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:
Why do banks feel under pressure to shut down services to remittance firms?
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.
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).
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.
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.
end result: some of the very poorest communities in the world suffer.
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.
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.
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.
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
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.
is also an argument for the creation of a new market infrastructure for
remittances to lower costs and remove some of the compliance issues.
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?””