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Risk Fraud & Compliance

COVID-19 pandemic complicates AML challenges for banks serving charities, experts say

Brett Wolf  Regulatory Intelligence

Brett Wolf  Regulatory Intelligence

The COVID-19 pandemic has complicated the provision of banking services to humanitarian and charity organizations that are trying to help globally amid a "de-risking" trend of banks unwilling to serve them, experts said during an anti-money laundering (AML) compliance webinar.

The U.S. Treasury Department may need to prioritize helping the charity sector get banking services, they said. “How do institutions actually manage high-risk customers?” asked John Byrne, executive vice president of AML RightSource, which held the webinar earlier this month. “That’s the big challenge. If you can’t appease your regulator or your institution or your business line, that’s when these things occur.”

De-risking is defined as “action taken by a financial institution to terminate, fail to initiate or restrict a business relationship with a customer, or category of customers, due to drivers such as profitability, reputational risk, lower risk appetite, regulatory burden, or unclear expectations and sanctions regimes,” Byrne explained, adding that the COVID-19 pandemic has only increased the need for humanitarian and charity networks to have access to financial services.

“We’re in the middle of a pandemic, unfortunately there have been hurricanes and earthquakes and all sorts of issues, and part of the response to that is always been ‘How do you get financial support?,’ and if there’s problems in getting that financial support, for whatever reason, that becomes impactful for getting things like medicine, water and other key supplies (to those in need),” he said.

De-risking of money services businesses, charities, embassies, and other customers viewed by the government as high-risk skyrocketed following the attacks of September 11, 2001 and the ensuing USA PATRIOT Act, which tightened the U.S. AML regime. Because some funding for the September 11 attacks moved through organizations that portrayed themselves as charities, the sector came under especially harsh scrutiny.

Charities losing bank accounts 

About seven years ago, the Charity & Security Network, a lobby group for non-profit organizations, began hearing from “quite a few of its members” that they were losing their bank accounts, said Andrea Hall, policy counsel with the group, during the webinar.

“They would get a phone call or a letter saying ‘You have 30 days to move your money,’ (but) there was never an explanation given and when they tried to inquire further the representative at the bank would say either ‘it’s out of my hands; it’s higher up the food chain,’ or ‘I’m not allowed to tell you,'” she said. “There was never a concrete answer, so there was never an opportunity to remedy what might have been a misunderstanding.” Charity & Security Network brought the issue to the attention of the U.S. Treasury Department and it “seemed empathetic, but they really wanted to see some data,” she said.

The group got a grant to study the issue, and found that “fully two-thirds of U.S. non-profits were having some sort of financial access difficulty,” Hall said. The two most common problems are delayed wire transfers and increased fees, and while account closures are less common, they can have a major impact, she said.

Focus groups involving faith-based non-profits and financial institutions and other groups revealed wire transfers were being delayed weeks or even months, with a delay of up to six months being “not uncommon,” she said, adding that in the wake of a disaster, “people can’t wait a week, they can’t wait six months for the food, water, medicine, or whatever the groups are delivering.”

But even less exigent programs have been affected, including a “winterization program” in Afghanistan in which — due to delayed wire transfers — by the time the money was available where it was needed, “winter was over,” she said. “So, the expectation is that lives were lost — and in many cases, these wire transfers never did go through, they were just canceled outright.”

Challenges by regulators

De-risking is “a made-up word” that began appearing in the early 2000s as regulators were challenging banks regarding their decisions to do business with certain customer types and many banks concerned about having to defend their choices exited relationships, explained Richard Small, director of the financial crimes compliance program at Truist Bank, during the webinar.

There is nothing wrong with doing business with customers deemed high-risk as long as the risk is managed, but it becomes more complex when a regulator challenges a bank’s decision and it is forced to defend it, Small said, adding that it can be costly to conduct adequate enhanced diligence capable of warding off regulatory criticism.

While regulators have said they do not pressure banks to dump high-risk customers, “unfortunately we’ve seen it,” AML RightSource’s Byrne said. “It has happened, where an examiner will say ‘Why are you banking (organization) X?”

While some banks may respond by explaining to regulators how they manage the risk, “others might say ‘You know what, revenues aren’t that great, we’re out of here,'” he said.

One positive step for charities is to be open with their financial institutions, voluntarily providing information that can help banks manage the risk — such as the missions and organizational structures and the identities of board members, Byrne noted.

Hall, of the Charity & Security Network, agreed, noting that while “there’s no single silver bullet solution,” transparency and trust building matters.

Truist Bank’s Small concurred as well, noting that governments may have to play a role. “Until the government provides some relief by saying ‘Every charity is not high-risk,’ this is going to continue to be an issue,” Small said.

When it comes to Treasury’s priorities for improving the country’s AML regime, “we could certainly make the argument that one of priorities should be getting bank accounts for charities so that money can get where it needs to go,” he added.


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