Anti-Money Laundering’s Poor Country Soak

With Turkey’s G-20 summit due to review the financial regulatory agenda, including unchanged remittance costs despite the 5 percent medium-term goal and bank “de-risking” shunning low-income economies and relationships with money transfer networks,  a Center for Global Development report suggests negative “unintended consequences” from anti-money laundering and terror funding rules. The IMF’s Financial Stability Board recently cited severed correspondent bank ties hurting trade credit and other lines may be due in part to compliance costs and heavy penalties associated with enforcement of the provisions through the 25-year old unrelated Financial Action Task Force, created at the height of the global drug wars and then strengthened in the post 9-11 era. Risk-based standards are harmonized in principle across developing and industrial countries, and violators are placed on “gray” or “black” lists depending on shortfalls. National authorities are supposed to coordinate information-sharing and supervision, but in practice lack of capacity and a proliferation of agencies involved  can leave gaps or sow confusion, with the US alone counting some 40 government unit participants. International banks have fled the money transfer business to high-risk locations like Somalia in recent years, with the last US connection Merchants Bank of California stopping facilitation of $1.5 billion in diaspora flows early this year. Relief groups and congressional representatives have petitioned the Treasury Department to relax regulations, and providers in Dubai and elsewhere have stepped in, but remittance size and expense has noticeably deteriorated there, according to the UN. Normal correspondent accounts have also been closed under new anti-secrecy interpretations that mandate “knowing your customer’s customer,” and not only firms, but non-profit organizations and vulnerable individuals cannot access needed cash and expertise, the report notes.

Basic data and research is lacking on the extent of the problem beyond indicative surveys as public and private sector bodies do not exchange details about applications and decisions. The FATF guidelines could be more simplified and transparent, and compliance could be easier with technological advances like biometric identification. The World Bank has just updated remittance work which shows costs largely flat although certain corridors have seen scarcity and spikes, and the International Chamber of Commerce last year pointed out that trade finance was under pressure, but not mainly due to global bank de-risking. The IIF’s latest emerging market sentiment survey underscored that this constraint was widespread, as the benchmark index dipped to a record low in the face of credit supply and demand setbacks. In China reported non-performing loans reached a high in the past quarter at over $600 billion in aggregate, as total social financing fell by half on a monthly basis.

The IMF in its G-20 summit preparation published an analysis of migration and refugee trends with a $435 billion developing world remittance total in 2014, over half of FDI and triple official aid. It cited a study of higher household contributions to education and health over average consumption, and increased financial intermediation in response often through dedicated diaspora channels. However the 8 percent average transaction charge remains steep and a 1 percent reduction could release $30 billion, greater than Africa’s annual bilateral donor budget. Expatriate savings could also be harnessed through special bonds for infrastructure and social projects, but the record has been mixed in Ethiopia, Nigeria and the Philippines where offshore money is unfamiliar with such recycling, the Fund comments.