Consequently, to reduce their own risk profile, they have opted to close higher-risk correspondent accounts or cross-border remittances, especially when the cost of compliance was too high to justify maintaining the relationship. For those correspondent accounts that are maintained but considered high risk, the respondent bank may be subject to restrictions and increased costs for maintaining such facilities. The loss of correspondent banking relationships can have negative effects on the international business activities and the ease of doing business in a jurisdiction, and the loss of cross-border remittances can have a negative impact on migrant remittances. Moreover, where a bank is considered complicit in ML or TF, supervisory authorities can take control of the bank and, in worse-case scenarios, go as far as to close the institution.2 However, such extreme cases are rare.
Reputational Risk As Benjamin Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” This classic saying is still true today for banks and other financial institutions. Unethical business practices, involvement in ML/TF, or enforcement actions by supervisory authorities can affect the reputation of a financial institution. Reputational risk is also difficult to quantify and factor into, for instance, capital adequacy requirements, but it should nonetheless be part of the institution’s risk management framework. Reputational damage can attract enhanced supervisory attention, not only in the home jurisdiction but also in other jurisdictions where the financial institution might be active. For developing jurisdictions, the adverse impact of reputational risk on access to correspondent banking should also be factored into the risk management framework of banks and their supervisors.
Legal and Compliance Risk Banks are exposed to higher legal and compliance costs associated with the risk of enforcement actions and penalties resulting from failure to comply with AML/CFT requirements. Indeed, financial institutions can incur high legal costs if they have to defend themselves from potential enforcement actions. In cases where the supervisory actions include long-term remedial measures, compliance costs can also rise significantly. Additionally, enhanced supervisory monitoring can have material costs on the operations of banks (for example, through more frequent and in-depth on-site inspections and audits). Depending on the financial standing and reputation of the bank, these costs can jeopardize the safety and soundness of the institution. In some jurisdictions, shareholders (and depositors) can also take legal action against the board of directors and senior management for failure to discharge their fiduciary responsibilities associated with AML/CFT arising from poor governance practices and negligent compliance.
BUSINESS-WIDE ML/TF RISK ASSESSMENT In order for financial institutions to apply the AML/CFT measures in a risk-based manner, to the extent allowed under domestic law, financial institutions need to understand and manage their ML/TF risks.3 They should therefore be required to conduct an overall, business-wide 168
PREVENTING MONEY LAUNDERING AND TERRORIST FINANCING
