Learn why many businesses need to adopt de-risking strategies.
Businesses tend to reduce their exposure to certain types of customers or business activities that are perceived as higher risk—sometimes avoiding certain clients, products, and segments altogether. However, this approach comes with challenges. Let’s look into what de-risking is in more detail, what it can protect against, as well as some best practices.
According to FATF, de-risking is “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach”.
In other words, “de-risking” is when financial institutions, such as banks, brokers, credit unions, or investment companies, reduce their exposure to certain types of customers or business activities that are perceived as higher risk for money laundering and/or terrorist financing (ML/TF). This can involve terminating relationships with clients or discontinuing services in order to minimize the overall risk to the institution.
De-risking is often a response to regulatory pressure, increased compliance costs, or concerns about potential legal and reputational risks associated with certain clients or transactions.
In addition to restricting certain types of customers and clients, de-risking can also exclude certain products, or geographic locations, or industries considered high-risk for ML/TF.
De-risking can take on various forms, including:
De-risking can indeed help businesses manage their risk exposure. However, there are concerns associated with this strategy. De-risking can lead to financial exclusion of legitimate businesses and individuals, especially in higher-risk regions, making it difficult for them to access services or products (especially banking services). Moreover, de-risking may not necessarily eliminate underlying AML risk, as it could drive illicit financial activities further underground.
Regulators and international organizations have recognized the challenges posed by de-risking and have encouraged financial institutions to adopt risk-based approaches to AML compliance instead.
De-risking can be used to mitigate a number of risks, including:
The de-risking process involves a strategic assessment by companies to reduce exposure to high-risk individuals, entities, activities, or regions in order to minimize compliance- and operations-related risks associated with money laundering or terrorist financing.
De-risking helps businesses mitigate risks like money laundering or AML non-compliance. However, it may also lead to financial exclusion of legitimate individuals and businesses and the possibility of driving illicit financial activities further underground.