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U.S. Treasury: “Zero Tolerance” is not the standard for bank due diligence

TOPICS:  Due diligence

In recent months the IMF, World Bank and other institutions warned that global banks were being so tough in their anti-money laundering and due-diligence campaigns that some small economically weak nations were virtually banished from the worldwide banking system. In response, the U.S. Treasury replied that it never intended an overly punitive “zero tolerance” regime.

IMF Managing Director Christine Lagarde had said in a speech to the New York Fed that large western banks — seeking to decrease their risk in the face of know-your-customer campaigns and related demands for strict screening of relationships — have terminated many correspondent-banking relationships in some of the world’s poorest regions. This cut off some small nations in the Caribbean and South Pacific, as well as East and West Africa, from global payment and settlement systems, Lagarde said. In Liberia, she added, “global banks have terminated almost half of the existing 75 correspondent relations, severely affecting the ability of local banks to conduct U.S. dollar transactions.”

The World Bank followed up with a report saying that big banks’ strict due-diligence standards, which it called “de-risking,” has threatened disaster in some war and famine zones because humanitarian groups can’t operate. Moreover, the bank said, de-risking can make terror financing and financial crime harder to monitor “by pushing higher risk transactions out of the regulated system into more opaque, informal channels.”

In response, the Treasury Department, the Fed and other U.S. financial agencies released a “Joint Fact Sheet on Foreign Correspondent Banking,” which it said dispels “certain myths” about U.S. supervisory expectations. It added that Washington’s anti-money laundering and countering-the-financing-of-terrorism regime “is not one of ‘zero tolerance.’” It said that “there is no general expectation for banks to conduct due diligence on the individual customers of foreign financial institutions”; many U.S. banks had feared that was the standard.

The Financial Action Task Force (FATF), the inter-governmental anti-money laundering body, made the same point in a recent “guidance.” It said: “The FATF Recommendations do not require financial institutions to conduct customer due diligence on the customers of their customer.” The risk in de-risking, FATF said, is that it pushes money “into less/nonregulated channels, reducing transparency of financial flows and creating financial exclusion.”

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