[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
INTERNATIONAL AND DOMESTIC
IMPLICATIONS OF DE-RISKING
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JUNE 26, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-105
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
31-494 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Shannon McGahn, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
C O N T E N T S
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Page
Hearing held on:
June 26, 2018................................................ 1
Appendix:
June 26, 2018................................................ 33
WITNESSES
Tuesday, June 26, 2018
Clements, Michael E., Director, Financial Markets and Community
Investment, Government Accountability Office................... 3
Eckert, Hon. Sue E., Adjunct Senior Fellow, Center for a New
American Security.............................................. 5
Haddad, Gabrielle, Chief Operating Officer, Sigma Ratings, Inc... 7
Lewis, John, Senior Vice President, Corporate Affairs and General
Counsel, United Nations Federal Credit Union on behalf of the
National Association of Federally-Insured Credit Unions........ 9
Yearwood, Sally, Executive Director, Caribbean-Central American
Action......................................................... 11
APPENDIX
Prepared statements:
Clements, Michael E.......................................... 34
Eckert, Hon. Sue E........................................... 64
Haddad, Gabrielle............................................ 96
Lewis, John.................................................. 103
Yearwood, Sally.............................................. 114
INTERNATIONAL AND DOMESTIC
IMPLICATIONS OF DE-RISKING
----------
Tuesday, June 26, 2018
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Present: Representatives Luetkemeyer, Rothfus, Posey,
Pittenger, Barr, Tipton, Williams, Love, Loudermilk, Kustoff,
Tenney, Clay, Scott, Green, and Crist.
Chairman Luetkemeyer. The committee will come to order.
Without objection the chair is authorized to declare a recess
of the committee at any time. This hearing is entitled,
``International and Domestic Implications of De-risking.''
Before we begin I would like to thank the witnesses for
appearing today, we appreciate your participation and look
forward to the discussion.
I now recognize myself for 5 minutes to deliver my opening
statement.
This subcommittee has spent significant time analyzing the
impact of de-risking on consumers, businesses, and entire
communities. As we have discussed, the overly punitive
supervisory and examination tactics employed by Federal
financial regulators that came in the wake of the financial
crisis have had dramatic implications on the availability of
financial products and services in all of our communities.
What we have not discussed are the global implications of
these regulations. Today we will not only explore de-risking's
impact on U.S. financial institutions and their customers but
also its impact on people and businesses around the world as
well as our fight to combat illicit financial activity. Making
relationships with so-called high-risk clients, they become
cost prohibitive for financial institutions due, in large part,
to heightened compliance expectations, and as a result many
institutions have opted to terminate relationships.
This decision has resulted in the elimination of the
consumer and small business access to financial products and
services, a decrease in the availability of money remittances,
and reduced flow of humanitarian aid globally.
To be clear, there are valid reasons for account
terminations and the fight against illicit finance is one of
the most important fights we wage; however, we would be better
equipped to wage that fight if we had a modernized regulatory
system.
It is particularly true in the case of compliance with the
Bank Secrecy Act and Anti-Money Laundering laws. The truth of
the matter is that compliance with BSA/AML is so costly and the
penalty is so steep, financial institutions would sooner rather
end customer relationships than run the risk of running afoul
of the regulators and law enforcement.
The status quo doesn't foster a safer system and it doesn't
necessarily help catch more bad actors; in fact, it is quite
the opposite. Instead of fostering collaborative relationships
between institutions and government, the modern BSA/AML
framework, along with the other regulatory drivers of de-
risking, push more people and more money into the shadows.
So where do some of those de-bank customers go? According
to data published last year by payment and compliance
technology company Accuity, correspondent banking relationships
with Chinese banks surged more than 3,300 percent, from 65 in
2009 to 2,246 in 2016. There was a 25 percent drop in the
number of correspondent relationships globally during the same
time period.
It is in the best interest of our financial services firms,
our communities, law enforcement, and the Federal Government to
monitor and maintain these global banking relationships. This
hearing isn't only important to the people testifying today or
to the financial institutions that do business internationally,
it is important to any small nation that relies heavily on the
U.S. dollar and the trading partners who sell U.S. goods there.
It is important to poorer communities that are losing banks
and credit unions because of the BSA/AML regime. It is
important to a worker in Florida who can no longer send the
money he earns to help his family in Haiti. This is an
incredibly important topic.
We have an excellent panel today and I want to thank each
of them for taking time to testify and we look forward to your
statements.
The Chair now recognizes the gentleman from Missouri, Mr.
Scott excuse me, who is subbing for Mr. Clay, the Ranking
Member of the subcommittee, for a 5-minute opening statement.
Mr. Scott. Thank you very much Chairman Luetkemeyer for
organizing today's hearing.
And to each of our outstanding panelists for this
testimony, we are looking forward to hearing from you.
First of all, it is clear that the push by depository
institutions' decisions to de-risk and discontinue account
services for certain customers is having very significant,
adverse consequences on a broad range of consumers, industries,
and regions around the world.
And in addition to the devastating regional impacts the de-
risking of broad categories of customers' accounts, has also
had an impact on key consumer groups that perform essential
functions in our society. This includes nonprofit
organizations, charities, embassies, and remittance providers
among others; although the adverse effects of de-risking are
clear, what is less apparent are the specific factors and the
degree to which each factor is responsible for arriving at this
trend.
We look forward to the hearing, hopefully we can come up
with some very good recommendations as to how we go forward.
Thank you again to each of the panelists for being here.
And I yield back the balance of my time.
Chairman Luetkemeyer. The gentleman yields back.
Today we welcome the testimony of Mr. Michael Clements,
Director, Financial Markets and Community Investment, U.S.
Government Accountability Office; the Honorable Sue Eckert,
Adjunct Senior Fellow, Center for a New American Security; Ms.
Gabrielle Haddad, Chief Operating Officer, Sigma Ratings, Inc.;
Mr. John Lewis, Senior Vice President for Corporate Affairs and
General Counsel, United Nations Federal Credit Union and on
behalf of the National Association of Federally Insured Credit
Unions; and Ms. Sally Yearwood, Executive Director of
Caribbean-Central American Action (CCAA).
Each of you will be recognized for 5 minutes to give an
oral presentation or a testimony. Without objection each of the
written statements will be made part of the record.
Just two quick housekeeping things. Number one, we have
votes called right around 3:30 to 4. We will see where we are
with our witnesses' testimony and our questions but we may have
to ask you to stay a little longer if we need to go vote and
come back.
In the meantime, the timing system on your microphones
there are such that green means go, yellow means you have about
a minute left, and red means your time is up and so you need to
wrap it up very shortly.
So, with that Mr. Clements you are recognized for 5
minutes. Excuse me you are--
STATEMENT OF MICHAEL CLEMENTS
Mr. Clements. Chairman Luetkemeyer.
Chairman Luetkemeyer. Recognized for 5 minutes. I am sorry.
Mr. Clements. Chairman Luetkemeyer, Mr. Scott, and other
Members of the subcommittee, I am pleased to be here today to
discuss our recent report, discussing de-risking by depository
institutions and the implication for the southwest border
region and money transmitters serving fragile countries.
My statement today focuses on three key findings from our
reports. As background, the Bank Secrecy Act serves an
essential function, it helps to prevent money laundering,
terrorism financing and other criminal activity.
We define de-risking as the practice of depository
institutions limiting services or ending relationships with
customers in response to perceived regulatory concerns.
Chairman Luetkemeyer. Mr. Clements, if you could move the
microphone, just pull right in front of and just take a bite at
it when you speak--
Mr. Clements. OK.
Chairman Luetkemeyer. Thank you.
Mr. Clements. Our first key finding, the extent of and
reasons for account terminations and bank closures in the
southwest border region. We found that branch closures in the
southwest border region were concentrated in a small number of
communities. Five counties in Arizona, California, and New
Mexico lost 10 percent or more of their branches. In some
instances, those losses were concentrated in smaller
communities. For example one California town lost five of its
six branches.
The loss of bank branches can have negative implications
for business lending and ultimately employment in these
communities. In many instances banks limit service or terminate
accounts in response to legitimate BSA concerns. The southwest
border region poses a high risk for money laundering because of
the high volume of cash transactions, number of cross-border
transactions, and number of foreign account holders.
However, we also found evidence of de-risking, in
particular 80 percent of southwest border banks reported
limiting or not offering of accounts because the customer type
drew heightened BSA regulatory oversight. Here the reason is
perceived oversight, not the customer's action.
Our second key finding, the challenges money transmitters
face remitting funds to select fragile countries. We examined
the experience of money transmitters serving four fragile
countries: Haiti, Liberia, Nepal and Somalia. Remittances from
the United States are an important source of funds for these
countries. All 12 money transmitters we interviewed that served
these countries report losing some accounts with banks. In the
case of Somalia, two of four money transmitters report losing
all access to bank accounts.
Some banks acknowledge closing and denying accounts for
money transmitters. These banks consider money transmitters
high cost and also high-risk customers. In particular banks
cite: One, high staff and technology cost associated with BSA-
related activities; and two, the perceived risk of significant
fines and penalties.
Money transmitters that lose access to banking services
often resort to nonbanking channels such as couriers physically
transporting cash. For law enforcement, nonbanking channels
provide less transparency and thereby hinder the ability to
detect criminal activities.
Finally, our third key finding, agencies' efforts to assess
and respond to de-risking concerns. Treasury and Federal
banking regulators have taken some steps in response to
concerns about de-risking. The agencies have issued BSA
guidance to banks. The agencies have also conducted
retrospective reviews; these are a lookback to assess whether
regulation should be retained, amended, or rescinded. However,
we found the agencies' reviews have not fully addressed the
factors that influence banks to de-risk.
The agencies also recently began collecting data on
international remittances from banks. However, we found
Treasury does not have the data it needs to assess how the loss
of banking services by these remitters will influence service
to fragile countries.
Given the problems we identified, we made several
recommendations. We recommended that Treasury and the banking
regulators conduct retrospective reviews that incorporate
banks' regulatory concerns regarding BSA/AML compliance. We
recommended that Treasury assess the extent to which remittance
flows through nonbanking channels may hinder its ability to
monitor criminal activity.
Chairman Luetkemeyer, Mr. Scott, and other Members of the
subcommittee, this completes my prepared statement. I would be
pleased to respond to any questions you may have.
[The prepared statement of Mr. Clements can be found on
page 34 of the Appendix.]
Chairman Luetkemeyer. Thank you. Mr. Clements yields back
the balance of his time.
Then we go to Ms. Eckert. You are recognized for 5 minutes.
Welcome.
STATEMENT OF SUE ECKERT
Ms. Eckert. Thank you. Chairman Luetkemeyer, Congressman
Scott, and distinguished Members of the subcommittee, thank you
for the opportunity to testify today on the international and
domestic implications of de-risking.
I applaud your efforts to call attention to the critically
important phenomena of de-risking--something that is not well
understood but which has profound impacts on some of the
world's most vulnerable populations. The U.S. has a unique role
to play in addressing de-risking globally as the dominance of
the U.S. dollar and American regulatory policy set the stage
for other countries.
My comments today focus on the impact of de-risking on
charities and nonprofit organizations and is based on the
research that I conducted for the February 2017 report,
Financial Access for U.S. Nonprofits. It was commissioned by
the Charity & Security Network and supported by the Bill and
Melinda Gates Foundation. While I am currently involved with
the World Bank ACAMS (Association of Certified Anti-Money
Laundering Specialists) process on financial access for NPOs
(non-profit organizations), the views expressed today are my
own.
I spent a number of years on Capitol Hill as a staffer in
the Executive branch as a regulator of dual-use exports and in
the academic community but in all those years there is no issue
that I dealt with that has more serious, real, and dire
consequences for populations in need. These severe implications
extend beyond NPOs and the groups that they serve; it also
extends to U.S. security and foreign policy interest. So with
my brief time I want to make a couple points.
First, there is no question of the need for humanitarian
and development assistance today, it is a profound need. The
United Nations estimates that in 2018, more people than ever
before will need assistance and protection, 136 million people.
Conflict, protracted crises, and natural disasters continue to
be the main drivers of need, which remains exceptionally high
levels in countries such as Nigeria, South Sudan, the Syria
region, and Yemen which are likely to remain the world's most
serious humanitarian crises.
To effectively respond to these humanitarian crises, funds
must be able to move across borders in a timely and predictable
fashion. Financial access for charities and NPOs, therefore,
can literally mean life and death.
Second, there is no question that de-risking or problems
with financial access for NPOs is having a serious and
widespread effect. The study from 2017, noted surprisingly that
two-thirds of all U.S. NPOs were having financial access
difficulties, perhaps more worrisome was the fact that in order
to respond and get the aid to these places, 42 percent of NPOs
were starting to carry cash because they could not get money
through the financial system. We actually have more recent data
that shows that the problem appears to be worsening.
Third, the problem relates to concerns by financial
institutions for the risk and cost associated with banking in
the charitable sector. This derives from well-intended and
important policies developed immediately after 9/11 by the FATF
(Financial Action Task Force), whereby NPOs or charities, were
considered particularly vulnerable to terrorist abuse.
Based on more recent analysis, the evolving nature of the
terrorist threat and actions that the charitable sector has
taken, that perception is outdated and, in 2016, FATF changed
its policies. However, the pervasive nature of the perception
that charities are high risk persist; serious unintended
consequences of these policies have resulted.
Fourth, de-risking is a complex problem that entails a
variety of interest: Financial integrity; national security and
counterterrorism; foreign policy; and the provision of
humanitarian and development assistance and it must be a shared
responsibility. No one group, U.S. policymakers, U.S.
regulators, financial institutions, or the nonprofit and
charitable sector, can address these issues by themselves.
Fifth, in terms of what kind of action should be taken,
very briefly, raise awareness and promote a balanced approach;
stakeholder dialog which the World Bank and ACAMS has promoted,
has enhanced engagement among all parties. What is really
interesting is how little these sectors know of each other.
The second is to provide regulatory and policy guidance.
The government needs to develop policy and regulatory guidance
that provides clarity to banks and NPOs on the implementation
of a risk-based approach; however, 2 years ago when FATF
adopted the recommendation, changed the nature of how charities
should be treated, nothing has happened subsequently. Banks
have told us there is no question that they have to have
something from the regulators in order to change their
assessment of risk.
Currently the World Bank and ACAMS initiative has produced
recommendations that were jointly made by banks and nonprofits,
which is pending before the regulatory agencies.
Third, we need to explore incentives for financial
institutions to bank NPOs. A menu of measures including the
creation of safe harbor to incentivize banks to keep NPO
accounts and encourage efforts to engage with NPOs should be
developed.
Finally, the creation of safe-payment channels. There are
times when banks are not going to go any further and we need to
consider those options.
There are additional recommendations in my statement. Mr.
Chairman, I look forward to discussing them.
[The prepared statement of Ms. Eckert can be found on page
64 of the Appendix.]
Chairman Luetkemeyer. Thank you.
Ms. Haddad, you are recognized for 5 minutes.
STATEMENT OF GABRIELLE HADDAD
Ms. Haddad. Thank you. Chairman Luetkemeyer, Congressman
Scott, and distinguished Members of the subcommittee, I am
honored by your invitation to testify before you today.
De-risking is a phenomenon that has had dramatic impacts on
the international financial system over the last decade. De-
risking has impacted the concentration of trade flows and
cross-border payment activity which challenges financial
stability and inclusion for affected markets.
For the United States specifically, a decline in dollar-
denominated transactions and flows through U.S. financial
institutions has potential implications on commerce as well as
the United States' competitive position.
I am the Co-founder and Chief Operating Officer of Sigma
Ratings, a company we founded to address de-risking by
highlighting and incentivizing good corporate behavior
globally. Today my testimony will focus on the drivers and
international impacts of de-risking that resulted from the
termination of correspondent banking relationships.
Since founding Sigma Ratings, my team and I have met with
financial institutions and regulators in dozens of countries
across Europe, Latin America, the Middle East, and Africa to
better understand the challenges of de-risking and determine
how our solution can help solve them.
We have learned that there are many drivers of de-risking
including profitability and reputational risk concerns and
these drivers may vary from country to country; however, fears
of regulatory enforcement actions and fines as well as the cost
associated with complying with anti-money laundering,
counterterrorist financing, and sanctions regulations, are
consistently highlighted as primary drivers of de-risking.
Regulatory fines imposed since 2012 against global banks
reached billions of dollars and have had a chilling effect on
the robustness of global correspondent relationships. The
magnitude of these fines has instilled fear in many global
banks and resulted in the reassessment of those banks' risk
appetites.
Another driver is cost. Global banks are spending billions
of dollars a year on compliance with some banks individually
spending over a billion dollars themselves. Cost of due
diligence and concerns about the compliance regimes of
respondent banks are frequently mentioned as the main reasons
for termination.
While much of bank-spending is for critically important
tasks, many costly compliance tasks are repetitive and viewed
as mere check-the-box exercises by banks. This may distract
institutions from the intended outcome of detecting real risk
and ultimately identifying illicit activity. As a result of
these fears and costs, many institutions determine that the
costs and risks associated with maintaining certain
relationships are no longer worth the revenue generated,
leading to terminations.
I would like to turn to the three key consequences of de-
risking: Financial exclusion, decrease in transparency, and
long-term effects.
First, research demonstrates that de-risking has direct
financial implications for individuals and businesses operating
in these markets. In a World Bank report from November 2015,
decreases in lending, international wire transfers, cash
management services, and check-clearing were highlighted among
some of the most significant impacts at the local level.
Additionally, an IMF report from March 2017 indicates that
small countries with low volumes of transactions experienced
increased costs for remittance transfers which has a direct
impact on end-users.
Second, it has been cautioned by the World Bank, the
Financial Action Task Force, and other groups, that de-risking
may unintentionally drive financial transactions underground or
into shadow markets. This makes detecting illicit activity much
harder. It is well-documented that channels with a low
likelihood of detecting illicit activities such as unregulated
industries are the channels more frequently used by money
launderers and terrorist groups for movement of funds. As
regulated entities, banks have higher likelihood of detecting
illicit activity.
Third, de-risking has long-term effects that should not be
ignored. We found in our research that many countries and
institutions that were de-risked continue to struggle to find
new relationships and for those who do, they are often subject
to higher fees and increased due diligence by correspondents
leading to higher costs of doing business.
The loss of correspondent banking relationships can also
create a long-term stigma, for example, rating agencies have
started to consider loss of correspondent banking relationships
as a factor for downgrading the rating of a financial
institution.
With de-risking and its drivers receiving much attention
over the last few years, with public and private sector players
have presented potential solutions, a sustainable solution,
however, will require a change in the overall cost-benefit
analysis for correspondents in high-risk markets.
Some possible approaches are the following: First greater
sharing of risk information to improve overall transparency and
reduce due diligence costs. For a bank with thousands of
relationships, due diligence practices, much of which are done
manually today, are almost impossible to keep up with. Greater
information sharing between both public and private sector
improves information availability and transparency.
Second, the compliance burden can be further reduced
through the use of standardized, independent third-party
assessments of potential respondents' risk and compliance
practices. An independent assessment would serve as a baseline
for a correspondent to enter into a relationship, thus reducing
much of the up-front and on-going diligence processes.
Furthermore, standardized assessments would allow for
benchmarking across jurisdictions, for use by governments as
well as financial institutions. This increased visibility and
comparability would allow for better allocation of capacity-
building resources.
Finally, the use of technology to enable financial
institutions to better understand their clients and manage
their risk should be welcomed.
Thank you for taking the time to hold this hearing and for
allowing me to share my perspective on this important topic. I
look forward to your questions.
[The prepared statement of Ms. Haddad can be found on page
96 of the Appendix.]
Chairman Luetkemeyer. Thank you, Ms. Haddad.
Mr. Lewis you are recognized for 5 minutes, hopefully it is
within a 5-minute timeframe.
STATEMENT OF JOHN LEWIS
Mr. Lewis. We will try.
Chairman Luetkemeyer. We have a difficulty with 5 minutes
today.
Mr. Lewis. Good afternoon Chairman Luetkemeyer, Ranking
Member Clay, and Members of the subcommittee.
My name is John Lewis. And I am testifying today on behalf
of NAFCU. I am the Senior Vice President of Corporate Affairs
and General Counsel for the United Nations Federal Credit
Union.
NAFCU and its member credit unions have consistently
recognized the importance of BSA and AML requirements in
assisting in prevention of illicit activity. Credit unions are
fierce supporters of efforts to combat criminal activity
utilizing our financial systems. Credit unions work closely
with examiners to ensure consistent application of BSA risk
assessments. Still, the implementation of BSA requirements
remains a burden for many credit unions especially in the post-
financial crisis regulatory environment.
Given credit union's field-of-membership limitations, it is
important for credit unions to have potential to serve everyone
in their field of membership whether individuals or legitimate
businesses, some members may present heightened-risks which can
mean increased compliance burdens, cost, and pressures on
credit unions.
Despite UNFCU's unique field-of-membership, we have been
fortunate to have good relationships with our examiners who
have worked with us in riskier areas. However, other credit
unions report that while NCUA (National Credit Union
Administration) doesn't directly prohibit them from serving
certain types of members, they feel pressured by examiners to
limit services.
It is important to note that when a credit union is serving
a higher-risk individual or business, they are very thorough in
their evaluation recordkeeping. However, when examiners
evaluate that relationship they can be very demanding of the
credit union, this additional pressure and scrutiny from
examiners can lead institutions to de-risk by limiting services
for certain types of members.
Sometimes the pressure to de-risk comes not from the
regulators but from law enforcement. Although credit unions
recognize the importance of sharing critical information with
law enforcement, some report they have received unreasonably
broad subpoenas asking for all information and correspondence
related to any members in a certain type of business. The
threat of over-broad investigatory demands makes credit unions
hesitant to provide services to members that are targeted as
higher risk.
Credit unions can also be impacted by others making the
decision to de-risk. At UNFCU, some of our members have
international ties and some are located abroad, as a result we
are presented with a unique set of risks for which we have
learned to adapt.
We have found that some of UNFCU's long-standing vendors
have reevaluated their relationships with UNFCU even de-risked
by ending the relationship due to the fact that we serve some
higher-risk members. This loss of vendors has led to a
significant disruption of services and increased costs to our
members. Our unique membership coupled with our vendor
relationships gives UNFCU a strong understanding of the
challenges from both sides of the de-risking issue.
Credit unions continue to work with FinCEN (Financial
Crimes Enforcement Network) and other regulators to develop
ways to provide services to higher-risk members without
incurring compliance burdens and costs that are so onerous that
de-risking becomes the only option.
Some ideas for improvement include first, creating a safe
harbor for the financial institution providing services to
high-risk accounts if they meet certain requirements in
scrutiny of those accounts.
Second, ensuring the risk-based review requirements for
financial institutions are understood by examiners.
And third, not making the financial institution the de
facto regulator of business. While it may make sense for the
institution to verify registration licensing, they should not
be forced to verify levels of compliance by the business.
NAFCU also supports legislative proposals to address these
issues. I outlined these in greater detail in my written
statement but they include H.R. 6068, the Counter Terrorism and
Illicit Finance Act which takes important steps to update and
modernize the BSA/AML regime; H.R. 4545, the Financial
Institutions Examination Fairness Reform Act, enacting this
legislation would provide relief for financial institutions
from perceived pressures from examiners; and finally H.R. 2706,
the Financial Institution Customer Protection Act of 2017 that
would ensure ``Operation Choke Point'' policies will not be
used by regulators to prevent the provision of financial
services to a member.
An additional area where relief is needed is the Bureau's
rule on international remittances. The rule has driven a number
of credit unions out of the remittance business as the cost of
compliance and risks associated with it are too great. We
believe that the Bureau should use its exemption authority
under Section 1022 of Dodd-Frank to provide relief to credit
unions on the issue.
In conclusion, NAFCU and its member credit unions recognize
the importance of the BSA regime as well as the importance of
regulator and law enforcement scrutiny of riskier businesses.
Given UNFCU's field of membership, we serve as an example that
it can be done, nonetheless heavy compliance costs, burdens,
and pressures from regulators and law enforcement when dealing
with high-risk members and businesses can lead many to de-risk
and stop providing services to them.
Congress can help by working with financial regulators and
law enforcement to alleviate these burdens and pressures. NAFCU
stands ready to work with you in this regard.
Thank you for the opportunity to appear before you today. I
welcome any questions you may have.
[The prepared statement of Mr. Lewis can be found on page
103 of the Appendix.]
Chairman Luetkemeyer. Thank you, Mr. Lewis.
Ms. Yearwood you are recognized for 5 minutes.
STATEMENT OF SALLY YEARWOOD
Ms. Yearwood. Chairman Luetkemeyer, Ranking Member Clay,
and Members of the subcommittee, thank you for the opportunity
to appear before you today. As one of the most insidious
threats to the Caribbean's economic sustainability, de-risking
is destabilizing economies, threatening trade, and creating
security concerns and it requires constructive solutions. I
would like to begin with some examples.
In 2015, on instruction from their U.S. correspondent
banks, the two banks in the Cayman Islands that supported money
transfer business, severed those relationships and the MTBs
(money transfer businesses), which provide critical remittance
services were forced to shut down. This led to moving cash in
planes in order to make sure that the affected population had
access to finance. Today only one MTB remains open.
Tourism is one of the Caribbean's most important industries
and generates significant demand for U.S. goods and services.
About 4 years ago, a leading hotelier told me that they had
received a letter from their longtime U.S. bank, it essentially
said ``as of today we are no longer your bank.'' There was no
valid explanation and no opportunity to address concerns. I
spoke to that hotelier last week in preparation for this
hearing to see how they had resolved the issue and was told
that finding a new U.S. bank was extremely difficult and that
they still feel that the situation is precarious. They did not
want me to use their name, the hotel name, the name of the U.S.
bank that they are now using, or disclose the country or
countries where they operate.
This last point underscores why getting a grip on the
impact of de-risking can be so difficult. A legitimate business
has lost its U.S. banking relationships regardless of whether
or not there is any real risk present, has the stain of de-
risking on them so they keep it quiet and try to replace the
lost relationship. Bottom line it is like Fight Club, the first
rule of being de-risked is, you don't talk about being de-
risked.
The toll has been highest on small- and medium-sized
business where the costs of banking are becoming prohibitive.
We have seen a rise in cash in informal economies in some
jurisdictions and the operation of parallel foreign exchange
markets. Even for long-established businesses banking has
become burdensome. One U.S. company that operates in the
Caribbean reports that a basic process like opening a new
account that used to take 10 days or so, now can take up to 60
days and require 10 times more paperwork.
The Caribbean Association of Banks reports that nine
members have no U.S. correspondent banks but have been on-
boarded by third parties to manage these banking services and
17 members have only one U.S. correspondent. At the same time,
they report a 39-percent year-on-year increase in correspondent
banking fees between 2014 and 2017, and the cost of compliance
has increased approximately 66 percent.
As relationships are lost with U.S. banks, they are being
sought in Asia and the Middle East and if the United States
doesn't work to address the challenges, countries may have no
option but to build new relationships and prioritize trade with
other countries.
While de-risking is a motivation for the loss of banking
relationships, the reality is that profitability plays a
significant role as well. These are small economies in a global
system and weighing perceived risk with profitability does not
always work in the Caribbean's favor, even though the region
has been working diligently to improve its risk profile.
It is important to stress that no one is advocating for a
removal of the rules. Today's world requires that we build
systems that have the capacity to recognize and eliminate
threats. But this should not be done in a way that forces
legitimate actors out of the system and there are a number of
ways to change the narrative.
First, the U.S. Department of Treasury provides important
assistance to the region. Resources could be made available to
allow the Department to deepen its engagement there. Another
idea related to Treasury is if larger banks are not going into
the market because of the profit ratio, is there a scenario
wherein community and minority banks are encouraged to serve
the Caribbean using the platforms within large banks, with the
large banks who make their platforms available receiving credit
under the Community Reinvestment Act?
Second, innovation has the capacity to level the playing
field. This is happening in the Caribbean where we have seen
the emergence of technology companies that are working to
remove financial friction-points across the region. I also
believe that some consideration should be given to the issue of
proportionality, fines can reach billions of dollars. Taken in
context, Belize, which has been particularly affected by de-
risking, had a GDP of just under 1.8 billion in 2016 along with
1.3 billion of external debt. If the application of the rules
is weighted against small economies and their inherent
vulnerabilities, how do we keep them viable?
In conclusion, taken as a group, the countries of the
Caribbean and Central America are the fifth largest buyer of
United States non-oil exports and the U.S. consistently records
a trade surplus. If access to banking is removed or becomes
more costly and difficult, it is likely that this healthy
relationship will begin to be eroded.
Second, the countries of the Caribbean and Central America
are the United States' third border. When the countries of the
region experience instability, mass-migration is one risk, and
in the absence of the U.S. actively working to help the region,
the door is open to other partners who may be antithetical to
the United States' security interests.
CCAA is grateful that this subcommittee has provided this
platform. Thank you, Mr. Chairman for the opportunity.
[The prepared statement of Ms. Yearwood can be found on
page 114 of the Appendix.]
Chairman Luetkemeyer. Thank you, Ms. Yearwood.
I appreciate everybody's comments.
And with that we will begin the question part of our
discussion today. And I will begin with my questions.
Mr. Clements, you and all the witnesses today have
described concerns about the problems of de-risking across the
board with regards to how law enforcement and regulatory
officials have come down on the people in the financial
services industry.
Is law enforcement aware that they are deterring actual
profitable, well-intentioned business and if they are do they
have some ideas on how to fix the problem so they don't deter
normal activity or are they content with driving everybody out
of the business altogether?
Mr. Clements. In the two reports, we were not talking to
law enforcement so I can't speak to the effect of whether law
enforcement is aware of it. I think you bring up a relevant
issue. In many instances it is not people telling, instructing
banks, for example, to drop a customer, it is simply the effect
of working through the examiners saying, this is a high-risk
customer, and the next thing you know, it involves additional
staff and additional resources; there is the risk of large
fines that we have heard about and those things create an
incentive for the bank to essentially drop service rather than
have to deal with that potential risk.
Chairman Luetkemeyer. Well it is very concerning because it
is a manifestation, a morphing if you will of ``Operation Choke
Point'' into other areas here from the standpoint of trying to
intimidate the banks and then discontinuing financial services
with customers who are legitimate customers or did a good job.
You know, Mr. Clements, I believe you were the one that
indicated and had some nice charts in your testimony that
showed the counties along the border between the United States
and Mexico are being dramatically impacted, where they are
closing branches so they can't do any business so they can de-
risk themselves of their problem. I guess my question is, have
you seen the next county above them, are they starting to de-
risk as well or are they starting to close financial service
because, I would assume, that if you close the branch off next
to the border, that people will start going to the next county
over, is that happening as well, or starting to happen now?
Mr. Clements. Our experience was just with the counties on
the southwest border, it was certainly the case that one option
that consumers have if they have lost their branch in that
community is to go one community over and have to travel to
that branch.
The other options they have are mobile banking.
Chairman Luetkemeyer. Mr. Lewis, you are a credit union,
did you see that happening, you see them closing on the border
and then moving to the next county over, to where you are
starting to get some pressure to be able to close those next?
Mr. Lewis. We, UNFCU are not seeing that, as we are not
located on a border State. We know that there are credit unions
that are under pressure and have had some issues with it.
Certainly, I could get back to you and provide a written
response to that in more detail if you like.
Chairman Luetkemeyer. Thank you.
I have another question here with regards to, there was an
article from Reuters back on May 8, 2017, the headline is,
``Chinese banks payment networks surge as Western lenders cut
ties,'' and there was a study to show this and it was, I quoted
the numbers in my opening statement here and the last part of
this says, ``the U.S. dollar dominates world trade but there is
a trend toward a decline in the use of U.S. dollar and an
increase in the use of the renminbi,'' which is the Chinese
dollar if you will. Have you seen this going on, any of you,
where we have seen that there is a risk to the U.S. dollar
being the reserve currency, we are starting to trade in other
currencies versus the dollar?
Mr. Clements, you have seen evidence of that?
Mr. Clements. We have no evidence of that.
Chairman Luetkemeyer. Ms. Eckert?
I know that you deal with a lot of charities around the
world. It is terrible that even they are being hurt by this. I
mean who wants to launder money through a charity but that's
the ultimate slap of whatever, but can you comment on this?
Ms. Eckert. On the question of reverting to alternative
currencies, we did not see that--
Chairman Luetkemeyer. OK.
Ms. Eckert. But I would say that in terms of the law, the
first point that you raised on law enforcement, I think it is a
very interesting comment because law enforcement actually has
been extremely concerned about the loss of traceability and
transparency, that as these NPOs are de-risked they will either
use cash, they will use MSBs, they will use alternative means.
Chairman Luetkemeyer. OK. Ms. Haddad, I would like for you
to comment and Ms. Yearwood as well on this question, have you
seen any problems with this or there are concerns?
Ms. Haddad. I haven't seen it directly but I have heard
from people particularly in Africa, from banks there that when
those banks were de-risked that some Chinese banks picked up
the correspondent relationships that were previously held by
U.S. correspondents.
Chairman Luetkemeyer. Yes, the relationships, they are
picking them up left and right like leaves on the--on the
ground here.
Ms. Yearwood, have you seen anything like that with the
Caribbean banks that you are dealing with?
Ms. Yearwood. I don't have any evidence of Caribbean banks
getting Chinese accounts; however, what I have been told is
that some Caribbean banks have tried to get Chinese accounts
but not being able to get them because of the ongoing
relationship to the U.S. dollar.
Chairman Luetkemeyer. OK. Thank you very much. My time is
up.
With that we go the Ranking Member, Mr. Clay.
Mr. Clay. Thank you so much, Mr. Chairman. I thank the
panel of witnesses for being here.
Let me start with Ms. Yearwood or Ms. Eckert or both of
you, what would give financial institutions more comfort in
serving remittance service providers especially those serving
fragile nations, can you help us with that, whoever wants to
go, Ms. Yearwood?
Ms. Yearwood. Thank you, Ranking Member Clay.
In my testimony I pointed to some of the things in terms of
the assistance from the Treasury Department that could help
give a certain amount of comfort to the people who are
providing services in the region. That being said, the
remittance side of the coin, I actually think Gabrielle Haddad
may have some input because I think transparency and the
ability to have traceability of where the money is going and
coming from is key especially when you are moving very small
amounts of money so--
Mr. Clay. Right.
Ms. Yearwood. I will defer to Ms. Eckert and then Gabrielle
may have something to add.
Mr. Clay. Go right ahead.
Ms. Eckert. Thank you, Mr. Clay.
I think that what banks are asking for as they relate to
NPOs is they are asking for some clarity about regulatory
expectations, what is expected of them and, in fact, to the
point of the interviews that I conducted, I had banks who say
that they can manage risk, that is what their business is;
however, what they can't deal with, there is regulator-risk and
that is examiners second-guessing them all the time in terms of
what their assessments are under a risk-based approach.
The other thing that the financial institutions want is
they want more information to be able to make the best-informed
decision so part of the process that we are engaged in is
identifying what information financial institutions need from
NPOs and getting NPOs comfortable providing that to banks so
they can break down some of these perceptions that exist about
each other.
Mr. Clay. Thank you.
Ms. Haddad, anything to add?
Ms. Haddad. I would just add that I agree that the
information-sharing is a huge challenge that banks face, both
from money-service businesses and from respondent banks, in
order for them to actually obtain the information that they
need to make assessments of their relationships, is incredibly
challenging and this is resulting in huge burdens and a real
lack of clarity, as Ms. Eckert mentions, around what their
regulatory expectations are.
Mr. Clay. So, it is more of the uncertainty on the part of
banks that they are hesitant to go forward?
Ms. Haddad. That is what it appears to be, yes.
Mr. Clay. I see.
This question is for Mr. Clements and Ms. Eckert, what
specific steps do you believe Congress or State governments can
take to address the adverse consequences of de-risking
remittance service providers?
Mr. Clements. We have a variety of recommendations to the
Federal agencies in terms of Treasury and the banking
regulators to conduct retrospective reviews, actually looking
at this issue of de-risking. The last round they simply looked
at the currency transaction reports and the SAR filings but
didn't get into the underlying cause of what is causing a bank
to de-risk.
The second thing we have asked Treasury to look on this
issue of de-risking, is remittances, the movement then of funds
out of the banking system to non-banking channels, how does
that affect Treasury's ability to actually monitor criminal
activity. Those are a couple of things we have looked at. We
have also recommended in the past, efforts among the bank
regulators to reduce the burdens associated with these
activities.
Mr. Clay. I see.
Ms. Eckert, anything to add?
Ms. Eckert. Yes. I think first and foremost again is some
clarity from the regulators about what is expected and here in
particular the bank examination manual, the standard changed
for NPOs, in June 2016 yet there is nothing reflected other
than statements by officials which are helpful but the bank has
nothing to rely on in terms of how they assess risk associated
with NPOs.
Currently it is an outdated assessment but banks have
nothing to hold on to. if you will. and to help them make the
appropriate risk assessment, the clarity, the regulatory
guidance; I think another thing is to recognize the importance
of humanitarian assistance--
Mr. Clay. Yes.
Ms. Eckert. Emphasizing that humanitarian and development
assistance are important U.S. objectives, they are important
for foreign policy, they are important for countering violent
extremism and promoting the kind of values in certain of these
higher-risk areas to rely on U.S. support.
And the other is to consider incentives, what can we do
that will actually encourage banks to take the additional step
to bank NPOs.
Mr. Clay. And I see the Chairman won't let me go over my 5
minutes so I yield back.
Thank you for your response.
Chairman Luetkemeyer. The gentleman yields back.
In fact, he went over 5 minutes significantly but that is
OK, we are not counting today, are we.
With that we go to the Vice Chairman of the committee, Mr.
Rothfus from Pennsylvania, you are recognized for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Ms. Yearwood, as you know, many poor and unstable countries
rely heavily on the flow of remittances from the United States.
Haiti for instance received $1.3 billion in remittances in 2015
and its GDP is only about 8 billion. What are the potential
impacts of a loss of remittances due to regulatory pressures on
U.S. institutions for countries like Haiti, Somalia, and Nepal?
Ms. Yearwood. I think it is impossible to overstate how
important remittances are to Haiti. I don't have the precise
numbers on me but it is a significant portion of their GDP that
is through remittances.
Going back to one of the statements earlier, what you will
begin to see is not just a drop in remittances but an increase
in money moving through unofficial channels, money that cannot
be regulated so it puts pressure on the system, it puts
pressure on securing the network and of course there are
questions whether the money will get to the people that it is
supposed to get to, will the money be diverted on the way, and
will it get to people that it is definitely not supposed to get
to.
I spent 10 years in Haiti and so I know first-hand that
remittances are a significant part of what drives the economy.
At this point, if it were to go away I think there would have
to be serious consideration about how the U.S. engage Haiti in
other ways to improve trade and other areas that aren't
necessarily subject to this hearing but the remittance channels
right now need to be kept open and alive.
And I am sure that Haiti's banking system is very much
under stress because of this issue. I believe they have maybe
one, maybe two U.S. correspondent banks right now and so if it
remains fragile it could go south.
Mr. Rothfus. With respect to the risks of going to
unofficial channels and maybe remittances not being made at
all, among the risks there would be any security or political
stability risks?
Ms. Yearwood. Oh, absolutely.
Mr. Rothfus. In what sense?
Ms. Yearwood. Again if--remittances make up such a large
portion of the GDP, I wish I had brought the number but I will
get that to you, they make up such a significant portion of the
GDP. We are talking about a country that has high unemployment,
low education, if people aren't able to pay for school fees,
for school books, for health, for food, political stability is
absolutely threatened and of course that has implications as we
saw back in the 1990's on migration.
Mr. Rothfus. And in 2015 there was a paper from Oxfam, the
Oxfam Global Center on Cooperative Security suggested that de-
risking practices will likely result in the further isolation
of vulnerable communities particularly women from the financial
sector and may have wide-ranging humanitarian, economic, and
security implications. Would you agree with that, Ms. Yearwood?
Ms. Yearwood. A hundred percent.
Mr. Rothfus. Let us see, yes, there we go, Ms. Haddad, the
GAO (Government Accountability Office) found that several money
transmitters including all of the Somali money transmitters
reported that they were using non-banking channels to transfer
funds, in some cases the money transmitter was forced to
conduct operations in cash. What are some of the risks
associated with pushing--activities out of the formal channels.
Ms. Haddad. I would say that there are a number of risks
with that happening because as it goes outside of the channels
you can't monitor it anymore, you don't know where the money is
flowing, you don't know who is transacting business--
Mr. Rothfus. But do you believe that the regulators would
have appropriately weighed the risks of this activity leaving
regulated markets?
Ms. Haddad. Do you believe that they have?
Mr. Rothfus. Would you believe that the regulators have
weighed those risks of pushing remittances out--
Ms. Haddad. --I am not sure. I believe that a lot of these
are unintended consequences of these regulations. I don't think
that it was intentional or even--
Mr. Rothfus. Would they be considering that, do you think?
Ms. Haddad. I don't know, I would hope so. I don't know.
Mr. Rothfus. Mr. Lewis in your testimony you expressed
support for facilitating BSA/AML innovation by financial
institutions, how can emerging technologies help to address the
problems caused by indiscriminate de-risking?
Mr. Lewis. Well, thank you for the question. Certainly,
technology helps because much of it's about monitoring and
crunching the numbers on the accounts it is tying certain
transactions to other transactions, accumulating those
transactions together so I do believe technology will help and
has helped and will continue to with BSA.
The one thing with technology is we want to make sure that
all the technology and all the FinTech companies are regulated
equally and it is a clean playing field, if you will.
Mr. Rothfus. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that we go to the distinguished gentleman from
Georgia, Mr. Scott, is recognized for 5 minutes.
Mr. Scott. Thank you very much Chairman Luetkemeyer for
holding this hearing. And I also want to thank you Chairman
Luetkemeyer for your leadership on the ``Operation Choke
Point'' legislation, H.R. 2706, which we passed out the
committee, got through the House. But I will remind everyone
that it was Mr. Luetkemeyer and I who were working on this bill
when it wasn't generating as much support and it wasn't a
popular thing to talk about back then, especially for some of
my Democratic friends, but we have grown with this legislation,
it has passed, it is over in the Senate now and we hope that we
can get it through.
But our bill gets at the fundamental purpose of what we are
discussing today and that is there are real side effects that
have a real impact on our economy when the regulatory pressure
we apply on our financial system is too strong and our ``Choke
Point'' legislation would prevent Federal banking agencies from
ordering a bank to terminate a customer's account without a
material reason and that reason could not be based solely on
reputation risk.
Now Ms. Haddad, how are you? In your testimony, you
provided an interesting recommendation for a way forward on how
to deal with the de-risking trend we have seen lately and your
recommendation caught my attention and it was, I quote, you
say, ``use of technology to lure AML/CFT (Combating the
Financing of Terrorism) compliant costs without the fear of
regulatory backlash,'' that is at the core of why we are here
and I am the Co-chair of the FinTech Caucus here in the House
and I share your enthusiasm about using innovative technologies
to solve many of the problems we have in today's financial
system.
And you say in your testimony that we should establish
channels for regulatory approval and support of innovation.
Tell me, are you envisioning a sort of sandbox approach to
regulation?
Ms. Haddad. Thank you for your question. I think that a
sandbox approach is a very good one. I think that it is one
that could be beneficial. We are a young FinTech company
ourselves and we are in regular conversation with regulators
because that is something that we have sought out on our own
but getting that type of engagement is quite challenging and
particularly working with banks and having them become
comfortable, trying out your technology and being able to see
how it benefits their business is a real challenge without some
sort of safeguard in place from regulators.
Mr. Scott. And as you know, and I am sure as the committee
knows there has to be a delicate balance between allowing
innovation while also at the same time making sure our
regulators stand firm on compliance and enforcement.
And so, Mr. Lewis, I would be interested to hear how you
feel about the approach and recommendation that Ms Haddad is
offering?
Mr. Lewis. Thank you. I appreciate it. I think that any way
technology can benefit, we should be looking at it. One of the
problems we run into with technology and new technology is that
technology is expensive, it is very resource-intensive. Our
systems at our credit union and many credit unions are
extremely complex, creating in the interfaces between the
systems and the new technology, testing the new technology,
demonstrating that to regulators, can be expensive and
resource-intensive so we certainly are always willing to and
very interested in looking at new technologies.
We use technology to operate our credit union on a daily
basis, some is home-grown and some was bought from vendors but
it is not so easy always just to test out a technology because
of the entry costs for us.
Mr. Scott. And tell me about that cost, you say it is very
expensive but give us an idea, give us what you are talking
about, why do you say that?
Mr. Lewis. Well I can give you one example on the
remittance side, when the remittance regulation came into
effect, there were requirements for disclosures and we had to
use outside third-party in order to create these remittances,
to originate the remittances because we weren't able do it
ourselves. In order for us to create that interface with this
outside third-party, UNFCU spent over $1 million to create that
single interface with this outside entity and it took about 3
months of time.
Mr. Scott. Well thank you.
And Ms. Haddad, do you concur with that?
Ms. Haddad. I mean engineering costs, costs of developing
technology is incredibly high--
Mr. Scott. Yes.
Ms. Haddad. --and banks are trying to do this internally
and they are incurring a lot of costs internally. As an
external company that is trying to work with banks, I
understand the costs, the costs are significant and it is
helpful to be able to work with third-party companies to reduce
the cost that the banks themselves have to face in leveraging
these technologies.
Mr. Scott. Well thank you both.
Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
I too want to thank Mr. Scott though for his leadership and
tenacity working with us on ``Operation Choke Point.'' We were
the lone voices in the wilderness for a long time and now we
can see the effects, even at the international level, of some
of these policies and actions that we have taken, so I thank
him again.
With that we go to the gentleman from Colorado, the
distinguished gentleman, Mr. Tipton is recognized for 5
minutes.
Mr. Tipton. Thank you, Mr. Chairman.
I thank the panel for taking the time to be here.
Mr. Lewis, if I could start with you, we would have had a
comment from Ms. Yearwood, I think saying some of the
compliance costs had gone up 66 percent and you just cited a
billion dollars of investment that had to be made, some of that
seems to be coupled back with what Ms. Eckert was talking about
when she had made the comment that banks have nothing to hold
on to in terms of having some real guidance.
Does that feed on itself not having some certainty in terms
of what you are going to have to be dealing with in terms of
de-risking, what you need to be looking for? I found it a
little concerning when you were citing that you will have some
of the law enforcement agencies that will come in and ask for a
broad swath rather than an individual account, that they would
like to be able to look into, which speaks to the chairman and
Mr. Scott's words in regards to ``Operation Choke Point'' so
are those issues, when we mold them together, is that creating
real complexity for you?
And you had cited a few bills in your testimony that we are
working on out of this committee, would you expand on how those
might be helpful as well?
Mr. Lewis. Well first, thank you very much for the
question. I would say that, yes, those things in combination
provide complexity for us. If they comply, it is cost, it is
resources, and it is the uncertainty. In essence, we are
talking about risk here and risk is uncertainty and for an
institution like ourselves, if we have some certainty then we
are able to evaluate the risk and mitigate against that risk;
it is the uncertainty that causes the problems with us and in
our industry.
So, anything that the regulators, Congress, the Bureau, can
provide some certainty on is beneficial.
I think some of the bills that we were talking about here
certainly--relief on 6068 which is the BSA/AML bill, that will
certainly help us, maybe not with uncertainly but it will
reduce some of the burdens as some of the caps will be raised
on what we would need to report; 4545, Financial Institutions
Examination Fairness, again this would provide institutions
with the ability to challenge or to go to the next level if
they have problems with the regulator or examiner.
So, I think and certainly ``Operation Choke Point'' would
help because theoretically that would reduce the regulatory
burden on credit unions and financial institutions.
Mr. Tipton. Great. Thank you for that. You might want to
speak to this as well but I would like to be able to talk to
Mr. Clements a little bit in regards to some of your testimony.
I happen to live in an area southwest Colorado, we have a
lot of high-intensity drug-trafficking designation areas, five
counties, southwest Colorado, are these areas more prone
probably to be suspect for de-risking by banks as we move off
of the borders that you had noted in some of your charts and
start to move up in States as far north as Colorado?
Mr. Clements. We conducted an econometric model as part of
our report and in that case it was nationwide so we weren't
just limited to the southwest border States. To your point,
some of the variables we did look at were the high-intensity
drug-trafficking areas (HIDTA), and high-intensity financial
crimes areas. In both those types of locations if the county
was designated, it had a greater likelihood of losing a branch
the following year, so those are certainly factors in the
declining number of branches in communities not just along the
southwest border but nationwide.
Mr. Tipton. Good. Do you have some examples of some
misplaced assumptions of high risk because of the HIDTA
designation for some businesses?
Mr. Clements. We looked at a variety of classes of
customers that stakeholders had told us were at greater risk of
money laundering, those would be cash-intensive small
businesses, money services business, and also domestic
businesses that have a lot of cross-border transactions. Those
would be the ones that they told us would be related to money
laundering, not exactly a particular business. You could have a
business that is completely legitimate operating in that space
but money launderers, their transactions tend to mirror the
type of transactions that you would see businesses in those
spaces engaged in.
Mr. Tipton. And so probably the extension would be natural,
and Mr. Lewis you might want to speak to some of this as well,
do the banks de-risk because of that HIDTA designation simply
for the fear that they are going to be out of compliance and
have a challenge with that?
Mr. Lewis. Well certainly, we haven't experienced that
directly but I know many of our credit unions have, and what it
comes down to is it comes down to the intensity of scrutiny
both from the regulator and law enforcement, so it may not be a
directive to de-risk but in essence it is an indirect effect of
the intense scrutiny either by a regulator and/or by law
enforcement with regards to these businesses.
Mr. Tipton. Right. Hey my time is expired. Mr. Chairman I
yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that we go to the gentleman from Georgia, Mr.
Loudermilk, you are recognized for 5 minutes.
Mr. Loudermilk. Well thank you Mr. Chairman.
And thank everyone on the panel for being here.
Ms. Haddad in your testimony you talked about how de-
risking reduces transparency by redirecting money to
unregulated channels, can you elaborate a little bit on how
that happens?
Ms. Haddad. Sure, I would like to highlight something that
happened actually just last month with a bank in Argentina,
this Bank chose to drop SWIFT in favor of a strategic
partnership with BIDEX, which is an unregulated crypto-exchange
firm and they are now using this crypto-exchange firm to settle
their international payments and the CEO noted for the reason
cost, and said that the cost of having an intermediary was too
high.
And I bring up that example because we speak a lot about
other unregulated industries like Hawala and unregulated money
service businesses as well as movement of large amounts of cash
cross-border, which are things that happen but I wanted to
highlight that because I think that this is critical today with
the change in the payment landscape, with the rise of crypto
exchanges, with the rise of alternative payments that this is
what is happening now that these alternative providers are now
gaining traction and banks are no longer a part of the system.
Mr. Loudermilk. So, I know that we have been dealing a lot
with the cryptocurrencies here in the U.S. with the Blockchain
technology which I think when you divest the cryptocurrency
from Blockchain, Blockchain's an interesting technology but it
also gives some challenges to law enforcement so what you are
saying is because of de-risking, we are forcing some businesses
into these somewhat underground networks that make it harder
for us to track and trace.
Ms. Haddad. Exactly there are no alternatives for the
payments to flow or for money to flow if they can't access
either a remittance firm--
Mr. Tipton. Yes.
Ms. Haddad. A regulated remittance firm or a bank and that
is why we are seeing the rise of these alternative systems.
Mr. Loudermilk. So, we are really being counterproductive,
well through this de-risking is creating more risk.
Ms. Haddad. It is possible. It is possible. I believe that
there actually have been some studies that have shown that that
when the de-risking has occurred that money laundering has
increased, I don't have those exact numbers, I could get them
for you but there have been some instances that I have read in
the past where that has happened.
Mr. Loudermilk. OK. Thank you. That was a very interesting
antidote.
Mr. Lewis, I want to talk a little bit about the Suspicious
Activity Reports (SARs), can those contribute to the problem of
de-risking because the SARs are such a compliance burden
especially on smaller institutions.
Mr. Lewis. Yes. Thank you for the question. Certainly SARs
BSA/AML requirements create a lot of constraints for smaller
finance institutions and even for institutions like ourselves.
People talk about the volume of SARs, which is certainly
something that we need to look at but also, what we have to
understand is that behind each SAR there is a tremendous amount
of research and investigation and decisioning that goes into
it.
We take SAR filing very seriously and while we are told by
the regulators, ``don't file too many SARs, we don't want
defensive SARs,'' we are also told by the regulators, ``make
sure you file the right SARs,'' and so for us to strike that
balance to the institution, it takes a lot of research, a lot
of investigation to do it.
We certainly support 6068 by raising the limit of the SARs,
modernizing BSA, as that in and of itself would eliminate the
need to file at least some SARs which would provide some relief
for us and certainly for some smaller financial institutions.
Mr. Loudermilk. Well besides raising that limit for the
SARs, is there anything else that you would recommend that we
can do to reduce that burden?
Mr. Lewis. Well certainly more guidance and certainty would
help out as well. A lot of the consternation we have is should
we file the SAR, shouldn't we file the SAR, under what
circumstance should we, under what circumstances we couldn't.
Now we do receive some guidance from the regulators but
even more guidance or maybe some possible safe harbor, don't
know how that would work as I sit here but something that would
give us an opportunity for more certainty with what we are
doing.
Mr. Loudermilk. OK. Thank you.
Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back.
With that we go to the gentleman from Texas, Mr. Williams,
is recognized for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
Risk management is one of the most important functions that
a financial institution performs. As a business owner myself I
can relate to the fact that compliance challenges especially
the excessive growth of Federal regulations over the past 10
years, it has been hard. De-risking forces an institution to
perform the cost-benefit analysis of doing business with a
customer. ``Operation Choke Point'' is one of those many
examples of Executive-overreach from the previous
Administration.
While this Administration has taken deliberate action to
curb efforts like ``Operation Choke Point,'' we must be
vigilant for future occurrences and this isn't theoretical, it
is reality.
I know firsthand how this occurs because I have experienced
``Operation Choke Point.'' Now while I understand the
importance of risk management, it is important not to view
whole industries as potentially high-risk groups, apply a
single standard to industries in different States with
different business owners and values is inconsistent in my
belief.
So, Mr. Lewis, first question, how would you categorize the
working relationship between State banking supervisors, Federal
regulators, and industry stakeholders when it comes to
discussion of de-risking.
Mr. Lewis. Thank you for the question. From our experience
I think there is some unevenness that echoes on. We are a
federally chartered credit union so we don't have much direct
contact with the State regulators so NCUA is our examiner and
regulator. We do, however, through law enforcement, we will
receive subpoenas and we will receive others and a lot of times
there's not coordination between those various areas of law
enforcement with regards to the subpoenas.
Mr. Williams. OK. Next question also Mr. Lewis. I
introduced H.R. 3626, the Bank Service Company Examination
Coordination Act, this Bill would enhance State and Federal
regulators' ability to coordinate examinations and share
information on bank's technology vendors in an effective an
efficient manner.
So, my question would be, can you touch on the benefits to
authorizing State regulators to examine third-party TSPs
(technology service providers) and how that could avoid
duplicative examinations and reduce regulatory burden on an
institution?
Mr. Lewis. Yes. Again, thank you for the question. We
again, we are a federally chartered credit union; I personally
don't have a lot of experience with State credit unions or
regulators. What I can say is we welcome the opportunity to
follow up with you in writing with that question, also we can
provide a good and thorough answer.
Mr. Williams. OK, thanks.
Mr. Clements, the Justice Department recently announced the
end of ``Operation Choke Point,'' are you aware of any account
termination notices since that announcement?
Mr. Clements. Not aware of any. We haven't conducted work
on that point.
Mr. Williams. OK, thank you.
I might ask if anybody else--so the question I talked to
Mr. Lewis--again I repeat if anybody wants to answer it, can
you touch on the benefits to authorizing State regulators to
examine third-party TSPs and how that could avoid duplicative
examinations and reduce regulatory burden on an institution,
anybody would like to answer that?
Yes ma'am?
Ms. Eckert. Congressman, I would just note that the
question of State regulators has become an important issue
because there are growing fines. For example, the New York,
Department of Financial Services has had significant fines on
numerous banks and I think that because they are looking at it
from a different perspective it has become a very significant
issue in compatibility perhaps of how some of the regulators
are actually looking at it.
The other question is examiners and the disconnect either
at the State level but in particular at the Federal level, the
disconnect between what policy is and what is going on at the
examination level; the examiners are sitting with the banks,
day-in and day-out. I had a situation where one financial
institution said their examiner asked them, ``do you know your
customers' customer?'' And when the Bank said, ``well according
to the 2006 guidance we don't need to know our customers'
customer,'' the examiner didn't even know that there was August
2016 guidance.
So, I think that there's an important you know, compounding
effect of State regulations on top of the Federal ones.
Mr. Williams. OK, thank you.
In my remaining time I might ask all of you, getting back
to ``Operation Choke Point,'' do any of you know, that if
account termination notices have been sent out or anything or
how that is going to happen, ``Choke Point''?
OK, very good.
I yield the rest of my time back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time is yielded back.
With that we go to the gentleman from Tennessee, Mr.
Kustoff, is recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman.
Thanks to the witnesses for appearing this afternoon.
Mr. Lewis, if I could, I could go a little bit broad and
talk about, going back to the 2008 financial crisis and the
enactment of Dodd-Frank, we have seen Financial Service
regulators expand their powers significantly, I think we can
all agree to that.
With the heightened regulatory requirements, coupled with
the prospect of financial entities receiving fines for
potential violations, we have seen the significant decrease of
products that many community banks and credit unions now offer.
I think a lot of times you see consumers look elsewhere to find
where they can have their services met, their needs met. Some
leave the financial system entirely, if I could ask two
questions.
One is can you discuss the consequences to driving those
customers out of the financial system, that is the first
question?
And then the second question is, toward that end, where do
those people typically go when they no longer have access to
financial products that a credit union or a community bank
would offer?
Mr. Lewis. Well thank you very much for the question.
I would like to add that, in addition to my role with UNFCU
and with NAFCU, I also recently was the Vice Chairman of a
community development credit union in New York with less than
$1 million in assets so I have experience in both the large
side and the small side.
And with that community development credit union, unbanked
and underbanked is a major problem in the community for various
reasons, so if these folks leave the standard banking channels,
they lose the opportunity for credit, they lose the opportunity
for credit reporting, they end up in areas where it could be
check-cashers or places where they are paying a huge amount of
fees in order for them to be able to cash their checks; they
don't have access to standard insurance products.
So, any time anyone's pushed out of the traditional banking
industry they are generally not going to a better place,
certainly we know that from the credit union's perspective;
credit unions as financial cooperatives owned by the members,
the reason for being is to serve the members so we are always
looking to serve those in our field of membership and we will
continue to do so, but we think that anyone who leaves the
system is not going to a better place.
Mr. Kustoff. Thank you very much for your answer.
Mr. Clements, if I could, we have talked about the problems
along the southwest border and in February of this year, a
report was issued by the GAO that examined de-risking along the
southwest border. The three factors I think you have identified
are unique to account closings at financial institutions in the
region. Specifically, I think you noted that these accounts are
generally cash-heavy, they involve foreign account holders, and
those transactions cross or transcend country boundaries.
Can you explain why these findings are unique to the
southwest border and what are the characteristics that have
been important drivers if you will behind the branch closures
in the region?
Mr. Clements. Correct. Those were the factors we had cited,
one: The large number of cash transactions. Just to give you an
indication, the currency transactions, 30 percent more currency
transaction reports filed by banks in the southwest border
region. Compared to comparable counties. There is the issue of
a lack of transparency if you have a lot of cash transactions.
Then also the issue of the cross-border transactions. The
concern there is that a transaction crossing the border can
look very much like money-laundering even if it is a completely
legitimate transaction.
We spoke with a farmer in Nogales, Arizona, and she had
operations in Arizona and Mexico and she needed to move moneys,
wire moneys from her Mexican operation up to a U.S. bank and
after a while the bank told her, this is too much risk for us
having these transactions going back and forth.
And then again last the issue of the foreign account
holders is just a problem with being able to identify that
customer and to meet the customer identification program
requirements under BSA/AML.
Mr. Kustoff. Thank you very much.
And I yield back the balance of my time.
Chairman Luetkemeyer. The gentleman yield's back.
With that we go to the gentlelady from New York, Ms.
Tenney, is recognized for 5 minutes.
Ms. Tenney. Thank you, Mr. Chairman.
And thank you to the panel for appearing today. I really
appreciate you being here and obviously de-risking has become
somewhat notorious especially in a community like mine but
under the Obama Administration, ``Operation Choke Point''
attempted to cutoff financing for ammunition and gun
manufacturers like Remington Arms, which was founded in my
district over 200 years ago and a new industry, a new
competitor in that market called Oriskany Arms and so we know,
we have experienced some of that in our own area.
But I would like to look at a couple of other things,
angles that de-risking and the links to the closure of a lot of
branches, small businesses or small banks and community banks
and also credit unions in my region which really dominate where
I live, in my district, and the implication on our very large
immigrant and refugee populations, many of these people would
like to send their money back to their home countries and do it
in a safe way but under de-risking of course, they have been
pulled from a reliable and a safe way to send that money over.
One of the issues is by pulling that out and there was a
study and the Government Accountability Office came up with
some numbers that the banks are now just terminating those
accounts and now they are not able to do this so they are
forced to go into other means.
I was wondering if you could comment, and I would just ask
everyone across the board, generally on what is being done or
what we can do on our side to try to deal with this de-risking
phenomenon and how we help people who are in that situation?
And maybe we could just go right through from Mr. Clements on
down, and I want to just save 1-minute left because I have a
question for Ms. Eckert at the end, having to do with New York
State.
Mr. Clements. We have a variety of recommendations to the
agencies to address de-risking including FinCEN and the banking
regulators--
Ms. Tenney. Yes.
Mr. Clements. Conducting retrospective reviews to really
get at what are the underlying causes of de-risking rather than
simply focusing on more superficial level of concerns.
And then second, getting to your point of the remittances,
we have asked Treasury to look at if de-risking is causing
banks to cancel these accounts, therefore the remitters have to
move to nonbanking channels, what is the implication of that
for security, what is the implication for consumers being--
Ms. Tenney. Yes.
Mr. Clements. Able to get the types of services they need.
Ms. Tenney. And as we go down the line, let me just also
add that I am in an area where we don't have as much
connectivity in terms of broadband, in terms of being able to
get on the Internet and we have a lot of a refugee population
and a lot of our seniors don't have access either so maybe you
could address that while we are saying how do we provide this
service back to a bank where they are not going to be subjected
to, in this case obviously from New York, excessive regulation
coming on the New York side?
Mr. Clements. The concern with--
Ms. Tenney. Yes.
Mr. Clements. If a bank branch closes that obviously limits
the number of options for the consumer. I was going to say one
of the options would be mobile banking or online banking but
that is not an option and--
Ms. Tenney. Not always, yes.
Mr. Clements. A senior person is either forced to find
another bank if there is one in that area. Or drive 45 minutes
to 1 hour, one way to get to another institution.
Ms. Tenney. Thank you.
Ms. Eckert and you know, while you are at it, quickly just
comment on the New York State regulatory regime in this space
if you could, please? You alluded to it earlier so it got my
interest on that.
Ms. Eckert. I think it is important, so what happens when
these communities are de-risked, in the case of nonprofits and
charities, their mission is to provide humanitarian development
assistance so they don't really have the option of saying, well
we are not going to do it and only I think 3 percent of the
cases, what we surveyed, did they cancel the program.
What they have done is to find the other alternatives
around, which is carrying cash, it is using unregulated money
remitters. And all of those things come at a cost for charities
in particular working in conflict zones, those come at a
personal cost in terms of safety, carrying large bags of cash
is enormously, inherently, dangerous for their staff and for
their beneficiaries but more than that it drives these things
underground which means that they are not traceable and that
they are not transparent to regulators.
The charities prefer to use the banking system, in fact
some of them aren't even comfortable with money service
businesses as much but there is no alternative.
Ms. Tenney. Do you find that the New York State government
has been effectively making it more difficult for a lot of
these people to have access or a lot of the charities that you
are referring to not-for-profits having access to a way to be
able to avoid having to carry around cash and to be putting
themselves at risk?
Ms. Eckert. I don't have--
Ms. Tenney. Quickly, I am running out of time.
Ms. Eckert. I don't have direct information with regard to
the New York system but what I will tell you is that the
personal liability now the individual compliance officers,
those things all contribute to what financial institutions have
to decide, which is, it is just not cost-effective for us to
bank these charities.
Ms. Tenney. Thank you very much to the panel, I am out of
time, thank you.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that we go to the gentleman from Kentucky, Mr. Barr
who is Chairman of our Monetary Policy Committee--
Mr. Barr. Thank you, Mr. Chairman--
Chairman Luetkemeyer. You are recognized for 5 minutes.
Mr. Barr. Thanks for holding this important hearing.
And I wanted to start with Mr. Lewis and touch on some
testimony that you offered earlier about the need to modernize
SARs and these Suspicious Activity Reports under the Bank
Secrecy Act and the--and your call for a greater guidance and
certainty from the regulators may be a safe harbor.
What percentage of SARs would you say if you have an
estimate, would actually justify further scrutiny or
investigation by regulators or officials investigating genuine
cases of terror-financing or money-laundering?
Mr. Lewis. I would say on the terrorist-financing side, a
very, very, very small percentage.
On the money-laundering side, I couldn't quote a
percentage. I would say that there's some but many of the SARs
that we file, while I think they are legitimate SARs under the
guidance are probably not indicative of any sort of illegal
activity, remember SARs is suspicious activity, it is not
necessarily an illegal activity.
Mr. Barr. Right. And that is the difficult balance that we
have to, as policymakers, we have to figure out how to strike
that balance.
If we were to create a safe harbor or if the regulators
were to create a safe harbor, well how would we know we are not
missing something?
Mr. Lewis. Well I think that is always the balance. We are
never going to be sure we are not missing something but there's
going to be a balance of the effort and what the utility of it
is, is that I couldn't sit here today and chart that out for us
but certainly I think it is worthy of a robust discussion and
we would welcome the opportunity to discuss that further.
Mr. Barr. Thanks, and I will move on but I would invite
further feedback from any of the witnesses about what a safe
harbor would look like, so as to ease compliance burdens while
at the same time not missing any critical information for law
enforcement.
Ms. Haddad, from your testimony it sounds like you believe
there is obviously a complicated set of factors that have led
global banks to de-risk and stop offering some or all services
in a particular region due to non-credit risk.
In your mind what is the number one reason why these banks
are de-risking?
Or if there's more than one factor, you can offer that as
well?
Ms. Haddad. I do think that it is difficult to pin-point
the number one because they are all interrelated so
profitability concerns is related to increased costs of
compliance and so all of the factors end up being related to
one another.
But I do think that one of the biggest challenges is around
balancing the cost of compliance with the revenue potential of
a particular relationship.
Mr. Barr. And I am sure you have already touched on this
but can you amplify your testimony on what role new technology
and third-party providers of independent standardized
assessments of respondent banks compliance with global
standards might have on de-risking?
Ms. Haddad. Sure. Today there does not exist a global
benchmark. It is frankly what we are creating at Sigma Ratings
and the relevance of this is that if there is a global standard
and there is one tool that is used to conduct initial due
diligence that provides a baseline for correspondents to
actually look at their respondent relationships, this
standardization will allow them to have a starting point from
which they can then do additional due diligence.
So today the way that it works is that these respondent
banks have a number of correspondent banking relationships
sometimes you know, 10 to 20 correspondent banking
relationships and they are required to provide the same
information to each of those, over and over and over again and
then each of the global banks or the regional banks are then
required to review all of that information individually and
provide their own risk assessment.
If there is a standardized approach that provides a
baseline risk assessment on all of the respondent banks or
potential respondent banks, then each of those global
correspondents can start from that point and then do additional
due diligence on top of it. It would reduce the redundancies
that are happening across the entire system and it would also
allow for banks to focus their time and energy and money on
real risk.
Mr. Barr. And in my time remaining, back to my question to
Mr. Lewis, what would a safe harbor on SARs look like, how
might this platform that you are creating limit the number of
superfluous or unnecessary SARs?
Mr. Lewis. Thank you. I think what Ms. Haddad's company has
done is excellent. I think it is a great start and it is a
direction and any information is good information, the question
of course is how expensive the utility but certainly I think
any information is good information for us to have but how much
is that information going to cost us.
Chairman Luetkemeyer. The gentleman's time--
Mr. Barr. My time has expired.
Chairman Luetkemeyer. --has expired.
Votes have been called but we have two witnesses or two
questioners yet.
So, Mr. Green from Texas is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
I thank the Ranking Member as well.
And I also thank the witnesses for being here today to
discuss de-risking, which is another way of saying closing
accounts, and these accounts are being closed to avoid legal
liability. And by the way, there's nothing wrong with avoiding
liability. I think that it is perfectly appropriate that you
avoid liability if you can.
The question that I have has to do with the NGOs that are
trying to be of help and that are finding themselves without
the means by which they can transfer large sums of money to
people who are in need of the help. That is doing good but
running into obstacles that are just not appropriate sometimes.
So, my first question is to what extent does this problem
exist? I have talked to at least two NGOs, there may be many
more, there may be just a few but to what extent does the
problem exist as it relates to NGOs, these are nongovernmental
organizations?
Ms. Eckert. Congressman, as a colleague of mine has said,
we have been admiring the problem, we know that there is a
problem. Two-thirds of all U.S. charities, NPOs are facing
financial access difficulties and that has a very serious
impact on their ability to be able to transfer funds for
humanitarian and development assistance.
Part of the problem is that it is not just closing of
accounts and that is one of the reasons why going beyond de-
risking, the term, we talk about financial access because in
the case of nonprofit organizations, delay and denial of wire
transfers are actually a very serious problem; when it takes 6
months to provide fuel for a hospital in Syria, the situation
is obviated; when it takes so much time to actually get the
bank to provide permission for the wire transfer, the
assistance is thwarted and in that regard the utility, the
technologies, that we have been talking about.
KYC Utilities can actually provide a significant path
forward and that is because of the repeated requests for
information, the same charity gets repeated quest--requests
from the same Bank for the information. If we are able to
create a utility where all of the NPO information resides,
financial institutions can actually rely, go there, get all of
the information about their internal compliance, their due
diligence procedures, and that is a repository or KYC Utility
for nonprofits is something that the World Bank and ACAMS
processes is exploring.
Mr. Green. It is ironic that you would mention the example
that you did because that is exactly what was called to my
attention about the delay that it was taking, what was thought
to be an inordinate amount of time, an unusual amount of time
to do something that was thought to be relatively simple so but
again I understand that it is happening but is it happening to
a large number of entities, 10 percent, 50 percent, 20 and just
a guesstimate?
Ms. Eckert. The study that was conducted and released last
year found two-thirds of all U.S. charities, NPOs, are
experiencing these problems.
Mr. Green. Two-thirds?
Ms. Eckert. Two-thirds and that was surprising.
Mr. Green. OK.
Ms. Eckert. It was extremely surprising and I would just
say with regard to the problems that are experienced, account
closures represented only 6 percent, refusal to open accounts
was about almost 10 percent but the transfers delayed was 37
percent of the charities that were actually surveyed so that
kind of delay, fee increases, et cetera are really posing very
serious problems for the provision of important humanitarian
and development assistance.
Mr. Green. Ms. Yearwood, do you have any additional
comments on this?
Ms. Yearwood. The only comment I would like to add is that
this isn't only a problem for charities. I can cite at least
one Caribbean government that could not get a bank account for
their embassy here in the United States and so this doesn't
only have implications for charity, it has implications for
diplomacy.
Mr. Green. Well thank you very much.
Mr. Chairman, thank you for the time. I do have another
question but I think it might go well beyond my 12 seconds, so
thank you very much.
I yield back.
Chairman Luetkemeyer. The gentleman yield's back his time.
With that we go to the gentleman from North Carolina, Mr.
Pittenger is Vice Chairman of the Terrorism Financing
Committee, you are recognized for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Really appreciate each of you being here today. I know you
made a great effort to do that and your knowledge is very much
appreciated. I would like to just address to a greater extent,
further discussion, issues related to the cumulative effects of
the AML/CFT and risk management compliance on the financial
service industry.
Just Mr. Lewis, if you could please, just give me some
effect, impact of the account of these terminations by this de-
risking?
Mr. Lewis. Thank you very much for the question.
I think from my perspective UNFCU, we have one very, very
significant example of this and we have several but that would
be with regards to international remittances through Dodd-Frank
and through the Bureau's ruling and rules; we had to basically
change our entire remittance business. We were able to
originate remittances ourselves for our members but then
certain requirements came in to be with regards to disclosures.
One disclosure was all the fees that would be taken out,
the problem is we don't control that transfer so if there's a
transfer going to Asia it may go through a correspondent bank
in Europe and then through a correspondent bank in Asia and
they may take fees out of that so what we had to do is because
we couldn't do that, we had to go to a third party to do that
and what that ended up doing is it ended up increasing the
expenses for our members because we had to go to the third
party.
In addition to that, it ended up consolidating the industry
because what you had was many credit unions have gotten out of
the business of remittances, obviously simply can't afford the
technology and they can't track it as well so you have this
consolidation which increases fees and costs and then on top of
that, as I was saying earlier, on our technology side in order
to do that, it was a million dollars.
So that is just one small example of what we endured with
regards to one specific type of regulation and I know the
credit unions across the board are experiencing similar
situations.
We as credit unions don't really fire customers, we don't
have that luxury if you will to do that. The best we can do
because we can't terminate an account without a very, very long
process so the best we can do is restrict services but it is a
real issue and a real problem for credit unions.
Mr. Pittenger. Thank you, sir.
Sure, Ms. Eckert?
Ms. Eckert. Mr. Pittenger in terms of additional monitoring
compliance costs of AML/CFT regulations, some have placed it at
$4 billion annually, one bank reported that over 4,000
additional compliance staff--
Mr. Pittenger. Yes.
Ms. Eckert. --in 1 year were hired at a cost of a billion
dollars. In 2016, the Association for Certified Anti-Money
Laundering Specialists surveyed their members and found that
three-fifths of the respondents cited enhanced regulatory
expectations as the greatest AML compliance challenge.
So, these are real costs. No one is saying that it is
solely due to that but it is among the most frequently cited
causes of de-risking or financial access difficulties.
Mr. Pittenger. Thank you.
Ms. Eckert, let me address the issues related to law
enforcement and national security agencies and their ability to
track financial activities and potential criminals, does de-
risking make it harder for them to do that?
Ms. Eckert. I would say absolutely, sir, because as
charities and other de-risked communities have to find
alternatives, they go to unregulated money remitters, they go
to Hawalas, they go to places where they are not transparent or
traceable and that is contrary to what our money laundering and
terrorist financing regime is all about, and that is
responsibility of financial institutions and others and
traceability and transparency so I think that the negative
implications for counter-terrorist initiatives and security
overall are quite significant.
Mr. Pittenger. Thank you very much.
Mr. Clements, I would like to ask you if you would just
speak to the specifics of what impact communities face when
banks as well as bank branches close up and move away due to
de-risking?
Mr. Clements. There were a variety of challenges for the
community. Just for the consumer angle, the consumers are going
to lose that access to the service. On a broader economic
scale, you are going to have less business lending which then
will ultimately flow down into lower employment, lower wages
would be some examples.
Mr. Pittenger. Thank you. Can I ask another question? I
don't have enough time.
Thank you.
Chairman Luetkemeyer. The gentleman yield's back.
With that I want to thank the witnesses for being here
today. I would love to follow up a little bit more here but we
have to rush-off to a vote.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
With that this hearing is adjourned.
[Whereupon, at 3:39 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 26, 2018
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