De-Risking: Distrust, Disruption, and Destruction

January 11, 2016

Part I: Where Did We Go Wrong?

The largest threat to money service businesses is the danger of becoming unbanked via de-risking as check cashing banks continue to sever ties with MSBs in the name of regulation. These same regulatory bodies that keep the little guy down under the guise of suspicion are protecting banks from harm when they blatantly violate rules and laws. HSBC, JP Morgan, and CommerceWest Bank are just a few of the banks, both big and small, who have committed crimes and slipped through the fingers of justice by paying fines.  How did we get here?  When did MSB banking become so elusive? How can we right this wrong?

Planting the Seeds of Distrust

On top of blatant preferential treatment for banks, regulators are systematically working to keep the money service business industry tied down.  Even though Operation Choke Point “ended” earlier this year, regulators continue to tighten their grip on “risky” industries. (American Banker) When the Operation went into effect in 2013, they even published a list of these so-called risky industries to accompany the regulation.
Many are surprised to learn about the FDIC’s involvement with the publishing of this list and Operation Choke Point as a whole. According to a new report, the “FDIC explicitly intended its list of “high-risk merchants” to influence banks’ business decisions. FDIC policymakers debated ways to ensure that bank officials saw the list and ‘got the message.” Money service business and money transfer services are among those labeled as risky.
As banks scramble to avoid fines and penalties, they shed clients on the risk list because the cost to manage the perceived hazard outweighs the cost to simply shed the risk. “Rather than engage in the comprehensive know your customer (KYC) and enhanced due diligence (EDD) requirements that make these customers very costly to maintain, larger banks in particular are reacting to heightened regulatory scrutiny and record-breaking fines by de-risking.” (ACAMS Today)  Even though the FDIC-published “risky industry list was formally retracted in 2014, the damage has been done and the de-risking continues today.

The Downfalls of De-Risking

While regulation can help manage risk, it is dangerous (not to mention lazy) to lump every business within an industry together. Specifically, it is important to point out that “just because there are some bad apples within a legal industry [this] doesn’t justify effectively destroying [an entire] legal industry through secret executive fiat.” (The Washington Post)  
Despite the obvious limits to the reasoning of de-risking, the money service industry has absorbed the largest blow.  Regulation that encourages de-risking has essentially made check cashing banks the AML and compliance authority for money service businesses. According to the World Bank, “MTOs are crucial to the international remittances industry and provide relevant services for many migrants and their families. They also help extend reach and access to remittances and other financial services since they operate in many remote locations where banks aren’t present.” (The World BankWhen big banks fail to uphold regulatory requirements, they are slapped with fines, which they pay and promptly carry on with their business. De banked MSBs don’t have this same luxury and are often forced to shut down as a result of becoming de-banked.
With more than 250 million international immigrants sending money home, the de-banking of MTOs damages the flow of remittance in a big way.  In February, amidst increasing regulatory pressure, California Merchants Bank turned its back on money service businesses.  CMB cited AML-related reasons for its decision, specifically concerns over money transfers being sent into Somalia. This type of indiscriminate de-risking occurs daily. But when money service business owners are suspected of failure to report fraudulent behavior, they are jailed. Their lives and their businesses are disrupted and many never recover.

Why Don’t Bankers Go to Jail?

As MSB owners go to jail, bankers get caught red-handed and still avoid time behind bars. How is this possible? Many people think that the 2009 financial crisis was an exception– “bankers got away with a lot, but that won’t happen again because we have all learned our lesson.” But this is not exactly the case. Only one Wall Street banker, Kareem Serageldin of Credit Suisse, went to jail for the evasive financial tactics and high risk instruments that brought down an entire economy.  
How we arrived at a place where Wall Street misdeeds go virtually unpunished while soccer executives in Switzerland get arrested is murky at best. But the legal window for punishing Wall Street bankers for fraudulent actions that contributed to the 2008 crash has just about closed. It seems an apt time to ask: In the biggest picture, what justice has been achieved?” (The Atlantic)
The simple answer; very little justice has been achieved. The fines that were imposed were not levied against individual bankers, but rather the banks as a whole. The result? These fines were actually paid by shareholders and were often treated as tax-deductible expenses. So while the pomp and circumstance of the fines are played up by regulators and PR teams to show that “yes, the banks are taking this seriously,” the reality is that these sums are little more than a slap on the wrist for their recipients.  
The preference for fines over criminal punishment can be traced back to the Holder Doctrine, a June 1999 memorandum from then deputy attorney general Eric Holder. The most damaging sentiment of the now infamous memo is the idea that “big financial settlements may be preferable to criminal convictions because a criminal conviction often carries severe unintended consequences, like loss of jobs and the inability to continue as a going concern.” (The New York Times)  You can see that there is no question regarding whether or not banks break rules. They break them and then receive fines instead of jail time.  No punishments are levied against banks that are harsh enough to actually affect their day-to-day operations.  
The Holder Doctrine essentially made it OK to protect bankers on the grounds that sending them to jail would be too disruptive for their operations. Now that Holder is attorney general, he continues to hand down fines, upholding the doctrine he set into motion some 15 years ago. “Instead of shining the bright light on wrongdoing that took place at the Wall Street banks, Mr. Holder’s settlements allow them to cover it up permanently.”  (The New York Times)  
The playbook revolves around one key formula:  “Threaten public disclosure of behavior that looks criminal and then, in exchange for keeping it sealed, extract a huge financial settlement. No one individual, or group of individuals, is held accountable. No predawn raids of Park Avenue apartments are made. No one gets arrested. No one gets publicly shamed.” (The Atlantic)
Bankers Get Off Easy
You can see just how easy banks get off in the treatment of the fraudulent behavior of banks like Citigroup,  West Virginia Bank, and CommerceWest.  Specifically, Citigroup turned it’s head the other way for years as a money-laundering scheme unfolded.  A man named Antonio Peña Arguelles opened an account with Citigroup’s Banamex USA under the pretense that he was a cattle farmer and would be depositing about $50 a month into his account. Just one week after opening his account with Banamex, Arguelles deposited over $7 million by wire, alleged from the drug cartel Los Zetas. His blatant fraud continued until it reached well over $50 million.  (Bloomberg) How could this not have raised internal red flags for Citigroup? How did he get away from this? And most importantly, how did no one go to jail for this egregious error?
CommerceWest Bank’s actions are no less alarming. The bank knowingly enabled a banking client to fraudulently debit bank accounts for unauthorized payments.  Several big banks, including Bank of America, brought this to the attention of CommerceWest. Their response? Bank employees ignored the warnings, made their client stop debiting BofA accounts, and continued to let the returned money fees flow into their pockets. The Department of Justice released a statement essentially saying that they are taking this very seriously and have handed down a $4.9mil penalty.  (The Department of Justice)  But how seriously are they really taking the matter? Why are no CommerceWest employees going to jail for being complicit in the illegal debiting of consumer bank accounts? This is an egregious act– and the punishment does not match the crime in this case. The Justice Department’s “harsh” actions are not nearly harsh enough.
Read Part II

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