In many emerging economies, remittance payments are not simply a financial service; they are a financial lifeline. For millions of families who rely on remittances for large portions of their day-to-day costs, they are a critical source of income. For local businesses, flows from 150 million migrant workers underpin domestic consumption. And for the broader economy, they have come to represent a vital engine for growth and development. To put this into context, according to a report published by the IFC last year, remittances to developing countries account for more than three times foreign aid ($432 billion in 2015) and close to 10 percent of GDP in 1 in 5 countries.

"Access to remittance payments and Remittance Service Providers (“RSPs”) matters. But they also represent an elevated risk for financial crime". RSPs have been exploited by organised crime and terrorist organisations as conduits to move and launder money, and finance some of today’s most damaging crimes. The top three areas for fines are breaches of Sanctions requirements, Correspondent Banking, and RSP activity. Many global banks have responded by exiting – also known as ‘de-risking’ – customers in this space, and this has led to reduced access to banking for RSPs as well as correspondent banking remittances.

As a result, we have seen the cost of remittance flows rise, which in turn can push financial flows underground with potential adverse impacts on trade and economic stability. In one extreme case in a region where RSPs have been significantly de-risked, physical movement of cash (via ships) has become cheaper and easier than trying to access the international financial system. The number of ships used for this cash-in-transit, in some areas of the Pacific, outnumbers the local navy and so far, exceeds their ability to supervise it. And this physical movement of cash (and so transfer of value) reduces transparency and thus increases exposure to financial crime risk and exacerbates the challenge for developing economies.

This goes to a central tension between safeguarding financial inclusion and protecting the integrity of the financial system. Increasingly, larger RSPs are aware of the expectations of the banks and those leaders among them are defining compliance programmes consistent with standards in place among international banks. These include identification and verification of its clients, payments transparency, responsiveness to information requests, and the ability to restrict future transactions when put on notice. "The challenge comes when smaller institutions don’t have the knowledge, capabilities or financial resources to meet essential regulatory standards designed to safeguard the system from abuse by criminals". This is driving a wedge between those who have the capabilities, knowledge and skills to comply with standards and those who can’t, because they don’t. That’s why a fresh look at the problem is needed.

Recently I was invited to take part on behalf of the Wolfsberg Group in the Financial Stability Board’s Roundtable on Remittance Service Providers. There, I shared an example from a parallel de-risking challenge that has resulted in a decline in correspondent banking. As the leading bank in many of the emerging markets we serve, correspondent banking is in our DNA. And so, over the past two years we have been pioneering a new approach to helping Respondent Banks who have the right intentions but not yet the right tools, knowledge or experience to build robust controls for financial crime risks. This has crystallised in a unique strategy called ‘De-Risking Through Education’. It comprises three elements: Correspondent Banking Academies, Regional Workshops, and E-Learning Portals. So far over 3,600 participants from over 1,100 correspondent banks, across 71 countries, have taken part. We have experienced huge pull from national banks determined to strengthen their controls and keep pace with evolving threats. By involving our client relationship managers, the programme is transformed from being just another training session into an important part of our customer relationships.

"Our approach offers a good blue print for partnering with institutions in other sectors to drive commerce and prosperity within the regulatory frameworks designed to keep society safe". We have already adapted the Correspondent Banking Academy model to the NGO and charity sector, and the learnings from these two programmes could provide the foundations for improving the financial crime compliance capabilities of RSPs.

I believe three additional things need to happen alongside strengthening RSPs’ capabilities to manage financial crime risk:

1. Payment transparency is necessary but not sufficient in and of itself. RSPs should be drawing on the standards set out in the Wolfsberg Payment Transparency Principles. Where on investigation, banks need a richer understanding of the profile, purpose, provenance, and destination of the transaction, RSPs should be responsive to information requests.

2. There needs to be agreement on what good standards look like – including creating greater alignment between national regulations and global standards. An analogue is the work of the Wolfsberg Group to create a unified Client Due Diligence questionnaire for respondent banks. In doing so, we need to ensure that the expectations of RSPs are reasonably attainable, that RSPs are given time to enhance their financial crime control frameworks, and help in understanding and in reaching these standards in a cost-effective manner. And countries with large concentrations of RSPs should ensure that their local regulations outline clearly expectations, which in turn should be aligned to global standards. It’s encouraging that the larger RSPs are working to develop an industry view on appropriate standards and the banking sector should engage with the RSPs on expectations.

3. Further work is required to achieve more effective supervision. Many regulators have increased focus on RSPs in order to drive control improvements over the past five years, but the perception and I think the reality remains that the due diligence banks undertake will be called into question when there are failures of a RSP irrespective of the fact that the RSP is subject to regulation in the same country as the bank. This remains a sector widely described by regulators as higher risk and that places on banks a set of expectations in relation to their controls.

In summary, to arrest the decline in access to banking for RSPs and the associated costs for remittances, there must be clear risk-based standards that are reasonably attainable, commitment by the RSPs themselves to meet these standards, improved supervision, capability-building to attain those standards, and international regulatory support.