The CGD Podcast: Fear of Being "Outed": Why Banks Are Deserting Developing-Country Clients
Date: March 10, 2015
Host: Rajesh Merchandani, Center for Global Development
Guest: Clay Lowry, Chair of CGD Working Group; Former Assistant Secretary of International Affairs, US Treasury

Episode Overview

In this episode, the CGD Podcast delves into the unintended consequences of international anti-money laundering (AML) and counter-financing of terrorism (CFT) rules. Rajesh Merchandani speaks with Clay Lowry about how well-intentioned regulatory measures meant to curtail crime and terrorism are, paradoxically, shutting out legitimate financial services for people in developing countries—especially those depending on remittances. Their conversation sets the stage for why major banks are “de-banking” entire regions and sectors, and what that means for global development and financial inclusion.

Key Discussion Points & Insights

1. Background: What Are AML and CFT Rules?

• Origins and Intent:
  • Designed to fight global crime and terrorism by cutting off illicit financial flows, measures include blacklists, naming-and-shaming, and large, escalating fines.
  • "After 9/11, the regime to try to fight this heightened up... All of this made sense in some respects, but it’s had some consequences." – Clay Lowry (01:12)
• Rising Risks for Banks:
  • Compliance costs and potential fines have soared (from hundreds of thousands to billions of dollars), making low-margin services like remittances increasingly unattractive.
  • "The fines for doing something wrong have increased dramatically... the largest one was $9 billion." – Clay Lowry (03:49)

2. The Downside: Withdrawal from Developing Markets

• Double Policy Dilemma:
  • Regulations to fight crime vs. the development objective of encouraging affordable financial flows to developing countries.
  • "As the fines have gone up, that risk has become too much for a lot of financial institutions. And so they stopped doing this." – Clay Lowry (05:35)
• Hard-to-Know Clients:
  • "Knowing your customer" is difficult in poorer or post-conflict countries due to poor information and data.
  • "It is now a risk on top of a risk on top of a risk just to do basic banking services in countries where ... we'd love to see good competitive financial flows." – Clay Lowry (06:51)

3. Scale and Impact

• Major Banks Exiting:
  • HSBC, Barclays, BNP Paribas, Citibank, JP Morgan, and Australian banks have all exited the remittances business due to risk.
  • "About 90% of remittance agencies in the UK [impacted]... It is a kind of a systemic thing." – Rajesh Merchandani & Clay Lowry (07:21)
• Remittances vs. Foreign Aid:
  • Annual global remittance flows are conservatively estimated at $400–450 billion, dwarfing traditional aid which is about one-third that size.
  • "The amount of money that people are sending home... is about $400 billion a year." – Rajesh Merchandani (08:37)

4. Real-World Effects: Somalia Case and Beyond

• Humanitarian Fallout:
  • Citing US senators' letter: "Decreasing remittances will exacerbate Somalia's humanitarian situation... One third of Somali families say they would not be able to afford basic food, medicines and school fees without help from their relatives abroad." (09:56)
  • Cutting these lifelines can boost insecurity and push people toward crime or terrorism as a last resort.
• Going Underground:
  • Pushing regulated players out risks shifting flows to less regulated, opaque, or even criminal channels.
  • "There's one possibility it’s going to go towards the shadows... going to banks that definitely are not as well known and not as transparent." – Clay Lowry (12:03)

5. Who’s to Blame?

• Banks as Victims?
  • Banks follow regulators’ guidance, but as risk outweighs profit, they de-risk to extremes.
  • "It's way too simplistic [to blame banks]. The banks in some respects are doing what is almost natural... It is just in their self-interest to just say we want no part of this anymore." – Clay Lowry (13:16)
• Regulatory Response:
  • The Financial Action Task Force (FATF) cautioned against total withdrawal, urging more nuanced risk management. However, for banks, exiting is often easier and safer than compliance.
  • "If you’re a financial institution, it’s much easier to basically say, how about I just get out..." – Clay Lowry (14:25)

6. Central Banks Speak Up

• Growing Regulatory Awareness:
  • Mark Carney (Bank of England) and Janet Yellen (Federal Reserve) have raised concerns with the G20 and US Congress, acknowledging the seriousness of the problem.
  • Yellen: "It's a difficult problem to deal with ... many [banks] are really very reluctant to want to take risks in their dealings when they may bring them in violation of those rules." (15:59)

7. The Way Forward: CGD's Working Group

• Seeking Solutions:
  • The CGD working group, including experts from various fields, aims to gather data and develop policy recommendations for both the public and private sectors by the end of 2015.
  • "Our working group... is going to have to try to come forward and think about some of the data problems and data issues and then what are some set of policy recommendations." – Clay Lowry (18:22)

Notable Quotes & Memorable Moments

• On the scale of the change:
  "What it’s now coming is hundreds of millions of dollars. In fact, actually in a few cases, billions of dollars. I think the largest one was $9 billion."
  – Clay Lowry (03:40)

• On unintended consequences:
  "The irony of the whole thing is... if you cut off some of these well-founded, sound financial institutions... where does that financing go to? ... [It] could actually go towards the exact things that we're most worried about."
  – Clay Lowry (11:29)

• On the regulatory bind:
  "It’s almost an unintended consequence of the unintended consequence."
  – Rajesh Merchandani (13:06)

• On banks' perspective:
  "You have made it very clear to us to stay away. Well, we're really going to stay away."
  – Clay Lowry (13:39)

• On central banks’ view:
  "It's a difficult problem to deal with because BSAAML rules impose heavy sanctions and banks have been penalized for violating those rules. So many of them are really very reluctant to want to take risks."
  – Janet Yellen (15:59)

Key Timestamps for Important Segments

• [01:12] – Explaining AML/CFT rules and their escalation post-9/11
• [03:40] – Dramatic increase in fines and compliance risks for banks
• [07:21] – Systemic withdrawal of major banks from remittances
• [08:37] – Global scale: $400–450 billion in remittance flows
• [09:56] – Real impact: Quote from US senators on Somalia
• [12:03] – Potential for driving flows towards less-regulated "shadow" systems
• [13:16] – Debunking the myth of "bad banks"
• [14:50] – Central bankers begin to take note (Carney, Yellen)
• [15:59] – Janet Yellen's Congressional testimony
• [18:22] – CGD working group’s mandate and hope for policy solutions

Summary

This episode exposes a critical policy paradox: measures to block illicit finance have made international banks so fearful of regulatory risk and reputational damage that they are abandoning developing markets, endangering lives dependent on remittances. While regulators and central banks are now acknowledging the problem’s seriousness, real solutions remain elusive. The CGD’s new working group aims to bridge the gap by proposing data-driven, practical policy recommendations in hopes of reconciling the goals of security and development.