Africa: Bank de-risking hits money transfer firms

KlickEx, the money transfer company, has been forced to postpone plans to expand in Africa as international banks pull out of correspondent banking.

Over the last year and a half, KlickEx has lost its ability to conduct wire transfers. Banks have closed the 37 accounts it held after they came to view the firm as a money-laundering risk, though KlickEx has no known history of falling foul of money launderers. 

It has had to postpone its Africa expansion plans as about 20 of its 37 closed accounts were with HSBC, and KlickEx had opened them in anticipation of rolling out its services on the continent, the firm’s founder and executive chairman, Robert Bell, tells Euromoney.

Though it is one of the most sophisticated digital firms operating in the Pacific Islands, because of the account closures KlickEx is now having to use an uncharacteristically costly, dangerous and old-fashioned system to transfer international remittances: flying or shipping millions of dollars in cash every day.

KlickEx is not alone. In a report published over the summer, the Commonwealth Secretariat tracked how banks were becoming increasingly cautious in their dealings with money service businesses, including in Africa. Some view this as a healthy shift from a loose culture of fighting financial crime. But others argue banks’ de-risking policies, as they are known, are going too far, cutting off swathes of the emerging markets from access to basic financial services.

Four of the 10 African countries that responded to the Commonwealth survey reported loss of correspondent-banking relations since 2012. Observers from the IMF to the Financial Action Task Force have said large, international banks have been cutting correspondent banking relations with a number of financial companies in Africa, even when they have not demonstrated weakness, simply because they operate in countries deemed risky. Even the Central Bank of Botswana has lost a correspondent bank, says Robert Hopper, researcher at the Commonwealth.

This issue came to public attention in the UK in 2013 when Mo Farah, the British Olympic distance runner born in Somalia, publicly criticised Barclays’ decision to close the account of African money transfer group Dahabshiil. The problem has only got worse since, observers say, as other banks have disengaged from countries and businesses deemed unsafe for business.

“In terms of the impact of de-risking, yes, this has been an ongoing and serious trend for the last three years at least,” says Dominic Thorncroft, chairman of the Association of UK Payment Institutions. “The impact on our member firms, which specialise in remittances, has been devastating.”

Large fines imposed on banks by US regulators for dealing with sanctioned countries – most notably, a record $9 billion penalty on BNP Paribas – have worried financial institutions to such a degree that they have now overcorrected their behaviour, say market participants. 

Gibril Faal, interim director of the Africa-Europe Diaspora Development Platform (Adept), says banks’ de-risking policies make a wrong assumption. “The evidence is that money remittances average $200, coming from migrants and diaspora usually on low wages,” he says. “On that basis, there is an assumption that there is no link with money laundering or terrorist financing. So if anybody wants to suggest that there is a link, the burden is on them to prove it. No institution or government or bank has done that in any serious manner.”

Gibril Faal, Adept

Faal calls bank closures of correspondent relations with African money transfer funds “perverse”, as he says it is international banks that have been found guilty of breaching money-laundering rules, not remittance businesses.

Thorncroft agrees with Faal about the importance of remittance flows. 

But, he says: “It is not fair entirely to blame the banks, who are acting, from their perspective, logically, given the threat of a high level of fines for getting it wrong, particularly in the US. Money remittance through smaller firms is apparently now too risky to bank, which means that only a handful of international brands are able to trade. This is not good for consumers. The problem is particularly acute on the African corridors.”

For countries where remittances represent a large chunk of gross domestic product – the World Bank puts the figure at 20% in Liberia and Lesotho, for example – loss of correspondent-banking relations is a serious problem. Remittance flows to Commonwealth African countries totalled $28 billion in 2014, as much as foreign direct investment and billions more than foreign aid.

Some money transfer firms have remained, but the reduction in competition due to correspondent closures could lead to higher rates for consumers. “Africa has been particularly badly hit,” Thorncroft says. 

As legitimate money transfer firms across Africa are cut off from the international financial network, more clients may start to use riskier modes of transferring funds, observers say, sending money in cash and via the black market, where financial crime may be more common and is, in any case, less easily tracked. 

Hopper says: “We asked our members: ‘Has there been a rise in informal flows, as a result of new AML/CFT regulations, and these standards?’ A number of them replied saying yes. In fact, countries on every continent of the Commonwealth said yes. And it was particularly a big issue for sub-Saharan Africa.”