Podcast Summary: "A Call for Action on De-Risking" – CGD Podcast with US Treasury Under Secretary Nathan Sheets

Podcast: The CGD Podcast
Host: Center for Global Development (Rajesh Merchandani)
Guest: Nathan Sheets, US Treasury Under Secretary for International Affairs
Date: November 17, 2015
Theme: The impact of anti-money laundering (AML) and combating the financing of terrorism (CFT) laws on financial inclusion and de-risking in developing countries.

Overview

This episode centers on the unintended consequences of AML and CFT regulations—specifically, their role in driving financial institutions to "de-risk," or withdraw from business relationships deemed high-risk, often affecting developing countries. Nathan Sheets discusses how both financial inclusion and financial system integrity can—and must—coexist, and outlines the responsibilities of banks, policymakers, and regulators in addressing the problem without compromising security.

Key Discussion Points & Insights

1. The Double-Edged Sword of AML/CFT Laws

• Purpose of AML/CFT: Enacted to prevent money laundering and terror financing, laws have inadvertently led banks to withdraw from risky markets, a process known as "de-risking" ([00:04]–[02:00]).
• Victims of De-risking:
  • Remittance recipients reliant on money from migrant workers
  • Small businesses and banks in developing countries needing access to international finance
  • NGOs and humanitarian groups operating in challenging environments

2. Why the US Treasury Cares

• Treasury’s Mandate: Sheets emphasizes a dual objective:
  • Efficient, global financial intermediation and inclusion
  • Preserving the integrity and security of the system
    "[We want] to ensure that the financial system is able to efficiently intermediate and mobilize resources… and to make sure that the system has integrity and is not abused." — Nathan Sheets ([02:41])
• Long-term Goal: Foster a system that supports growth and access while minimizing illicit activity.

3. The Regulatory Labyrinth

• Complexity for Banks: Confusion arises from overlapping requirements (31 agencies in the US alone).
  "The issue of clarity and of communication is absolutely front and center." — Nathan Sheets ([05:15])
• Need for Clarification: Both regulators and banks share responsibility:
  • Regulators must better articulate expectations
  • Banks must avoid "indiscriminately cutting off" entire classes of clients

4. The Role of Banks

• Expectations for Financial Institutions:
  "We very much expect banks to be playing a role in financial intermediation…not indiscriminately cutting off classes of institutions or counterparties." ([07:19])
• Proper Risk Management: Banks should assess and manage risks case-by-case rather than wholesale account closures.
  • "[Banks should] commit significant resources and take on new responsibilities." — Nathan Sheets ([08:08])
• Historical Role:
  "The role of the banks…is to channel funds from depositors to lenders… they have to manage risk, they have to assess risks, and that's inherent in their business." — Nathan Sheets ([08:33])

5. The Cost of Better Compliance

• Who Pays?: While banks will bear the upfront costs, a safer and more stable system is a long-term benefit.
  • "It wouldn’t surprise me if over time, these kinds of reforms ended up paying for themselves." — Nathan Sheets ([09:42])

6. Data Sharing and Transparency

• Data Bottlenecks: Institutions have data but are reluctant (or unable) to share, hampering effective policy and research.
  • Example: Legal reforms allowing Mexican banks to share data with US banks improved cooperation.
    "It’s important that [information] be collected and regularized so it can be studied across institutions." — Nathan Sheets ([11:03])

7. Risks of Inaction

• Potential Fallout:
  "One [equilibrium is] where financial institutions are backing away and we end up having a less interconnected global financial system. I think that’s at the peril of the global economy." — Nathan Sheets ([12:23])
• Vision for the Future: Collaboration will lead to a balanced, inclusive, and secure global financial system.
  • "We’re looking for…institutions [that] take the necessary steps, where regulators…clarify expectations and this business is able to be brought back on balance sheet in a constructive way." — Nathan Sheets ([12:23])

8. Balancing Inclusion and Security

• Core Challenge: Address the unintended consequences without weakening security objectives.
  • "As systems are put in place…as financial institutions train their staffs, the risks…can be managed and mitigated rather than ones that they have to pull back from entirely." — Nathan Sheets ([13:35])

9. The G20’s Role

• Global Policy: The G20 has prioritized financial inclusion and cheaper remittances.
  "The G20 in the area of financial inclusion has a robust agenda…committed to ensuring that these flows continue… and that the cost of these flows remains economic." — Nathan Sheets ([14:32])

Notable Quotes & Memorable Moments with Timestamps

• On Joint Objectives:
  "[We are] committed to addressing [correspondent banking challenges] in a way that protects our joint goals of supporting financial connectivity and inclusion and maintaining the integrity of the financial system." — Nathan Sheets ([01:23])

• On Banks' Responsibilities:
  "We expect them to play a role in managing risks and not indiscriminately cutting off classes of institutions or counterparties." — Nathan Sheets ([07:19])

• On Data Sharing:
  "To the extent that there are bottlenecks that prevent the sharing of data, steps [must] be taken to eliminate those bottlenecks." — Nathan Sheets ([11:03])

• On the Dangers of De-risking:
  "We end up having a less interconnected global financial system. I think that's at the peril of the global economy." — Nathan Sheets ([12:23])

• On Sustainable Solutions:
  "As financial institutions train their staffs, the risks…can be managed and mitigated." — Nathan Sheets ([13:35])

Important Segment Timestamps

• [00:04] — Introduction to de-risking and unintended consequences
• [01:23] — Nathan Sheets' speech excerpt on US Treasury’s position
• [02:41] — Sheets outlines Treasury’s dual objectives
• [05:15] — Regulatory confusion and need for clarity
• [08:08] — Direct discussion of banks' responsibilities
• [09:42] — Who should pay for compliance costs?
• [11:03] — Data sharing and regulatory bottlenecks
• [12:23] — Risks to the global system if left unchecked
• [13:35] — Reconciling security and inclusion goals
• [14:32] — Expectations from the G20

Tone & Final Thoughts

Throughout, both host and guest emphasize that protecting the financial system and supporting global development are not mutually exclusive. Sheets’s approach is practical, collaborative, and optimistic yet clear-eyed about the challenges. He calls for continued regulatory clarity, greater investment from both banks and governments, and ongoing international cooperation, especially from global forums like the G20.

The episode offers a succinct yet nuanced look at how well-intentioned policies can have far-reaching impacts—both positive and negative—on development, security, and the fabric of international finance.