Unintended consequences of the risk-based approach? De-risking tendencies in anti-money laundering and countering the financing of terrorism compliance

Abstract

This paper provides an overview of the regulatory approach taken by the European Union (EU) to counter unwarranted de-risking activities by financial institutions in the field of money laundering and terrorist financing. As an integral part of the network to combat money laundering and terrorist financing in the EU, financial institutions are subject to a comprehensive regulatory framework that follows a risk-based approach. In the course of the revision of this legal framework and driven by different developments such as migration, the phenomenon of unwarranted de-risking has increasingly come to the attention of EU regulators. Some related factors to unwarranted de-risking are typically the risk of non-compliance with rules in the field of anti-money laundering (AML) and countering the financing of terrorism and respective sanctions, including reputational damage, the increasing administrative burden that potentially comes with risky customers, as well as the associated high compliance costs and necessary training for employees. Additionally, the phenomenon of unwarranted de-risking can only be fairly assessed when being distinguished from de-risking decisions taken by financial institutions in accordance with their business strategy. Given the high impact unwarranted de-risking can have on important areas such as financial inclusion and as a result of observing an increase in unwarranted de-risking activities, EU regulators have focused on clarifying legal uncertainties faced by financial institutions, for example in the AML package published in 2021 and in the revision of existing and issuance of new Guidelines by the European Supervisory Authorities in 2023, as examined in this paper.