This Week in AML

Treasury’s 2023 De-risking Strategy

The US Treasury has issued its 2023 De-risking Strategy. The report reviews the reasons that banks engage in de-risking and includes recommendations to reduce the impact of the practice. John and Elliot discuss their thoughts on the strategy, where they think Treasury got things right, and where it missed opportunities.


Treasury’s 2023 De-risking Strategy - TRANSCRIPT

Elliot Berman: Hi, John. How are you?

John Byrne: Hi, Elliot. Good. Obviously, we were both at the Partnership Forum last week. Tremendous success, if I do say so based on the input from the steering committee and the attendees was really happy, not just how it turned out, but the support that we all received from our law enforcement partners.

I think that was key to making the event, not just simply successful, but hopefully something that continues for many years to come.

Elliot Berman: Yes. Got a lot of great feedback. Good attendance and focus. And as you already pointed out, really great commitment from the law enforcement partners, which is critical, given the format and the concept behind the Forum.

Heard a lot of interesting presentations and discussions. Some things that I'm still pondering.

John Byrne: We're recording this earlier in the week than normal because I'm also attending to the West Coast AML Forum in San Francisco this week. And that was the model which we patterned our Forum after checking with the coast folks from West Coast to make sure they were okay with that.

And they certainly not only were they okay with it, they were one of our sponsors, which was what was great. So they also are going to have law enforcement participants. In fact, Guy Ficco from IRS:CI is their keynoter there. And there'll be case studies and other things very similar to what we were able to do.

So definitely, it's a clear signal that we know, but maybe not everybody in our community knows, it's so important to have partnership, to try to learn together. And both of these events certainly tackle that. And I think do it very well. This is the 30th anniversary of West Coast AML. So hats off to them.

And hopefully we can have a long run on the East Coast as well.

Elliot Berman: Yes, that would be great. So we've had two good years and I know there's a lot of energy to putting together a 3rd year. So we'll start working on that shortly. So John, last week , the Treasury Department announced its 2023 De-risking Strategy.

I'm assuming you saw the report and the executive summary, and they've also published a fact sheet. Did you have a chance to take a look at that?

John Byrne: I did. And it's also driven by AMLA. It was obviously a mandate from AMLA that this be crafted and released. And I want to say that from where I sit and from working with using the word partners again in the humanitarian world and others that struggle with financial access.

I was disappointed in the report because, as others have said, this is a report that was really asked to address this issue in a transparent fashion. What are all the rationales and factors that go into it? And then what are some recommendations and strategies to improve it? Some of that was covered and we'll talk a bit about this.

I was disappointed in a few things, but I'll just start off with this one area that we can build our conversation off of that. And that is that the main theme is the description or the definition of de-risking that Treasury focused on. And it was referencing the executive summary here: the practice of institutions terminating and restricting business relationships indiscriminately with broad categories of clients rather than analyzing and managing the risk of clients in a targeted manner. So that already put you on the defensive. If you're in the financial sector. I don't agree that's the issue that it's indiscriminate at all.

I think there is a whole host of factors that go into making risk decisions. And I know we're going to talk about that. So that was one. And then the other thing that really, I think, got many people that came to the conference, the forum last week, talked about this very upset was the key finding that you'll see in the fact sheet, the Treasury released that, quoting here, profitability is the primary factor in financial institutions de-risking decisions.

They do say profitability is influenced by a range of factors. The profitability. Really, folks, that's what we're doing. I disagree with that wholeheartedly, and I think it's unfortunate. Of course, my definition of profitability may be different than others. But those were the few things that jumped out at me and I thought they missed a key opportunity here.

Elliot Berman: Agreed. And I think the two factors that you mentioned left me feeling when I read the report that this was pretty much how de-risking was looked at 15 years ago and that there wasn't a lot that was brought forward or brought out in this new report.

It felt to me like there was a lot of prior work and not a lot of new work. And even in some of the recommendations, I scratched my head because it was aren't we already doing that? Or isn't this already in flight? A couple of examples consider proposed regulations that require financial institutions to have reasonably designed and risk based AML/CFT programs supervised on a risk basis possibly taking into consideration the effects of financial inclusion.

Okay I guess I can't think of, I can't point to a specific regulation that has financial inclusion built into it in this space. But I think many people in the community are already running their programs on a risk based basis, and are also making their customer decisions on a risk basis.

So that struck me as a little hollow. And the other one that really caught my eye was bolster international engagement to strengthen the AML/CFT regimes of foreign jurisdictions. And I'm thinking it seems to me the FATF is putting out a lot of great material. They have a process where essentially there are shared examinations. They're not regulatory in the sense that they're not by an organization's given regulator, but it is by the other countries and they test against what have become international standards generated through the FATF process.

So it was like, I'm sure they had something else in mind, but it just seemed to leave open the question, is this really the best current work that Treasury could have put out?

John Byrne: Yeah, and clearly it's not. As we, the financial sector and humanitarian world through the charity security network released a study back in a report back in June of 2019. That is not noted anywhere in this report number one. Number two in that report we crafted under the auspices of ACAMS, the World Bank, regulators, we had a really broad group of people that worked on it. It was basically designed to have humanitarian groups better explain their due diligence processes for the financial sector and for the financial sector to explain in a more clear way what their obligations and expectations were. And so that was a more than a starting point, it has some really solid recommendations, including perhaps the government creating a registry, which is nowhere mentioned in this report could be tough, but still they don't even address it.

And I just think that not recognizing that there's been these efforts in the past is a real miss here. They do reference something that I was very tangentially involved and won't take no credit for was a decent report from CSIS that looked at these things that came up with additional recommendations.

But, if you're going to do a report like this, you need to, in this case, boil the ocean. What else is out there? And I thought they missed that. They talk about encouraging ongoing engagement private-public with MSBs, MPOs, banks and regulators. Great. Give us some ways in which that can occur.

Didn't do that. It says reduce burdensome requirements for processing humanitarian assistance transaction. Okay. Sounds great. What are we talking about? Doesn't mention that either. I think, and just going back to the whole idea of profitability I think is really unfortunate. They do talk about this and it's not all on the regulators, but they do.

One of the recommendations I do support is consistent supervisory expectations, including training the federal examiners that consider the effects of de-risking. I agree with that. I will also say, though, we need to give our regulators credit for some of the statements and guidance documents that they've been issuing because they've been doing quite a bit, but it really hasn't solved the problem.

And I'll end with this comment. I received an email from a peer of ours that we both worked with who was in the federal government and is now in the private sector advising firms. And I can't say any better than this person said to me in the email.

He said, "regardless of how reasonable sounding policymakers may seem in far too many cases, it simply does not always translate to the field. The practical reality is that policy issuances and public statements from on high do not really matter. Regardless of what the policymakers say and what the law actually requires, the BSA is what your examiner says it is, plain and simple."

I couldn't have said it any better. And it's not just because of examiner criticism. It is because you have to justify a higher risk entity that you're going to mitigate and what that means and how you're going to do it. And you may decide it's not worth it financially, but that's a resource issue. It's not a pure profitability issue. I think these are some of the areas that the Treasury totally swung and missed on in my opinion.

Elliot Berman: Yeah, I don't usually say this about the work coming out of Treasury because I actually think most of it's pretty good, but this really felt like a, oh, we've got a requirement to, to do this study and create this strategy, we got to get something out. And I'm sure the people who worked on it were earnest.

I, you and I both have a very high regard for our colleagues in the government, both in law enforcement and in the regulatory side, but these kinds of opportunities don't come along as often as we need them to, and to not make the most of it is, I think, a big, as you say, swing and miss.

John Byrne: So you should look at not just the quick fact sheet on the recommendations, but how they spell them out, and there are some things there which I think, as you just mentioned, are valuable. And I'll just go back to their conclusion. They do recognize that the findings support the view that de-risking is a challenge of both private and public sector.

No single action by the government will be a panacea. Totally agree. They think coordinated action by the federal government could make significant progress. I agree with that. But that means understanding the scope here. But collaboration makes sense. I say the regulators have made some inroads in public statements, but that has to translate to the field like our peer has said, and then they end with continued open engagement dialogue to improve financial inclusion are essential to mitigate the causes of de-risking. I agree with that and hopefully there'll be updates to this document going forward.

Elliot Berman: Yes. So before we ring off and before you jump on a plane to San Francisco what is this month's webinar?

John Byrne: This month, we are doing a program on May 25th, one o'clock Eastern, and this is on the concept we're referencing today, private-public partnership.

So AML Voices will have Don Fort, as we know, former IRS:CI chief, Director of Investigations, at Kostelanetz. We will also have Tom Fattorusso, who's the SAC in New York IRS:CI. Marilu Jimenez from our board and the head of her firm financial advisors. And it's all going to be about how the partnership can enhance detection, prevention reporting of financial crime. Marilu's got broad experience there with local regulators in Puerto Rico, but also more broadly in the remaining parts of the U. S. And according to Don, we haven't had a chance to talk to Tom yet, but Tom's going to talk about some specific examples of partnership and how they've worked with IRS and the financial sector. So we're going to give you some both broad understanding of this, but some real good practical advice that you could take back to your institutions and the partnering that hopefully everybody is trying to enhance.

Elliot Berman: And you can register for the webinar again on our website, amlrightsource.Com. And we already have good early registration, so

we're looking forward to having a large audience and to sharing those practical ideas in this important area. John, you have a safe trip and enjoy the West Coast Forum, and we'll be back with our audience next week.

John Byrne: Take care, Elliot. Stay safe.

Elliot Berman: You too. Bye bye.