(Bloomberg) — Top US Treasury Department officials plan to make the rounds in 2023 to address what they see as a troubling pattern when it comes to sanctions and other forms of risk: Banks are being overcautious and turning away customers who may need them the most.
(Bloomberg) — Top US Treasury Department officials plan to make the rounds in 2023 to address what they see as a troubling pattern when it comes to sanctions and other forms of risk: Banks are being overcautious and turning away customers who may need them the most.
Brian Nelson, the Treasury undersecretary for terrorism and financial intelligence, will go to Seattle, San Francisco and San Diego this month to warn banks against overcompliance such as cutting people off from services over fears of running afoul of sanctions.
“When financial institutions engage in de-risking — the indiscriminate loss of financial access for entire categories of customers — everyday Americans can be forced to turn to unregulated and potentially dangerous financial activity,” Nelson said in a statement.
His push highlights a challenge the US faces with sanctions: Successive administrations have imposed them swiftly and sometimes without much clarity, expecting financial institutions to comply on their own. Banks that run afoul of sanctions can face heavy fines, so they often adopt extreme caution toward anyone who could be considered a sanctions risk.
While de-risking can stem from concerns about profitability, fear of sanctions exposure or confusion about complying with anti-money laundering rules, the intent of the effort is to ensure no one is cut out of the financial system because an institution preemptively excludes them instead of assessing their actual risks, according to a spokesperson for the Treasury Department.
That’s what happened after Russia’s Feb. 24 invasion of Ukraine.
‘Self-Sanctioning’ of Russia Sparks Worries About Ripple Effects
In some cases, sanctions went beyond previous measures, targeting the country’s sovereign assets held in US and other western institutions, and blocking Russia’s banks from Swift, the international messaging system used by banks and other financial institutions.
In many cases, US companies that were not forbidden by law from doing business in Russia left the country on their own to protest the invasion. That helped lead to fears of exacerbated inflation and food insecurity well beyond Russia’s borders.
Now the US is encouraging banks to allow transactions under a “National De-Risking Strategy” that will include recommendations and reforms to make it easier for banks and other financial institutions to comply with sanctions.
As part of his outreach, Nelson is scheduled to meet with large technology companies such as Apple Inc. and Alphabet Inc. as well as smaller institutions such as independent community banks and money service businesses that serve diaspora communities that are primarily affected by de-risking.
“We believe that financial inclusion and countering illicit finance are actually complementary rather than contradictory, which is why we continue to push for a risk-based approach to stopping money laundering, terrorist financing, and other illicit activity,” he said.
The US has approximately 44 million foreign-born residents, according to the 2020 census, and the World Bank estimates they sent about $73 billion in outbound remittances in 2021. Officials argue that needlessly restricting the flow of that money is bad for US foreign policy.
(Updates with foreign-born residents, in final paragraph.)
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