Generally, “de-risking” refers to situations where Financial Institutions (FIs) cease to provide all or certain types of services to their customer(s). De-risking can also mean FIs leaving relationships with and closing the accounts of customers considered “high risk”, this refers to high risk for Money Laundering (ML), Terrorism Financing (TF) and Proliferation Financing (PF) activities.
In short, if a FI is under the impression that having customer(s) presents a high risk of ML/TF/PF, such FI can decide to stop or minimize the services it provides to such a customer. This is sadly an emerging trend in both banking and non-banking financial sectors. This article provides an understanding for why FIs consider de-risking and some considerations for customers of financial services to minimise the potential of de-risking.
- Why do Financial Institutions consider de-risking customers?
Usually, if FIs do not receive satisfactory information about a customer, they are bound to have lesser information with which they can manage relevant risks that customer may expose them to. If such a ML/TF/PF risk is deemed intolerable (or too high) for the FI, they can sometimes consider to de-risk or stop providing services to that customer.
The Financial Intelligence Centre and the Namibia Financial Institutions Supervisory Authority do not encourage de-risking at all, for various reasons such as its potential to undermine national financial inclusion objectives i.e. the delivery of financial services at affordable costs to sections of disadvantaged and low-income customers. It is however accepted that the FIs have a duty to strike the right balance between advancing financial inclusion and mitigating relevant risks they are exposed to. It is within the context of striking this balance that de-risking has emerged locally and internationally.
FIs have authority in terms of the Financial Intelligence Act 2012 (Act No. 13 of 2012) (The FIA) and other laws, to request for information that they deem necessary to help protect their businesses and the entire financial system from ML/TF/PF activities. According to the FIA, FIs may request for such information in the following circumstances, amongst others:
- when a business relationship is being established or a single transaction is to be concluded by that customer;
- when transactions are concluded in the course of the business relationship (if some information was not obtained in the beginning of the business relationship); and
- when the FI sees a need to request for more information in respect of certain or all business relationships, including maintaining adequate current and up-to-date information and records relating to customers and beneficial owners (that are its customers).
- What the Financial Institutions expect from customers
This section highlights such major considerations customers should keep in mind when dealing with FIs, in order to reduce the potential for de-risking.
- When approaching FIs (to open accounts), disclose requested information to demonstrate openness and transparency and to build trust. This information is important as it is used to create a customer profile that is used by the FI to mitigate risks presented by the relevant business relationship. This information is also crucial as it is used for contacting the customer, amongst others;
- When there are changes in a customer’s contact, address or other relevant information, the customer should inform the FI accordingly so that the FI can update its records (customer profile);
- It is important that the information is provided to FIs timely and is as accurate as possible. Providing information timely ensures that measures can be taken timely to mitigate risks. Providing accurate information lays the foundation for appropriate or reasonable actions aimed at mitigating relevant risks.
In conclusion, the FIA does not prohibit FIs from entering into a customer relationship with customers that present a higher level of risk or providing products/services prone to ML/TF/PF risk. On the contrary, the FIA encourages FI’s to do so with on a risk-based approach. Therefore, complying the FI’s on request for customer information when purchasing goods or services remains the most effective way for customers to prevent being “de-risked” and as a consequence excluded from