Quantifying Reputational Risk vs Humanitarian Reward
Reward in the banking industry is always shadowed by a fear of Reputational Risk and it is argued that MSB clients are being exited as a direct result of this fear. The potential PR fallout when a rogue client is discovered and becomes sensationalized front page news can seem catastrophic but if a bank minimizes risk, by implementing procedures to manage the risk associated within the MSB industry, the rewards would be substantial both from a financial and PR position. Risk in all forms can be mitigated, people still fly after 9/11 and the Lindt Café in Sydney has re-opened for business.
The past decade has seen USA regulators collect fines from both domestic and foreign banks that total over USD $100 billion. Fines were given for reasons that include sanction violations, Libor and Forex rigging, stripping payment information, foreclosure abuses, misleading customers, money laundering and more. Whilst these fines span a catalogue of violations to date no penalty has been handed down for facilitating the payment of an MSB.
With no remittance voice inside banks the method of dealing with associated risk appears to be the closure of MSB banking rather than implementing a workable solution. It is common practice to exit bank accounts without asking clients any pertinent questions or possessing an in depth understanding of how each client operates.
The remittance industry facilitates a massive amount of aid for third world countries providing six times more foreign aid than the Australian government. There is often an outcry about how much aid is sent to foreign countries. Would the government increase this aid six fold? Supporting the MSB industry and simultaneously saving taxpayer’s money whilst carrying out humanitarian aid and thwarting terrorism would show banks in a positive light. The positive media capital a bank would earn both locally and internationally by supporting the MSB industry is a PR gift.
The financial reward for banks dealing with the large MSBs is that they receive banking fees and a shot at winning some very lucrative foreign exchange (FX) business. The potential FX business for an international remittance company is very competitive resulting in low margins – in some cases less than 1 point. Local remittance companies are content for a margin of 10-30 points even more if it means they keep their business alive which in practice means that smaller local remitters are more profitable than the larger businesses that expect FX transactions to be dealt with almost no margin. (See table below).
|Type of MSB||Spot |
|FX Amount p.a.||Bank
|Large International Remitter||0.73000||0.3||0.72997||$1,000,000,000.00||$30,000.00|
|National Network Provider||0.73000||10.0||0.7290||$50,000,000.00||$50,000.00|
There will always be the need for a remittance industry and it is in the best interests of everyone that it is regulated and not forced underground. It is vital that solutions are implemented to monitor payments effectively to destroy avenues of terrorism funding while aiding innocent parties who benefit. Instead of closing MSB accounts the industry should become proactive and find solutions. Because this is how we are advised to react in the face of terrorism on a day to day basis. In the face of terrorism it is business as usual, do not let the terrorist win. By closing down remittance accounts we are allowing lives to be negatively influenced by terrorist actions – giving terrorists a victory.