UN whistle-blower and WorldRemit CEO warns banks' refusal to do business with money remitters is driving them underground, heightening the laundering risks they pose

UN whistle-blower and WorldRemit CEO warns banks' refusal to do business with money remitters is driving them underground, heightening the laundering risks they pose

The founder of WorldRemit warns that banks’ bids to avoid breaking tough new anti-money laundering rules, by ditching virtually all of their money remittance clients, is having the opposite effect.

Dr Ismail Ahmed says the ‘blanket de-risking’ approach taken by the banks operating in New Zealand is driving many of the money remitters whose accounts they’ve closed, to operate underground.

Without recognising these clients as ‘remitters’ and doing the necessary checks on them, banks are more at risk of breaching the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act 2009, than if they assessed remitters’ risks on a case-by-case basis.

The London-based and Somali-born chief executive has drawn this conclusion having established WorldRemit in 2010 – an online service that lets people send money using a computer, smartphone or tablet. It services around 400,000 transfers a month – 15,000 of which come from New Zealand.

Prior to this, Ahmed worked as a compliance adviser to the United Nations East Africa Remittance Programme. During this time he blew the whistle on alleged fraud and corruption at the UN Development Programme.

How is blanket de-risking exacerbating money laundering risks?

Speaking to Interest.co.nz in a Double Shot interview, Ahmed says banks’ blanket de-risking policy is “wrong”.

“The money transfer industry is huge – we’re talking about US$600 billion. Historically more than half of that volume used to go through informal networks. Regulation has helped move the industry to formal financial services, where most of the players are now registered.

“What the de-risking is doing, is it’s reversing that trend.”

Ahmed explains that a large portion of remittances are done through retailers who work as agents for remittance companies. Remittance services often make up only small parts of these businesses.

“When a bank says it’s shut down the accounts of a money transfer business, it means some of those retailers that are mixing business will continue to deposit money transfer funds into banks.”

For example, a corner store that generates 90% of its business from selling food, and 10% from remittances, is unlikely to separate out and disclose this remittance portion to the bank.

So banks are still working with the same businesses, but they aren’t doing the checks they would have done if they were registered as remitters.

Ahmed says this exposes remitters to greater risks. By not being recognised as remitters, they aren’t investing the capital needed to build robust systems to comply with the AML/CFT Act.

What’s more, they’re no longer in a position to work with banks to help report suspicious activity to the regulators.

Ahmed coins the approach taken by banks as “wilful blindness”.

“Banks know that when they say ‘we’ve taken a blanket approach’, a big chunk of remittance is still going through their networks. They’re avoiding investing the capital needed to build the compliance infrastructure.

“Whereas the banks taking a case-by-case approach are working closely with industry associations. They’re learning from the companies they work with, and they’re also sometimes getting tip-offs from clients in the industry.”

How worried should we be about remitters operating underground in NZ?

Asked about the extent to which remitters operating underground is a problem in New Zealand, Ahmed says: “It is a big problem in New Zealand. New Zealand de-risking was far bigger than anything we’ve seen elsewhere in the world.

“Here, you have a small number of banks that dominate the [market]… and we understand two of the four large banks decided to take a blanket approach. So certainly we think de-risking is a far bigger issue in New Zealand than elsewhere.”

In fact, Kiwibank has been taken to the High Court on two occasions, further to it trying to close two of its final few money remittance clients’ accounts.

KlickEx a couple of weeks ago filed court proceedings against Kiwibank, which are expected to be heard once a High Court judgement for a case between Kiwibank and E-Trans International is released.

E-Trans has dubbed Kiwibank the “last bank standing”, as its accounts have previously been closed by ANZ, ASB, BNZ and Westpac.

Ahmed concludes: “If there’s a lesson that New Zealand should learn from the US and Europe, is the fact that the blanket approach does not work.”

He notes some of the big US banks that adopted the blanket approach 10 years ago, have reverted back to addressing remitters on a case-by-case basis.

The UK banks – Barclays, the Royal Bank of Scotland and Lloyds for example – haven’t exited the remittance market as a whole.

Ahmed says that globally, HSBC is the only bank that’s taken the blanket approach.

Does the remittance industry simply need to change with the times?

Despite Kiwibank trying to close KlickEx’s accounts, even though it provides an online service that doesn’t involve the sorts of retail agents, Ahmed maintains online money transfer operators are the way of the future.

“The challenge with the traditional money transfer has been there’s been no audit trail. Someone goes to an ATM or takes money from somewhere, then goes to a corner shop, and then sends a transaction.”

The independent agents used are separate to the companies that own the networks. Often the person doing the transaction won’t take compliance with AML/CFT rules as seriously as the remittance company.

“In the online setting there’s an audit trail, the migrant uses a debit card or transfers the money from a bank account, so if the transfer becomes suspicious, law enforcement agencies have something to check.”

Ahmed says that as the industry becomes digitalised and AML/CFT compliance becomes tougher, smaller players that can’t afford big investments are being driven out of the sector.

“Before we [WorldRemit] started, we had invested heavily in compliance. We built a code of compliance. We’re a big player, we raised a lot of money, we raised close to US$200 million.”

He says WorldRemit also partnered with big global banks and hasn’t been as affected by blanket de-risking as the corner store type remitters.

“Traditional players require a local bank account so they can take the money they collect to a local branch. For us it’s different because we don’t accept cash. We’re cashless, we use debit and credit cards to process transactions.”

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We seem to be moving steadily along a trajectory toward a situation where any international financial activity is regarded as an indication of being guilty.

Not guilty of anything in particular, but guilty nonetheless.

And liable to various forms of sanction as a result.