“Debanking” refers to where a financial institution chooses to withdraw or limit banking services to customers in certain industry sectors due to factors such as commercial considerations, reputational risk and regulatory risk exposure.
While such decisions may be taken as part of a risk-based approach to anti-money laundering and counter-terrorism financing (AML/CTF), they can in fact undermine the ability of Australia’s AML/CTF framework to effectively combat serious crimes like money laundering.
By discouraging transparency and potentially pushing customers towards unregulated avenues, debanking can diminish the framework’s capacity to prevent and identify such illicit activities. It can also have a devastating impact on legitimate businesses.
This article explores how financial institutions can effectively deal with higher-risk customers without debanking, and other key considerations, as outlined by AUSTRAC.
A risk-based approach to AML/CTF does not dictate debanking
Financial institutions are obligated by the AML/CTF Act to create customised systems and controls that consider the organisation’s specific risks associated with money laundering, terrorism financing, and serious crimes. These measures should be proportionate to the level of risk they encounter when offering services to specific businesses.
Businesses such as remitters, digital currency exchanges and payment service providers are often classified as high-risk, and these sectors are commonly affected by debanking. However, taking a risk-based approach does not mean avoiding or refusing to engage with risk altogether. Financial institutions can establish and maintain business relationships with customers deemed to have higher risks while implementing appropriate safeguards.
The AML/CTF Act and Rules do not mandate the refusal of designated services to entire industry sectors. Even if a financial institution implements appropriate risk-based systems and controls, AUSTRAC acknowledges that no reporting entity can completely eliminate the risk of financial crime.
Enhanced customer due diligence in high-risk situations
The level of due diligence financial institutions undertake should be appropriate to the assessed risk. Higher money laundering/terrorism financing (ML/TF) risk does not automatically mean that a financial institution must discontinue a business relationship. Rather, a financial institution must apply enhanced customer due diligence (ECDD) when they determine that providing a designated service involves high ML/TF risk.
AUSTRAC reporting entities are required to have an AML/CTF program, which must include an ECDD program. ECDD measures may include collecting additional information, undertaking a more detailed analysis of existing customer information, verifying or re-verifying customer information, undertaking more detailed analysis and monitoring of transactions, and getting approval from senior management to initiate or continue a business relationship.
Deciding to end a business relationship
While taking a risk-based approach to AML/CTF does not require financial institutions to end relationships with, or decline to provide services to, customers deemed as higher-risk, an organisation may decide to follow this path if they deem that there is an unacceptable level of risk. In such cases, AUSTRAC recommends that the entity:
- Record the rationale in writing for declining to provide services to the customer.
- Where possible, give existing customers sufficient notice of the intention to discontinue providing services to allow them to find an alternative financial institution.
- Where possible, provide meaningful reasons to customers for deciding not to provide financial services. If the financial institution suspects that someone is involved in criminal activities, and has submitted a suspicious matter report to AUSTRAC, they need to take care to avoid tipping off the person.
Key takeaways
Financial institutions can effectively mitigate money laundering and terrorism financing risk without debanking, by conducting enhanced customer due diligence as part of their AML/CTF program. If a decision is made to end a relationship with a customer or to not engage with a prospective customer based on perceived risk, AUSTRAC’s guidelines must be followed.
