Bank compliance: It costs to do it right

Published August 30th, 2015 - 04:00 GMT
Enhanced due diligence has been a feature of modern regional banking, especially in combating terrorism financing. (Saida Online)
Enhanced due diligence has been a feature of modern regional banking, especially in combating terrorism financing. (Saida Online)

The high cost of compliance is straining the ability of Lebanese and Arab banks to finance the economies in the region in a proper way, the secretary-general of the Union of Arab Banks said.

“Naturally, the cost of compliance is affecting the ability of banks in the region to properly finance the economies,” Wissam Fattouh told The Daily Star.

He added that a bulk of bank loans in Lebanon and the Middle East was more focused on retail loans such as personal loans and car loans, noting that these types of credit lines do not stimulate the economy or trigger GDP growth.

“Only 7 percent of the bank loans go to small- and medium-size businesses in Lebanon compared to 37 percent to retail loans,” Fattouh said.

Lebanese and Arab banks have allocated large sums of money to set up compliance departments that monitor all transactions and transfer of funds to other countries.

Fattouh made his remarks following the release of a joint survey by UAB and the International Monetary Fund on the impact of de-risking on MENA banks.

The survey was released during a one-day conference organized by the UAB at the Four Seasons Hotel.

The President of the Association of Banks in Lebanon Joseph Torbey told the participants the regional tension are reflecting negatively on growth in the Middle East, reducing job opportunities and increasing poverty.

He stressed that Arab banks should not focus only on profits and commercial matters.

“We should defend our banking sector in the face of crises and this is exactly what the association of banks and monetary authorities are doing in Lebanon,” Torbey said.

Fattouh noted that dealing with correspondent banks have created problems to some small banks in the region. “Around 12 percent of the surveyed banks in the region have stopped any kind of relations with correspondent banks. We are talking about correspondent bank relations in the Middle East,” he said.

Fattouh added that Arab banks are exercising caution when dealing with some banks in the region that have issues with American banks.

He added that no banking transactions are taking place with Syria and Sudan, which are considered high risk countries, and there is even caution in dealing with Iraq.

The survey said that stricter enforcement of Anti-Money Laundering/Combating the Financing of Terrorism legislation has increased business costs as a result of the widening and changing sanctions lists for countries in the region in addition to the imposition of large penalties and fines on global banks in recent years for noncompliance with AML/CFT standards.

The survey showed that many lenders have reported correspondent banking is becoming too costly to maintain and more time consuming. “About 40 percent of banks indicated that their CB relationships are becoming more demanding, more time consuming, more complex and expensive to maintain,” the survey reported.

None of those banks has suggested that global CBs have exited relations with them (de-risking), but admitted that they are facing higher compliance requirements.

“Around 10 percent of banks responded that they had reduced their CB risk profile by closing a few relations with respondent banks from countries on the sanction list or where they found material weaknesses in their AML/CFT policies,” the report said.

Around 10 percent of the banks suggested that IT upgrades and due diligence enhancements are necessary and part of their business plans.

“This will have a positive impact on CB relationships and enhance the integrity and the soundness of the financial system. Some [fewer than 10 banks] also stressed the importance of implementing measures against financial crime, and that this did not affect them negatively as enforcement and enhanced due diligence is on the rise both globally and regionally,” the survey said.

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