This Week in AML

The Wolfsberg Group, the European Banking Authority, and De-risking

The Wolfsberg Group and the Institute of International Finance have issued a joint comment letter to the European Banking Authority on de-risking. John and Elliot discuss the details of the comment letter, including its recommendation that the EBA adopt definitions and other approaches on de-risking taken by FATF, as the EBA works toward updating its AML/CFT regime for the European Union.



The Wolfsberg Group, the European Banking Authority, and De-risking - TRANSCRIPT

Elliot Berman: Hi John. How are you today?

John Byrne: Hey Elliot. Doing well. Thanks. Good connecting last weekend in Milwaukee. It was to see you and your wife and connect with Dennis and his wife. So we had a nice time. So that was great. Yeah, it was good to see you guys.

Elliot Berman: You saw a great basketball game, which was good and a nice program that you and Dennis and Chris Farrell from the FBI did at the Marquette University Banking Club on Monday night, too.

John Byrne: Yeah. The key I think is you and I do this all the time in terms of what's the next couple of generations of folks that are thinking about career pathing, and obviously we believe very strongly our space is an area they should consider with all the positive impacts you can have on societal and community challenges. So anytime we get a chance to talk about what's happening in terms of financial crime and what folks can do either in the government or outside, it's always useful.

So we'll always raise our hand to be part of those sorts of discussions.

Elliot Berman: Yeah. Nice crowd of mostly college undergraduates who after their regular school day, spent 90 minutes listening to you guys. I think it was good. And I agree, those are really important opportunities for us to let people know about career opportunities that they may not have any insight into without a program like that.

John Byrne: So couple things. Next month in, in March, we're gonna be doing. One of, one of our AML voices webinars on the Wolfsberg Group, which is obviously an organization that is well known by many in the AML community, but not everybody. So we want to expose our clients and those that actively participate or listen to our programs about the Wolfsberg Group, but we saw a statement or comment letter, if you will, that they submitted on an issue that we also have covered in depth and will continue, and that's the issue of de-risking. So did you get a chance to look at that posting from I guess both the Wolfsberg Group and the Institute of International Finance, they did that together.

Elliot Berman: I did see that. Read through it. Interesting take again, written from the perspective that the European Banking Authority which is the centralized banking authority for the European Union is working on an update to its approach to anti-money laundering and terrorist financing.

It's in the process of going through their legislative process at the central level, and then it goes to the constituent states. So this was a response to some preliminary materials that came out of the EBA about de-risking

John Byrne: One of the things that continues to challenge both the financial sector and the public sector is to have a clear understanding of why de-risking occurs.

And there's a variety of themes that the filers, the Wolfsberg Group and IIF made clear, which I thought were not just relevant, obviously globally, but relevant to the debate we're having in our country. And one of the first things that they focus on is the definition. I should step back.

They urged that the EBA to work more closely, I don't think work more closely is probably the wrong term, but to recognize that FATF has done a lot of work in this space and to utilize their verbiage and their their recommendations, their guidance, so that we have sort of one area to look at.

And they say that the the definition that the EBA proposes they thought was incomplete, so it did not include, what are considered reasonable grounds that financial institutions might have for exiting a relationship or not onboarding at the beginning to try to manage high risk or higher risk money laundering, financial crime, terrorist financing risks or commercial realities following a case by case assessment.

And I thought that was interesting that they think there's a gap in the EBAs proposed definition.

Elliot Berman: Yes. Again, FATF, and this is taking something that's lengthy and complicated and trying to reduce it to a sentence, FATF's approach is acknowledging that de-risking does not occur when a financial institution after a case by case assessment of the risk of a particular client chooses either to ask the client to exit or does not agree to offer services in the first instance. De-risking has been thrown around a lot and certainly at the front end, I think a lot of it was focused on whole classes of customers.

We are not going bank NGOs, period. Or we're not going to bank NGOs who work in conflict areas because they're, per se, high risk and

unacceptable. I think the FATF approach is much more nuanced. I think many people in the industry have become more thoughtful in the conversation and the comment letter certainly is reaching out to the EBA and saying, this is a good approach. And as you pointed out, a unified approach with FATF. Makes a lot of sense because I, all of the EU countries are also participants of FATF, so why not have one set of definitions?

John Byrne: They've issued several recommendations and a couple I want to mention specifically that the general guidance that EBA is considering that it should acknowledge some of the following, or the acknowledge, I'll give you one aspect, which I think are, it's very clear and direct, the principle of having financial institutions have legitimate risk management reasons for exiting or declining individual customers on a case by case basis. This all goes back to giving deference to the risk assessment of a financial institution and also FATF's heavy reliance, which we agree with on the risk-based approach. So that principle of understanding that happens by individual institutions on individual customers, whether they be entities or whether they be individuals, case by case.

And as you say, not putting every type of entity in the same bucket. NPOs and NGOs are the best example of that, something that we've talked a lot about. They're not homogenous. There's all sorts of different types of NPOs and that's something that it seems that the EBA is not recognizing, and that's certainly one of the stronger points that Wolfsberg makes in this comment letter.

Elliot Berman: Yes. We've talked a lot in the United States, the fact that the regulators here have written a fair amount about applying a risk-based approach, but then don't always seem to take that into account when they're doing examinations. I think with FATF on record of saying, a risk-based approach is the preferred approach, I might go so far as to say best approach and and that we believe that, I'm putting words in FATF's mouth now, but we believe that financial institutions can develop effective risk analysis processes, so they really are able to discern high risk from medium risk, from low risk, and therefore make sound business decisions based on that approach. EBA in their current proposals is a little behind the US; on any given day it's a little hard to figure out where we are, we know what the rhetoric is, but I think it just depends on whether you had a good exam or a bad exam recently, whether you actually believe that you're allowed to do a risk-based approach.

John Byrne: And a couple of other things that we've talked about, and actually was part of the paper we produced several years ago is to have NPOs better understand what financial service providers need in terms of various requirements, whether it be things like sanctions licensing, or just normal due diligence processes so that on the one hand, NPOs need to

understand what FI's requirements are, and then FIs need to work with NPOs to understand their structure and how they operate.

So basically saying what we said five years ago, both sides need to better understand each other because once you do you're better able to do a more effective risk assessment and risk management and risk mitigation. So I think that's that's a strong statement from Wolfsberg and something that logically could lend itself to a more transparent and open process.

And that's here. I gotta say to some of us outside of Europe, not as easy to manage the wording and that's on us. That's not a criticism of European verbiage. But I think as you go through this, read this very carefully because there's a lot of excellent points that we've mentioned before, meaning institutions in the US and many US institutions are part of Wellsberg and they make that clear as well.

But I would just say that five page document, a lot of good information here. And you would expect that the EBA would welcome this, especially the overall point of connecting more closely with FATF, the various recommendations of various guidance documents that they've issued on this very tough and challenging issue.

Elliot Berman: Agreed. So you've already mentioned the March webinar that we're gonna do. February's webinar is. AML compliance for mid-size banks, and we'll have a great panel of experts from mid-size institutions talking about some of the challenges they face given the resource levels they have and the expectations that regulators have for banks of their size.

So that will be Tuesday, the 28th of February. The livestream starts at 1:00 PM Eastern Time, 6:00 PM GMT and you can register at our website amlrightsource.com. John, I know you've been doing some interviews because they've been coming my way for production. Tell our audience about some of the interesting ones you have coming.

John Byrne: Very excited to to mention a couple of things. One is we've done a series with Homeland Security on a variety of issues that they're involved in, and that'll be getting posted shortly. Also as of this recording, Jim Lee, the Chief of IRS: CI, sat down with me a few weeks ago and we posted it today about his challenge to IRS to look at the value proposition of Bank Secrecy Act data. So we were really pleased to, to help IRS:CIprovide additional outreach to the AML community, and that's available on our website. We've also, communicated that via LinkedIn and other social media platforms.

Also, I interviewed a former enforcement lawyer from the OCC about his career. Very interesting lawyer who's been involved over decades with everything from the savings and loan crisis to technology challenges just before he moved on to work at a law firm in Washington DC. And then I have an interview this week that will be posted in a few weeks with Tom Vartarian, who's a banking law expert of many years. And he's just written a new book about cyber related topics and issues from overview of the internet to beyond and hacking and all sorts of things. I'm really excited to sit down with Tom every time I do he teaches me something new. So really interested in that as well. So a lot going on, as we always say. If you have people or topics or themes you want us to cover, please reach out to Elliot and myself. We'd be more than happy to put that in play.

Elliot Berman: Yes. So thanks John. You have a great rest of the week and I will talk with you next week.

John Byrne: Sounds good, Elliot. Stay safe. Talk soon.

Elliot Berman: You too. Goodbye.