There have been some extraordinary activities of late, what with Barclays throwing money transmitters off their network and gaining the wrath of Mo Farah.
HSBC has taken similar action, but went one step beyond and annoyed all the diplomatic embassies based here in London by shutting any they view as suspect accounts based upon five criteria: international connectivity, economic development, profitability, cost efficiency and liquidity.
It is only going to get worse as these actions are all attributable to the behaviours of the US authorities last year, fining Standard Chartered in a move to make headlines and throwing the book at HSBC for being in cahoots with drug lords and terrorists.
This led to me blogging a piece earlier last month that gained some significant reactions, including a dialogue with Mike Laven, CEO of Currency Cloud, that clarified some aspects of what is really going on here.
Here is the rough conversation I had with Mike on this subject:
Q: Why do banks feel under pressure to shut down services to remittance firms?
A: Sadly, it should have come as little surprise that Barclays decided to shut down its services to hundreds of money transfer businesses. Regulators have been cracking down on terrorist financing and money laundering. The vast majority of funds that pass through remittance firms are entirely legitimate payments, money that supports families and communities in some of the poorest parts of the world.
However, a small proportion of the money that passes through remittance firms funds illegal activities. Rather than risk the wrath of the regulators, many banks have pulled the plug. A lot of this pressure has been coming from the US where the Patriot Act gave US authorities the powers to impose significant fines on institutions that did not meet stringent AML/CTF standards.
This has not only affected US financial institutions but any institution worldwide which conducts business with the US. HSBC paid a record $1.9bn in fines following a US Senate investigation that discovered the bank had conducted business with other banks in Mexico, Saudi Arabia and others, with links to terrorist financing and drug trafficking. Standard Charted recently paid $667bn to US authorities for breaking sanctions on Iran and other countries. Remittance giant MoneyGram was fined $100m last year for wire fraud by the US Justice Department. The US attorney covering the case claimed “Despite thousands of complaints by customers who were victims of fraud, MoneyGram failed to terminate agents that it knew were involved in scams” (you can read the US Department of Justice press release here).
The above cases demonstrate the regulatory environment that banks are operating in. Banks have a substantial regulatory risk for servicing agents who deal with cash which explains the Barclays shutdown. With cash-based agents, it’s pretty difficult to ascertain whether the money reaches the people it should do.
Yet this is like using a sledgehammer to crack a nut. The only legitimate channel to send money to many parts of the world is via small money transfer firms. That money gets mixed up with ‘bad’ money which is used to fund illegal activities. The banks prefer to shut down the whole channel rather than snuff out the fraud.
The end result: some of the very poorest communities in the world suffer.
Q: Is the government trying to help the remittance market?
The UK government has an interest in creating a more competitive payments market which includes remittances. In March it announced a consultation setting out proposals for opening up payments. You can read the full release here which states that the new regulator will have powers to “ensure access to the payment systems is on open, fair and transparent terms for all banks”, “force the payment systems and their direct members to invest to deliver new innovations”, “ensure that consumer views are fully taken into account in decisions about payment systems” and that “End the ownership of payment systems by the big banks, if necessary”. These moves could benefit workers in the UK who send money home by increasing competition, reducing prices and increasing access for remittance payments.
However, banks have been more inclined to protect themselves against the threats of fines from regulators rather than follow this alternative government push.
The irony of all this is that when money transfer firms shut down, money will be forced down illegal remittance channels, and more likely to end up in the hands of terrorists and drug cartels, which is the last thing that governments want. In a nutshell, because of a fear of terrorism, a whole remittance business is crippled, the vast majority of which is legitimate. Government, regulators and banks have focused on one issue, devastating the lifelines of countless communities in the process.
Q: How can technology help deal with some of these issues?
Economies that deal solely in cash more often than not bypass the control of the regulators. At The Currency Cloud we have seen a lot of innovative firms who have come up with secure, non-cash ways to enable the receipt of payments in places without banking infrastructures. We have seen some great work in direct payments in developing parts of the world. We have encountered companies who enable the unbanked to receive payments via prepaid cards or mobile. We know companies who can help people pay school fees or their utility bills.
Most of these innovations focus on the ‘pay out’ side of the value chain rather than the ‘pay in’ side. Without banks or card schemes, certain parts of the world still have to make payments in cash. However, these sorts of pay out solutions can confirm in the minds of the regulators that payments are ending up where they should. Governments, banks and regulators should be encouraging these efforts, looking to see how they can be more generally applied to the remittance market.
On the issue of banks stopping services for money transfer firms, they could look to engage with intermediaries who are capable of conducting due diligence on smaller firms. Due to their size and scope, banks are also not capable of performing microlevels of due diligence. They could devolve these responsibilities to advanced technology firms (such as ourselves) who are more geared towards dealing with smaller firms.
There is also an argument for the creation of a new market infrastructure for remittances to lower costs and remove some of the compliance issues.
Let’s be clear, there is no quick and easy solution to the lack of banking infrastructure in places like Somalia which is a big part of the problem. As a spokesperson for the humanitarian organisation Adeso said in a New York Times article on the Barclays story, “There’s no equivalent to Citibank that could receive those funds and distribute them”. Government, banks and the technology community need to mobilise to figure out a solution to this problem.
But the fact of the matter is that we’re killing a whole industry which millions of people rely on because of our concerns over terrorism and money laundering. We’re asking ‘How can we stop the bad guys get guns?”. We should be asking “How can we ensure that vital payments are able to reach some of world’s poorest communities?””