Factors (FATF, EU, BIS); Negative
Factors (Sanctions, NCCT, Offshore, …)
1
2
3
4
5
1
2
3
4
5
Policies & Procedures
Governance
Training
Risk Assessment
Customer Risk Rating
KYC, CIP, EDD
PEPs
Screening
Surveillance
Reporting
Record Keeping
Auditing Testing
Control Areas

Know Your Clients so You Understand The True Nature of Compliance Risk and Manage It
… Ambiguity, Uncertainty, and Ignorance are not Risk Management!
Increasing Our Understanding of
Potential Outcomes
Increasing Evidence on Probability of
occurrence
Risk
Management
Uncertainty
Ambiguity
Ignorance
Reputational
Risk
Reputational
Risk
Reputational
Risk
Know Your
Customers through
Enhanced Due
Diligence.

The Ironic Result of
De‐Risking is
Re‐Risking.

Ua bmay2015 aml.fheili

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Ua bmay2015 aml.fheili