Carlos Santos critically analyzes de-risking and the collapse of correspondent banking, exploring how AML/CFT compliance threatens global trade and financial inclusion.

🛑 The Invisible Wall: De-risking and the Fragility of Correspondent Banking Relationships

By: Carlos Santos

The architecture of global finance relies heavily on Correspondent Banking Relationships (CBRs)—the crucial links where a local bank (the respondent) relies on a larger, often international bank (the correspondent) to settle foreign currency transactions. As someone who has closely observed global economic shifts, I, Carlos Santos, view this relationship as the essential pipeline for international trade and remittances. However, this system is currently under severe strain due to a phenomenon known as de-risking. This isn't a minor technical glitch; it's a systemic threat that cuts off vital financial lifelines, particularly for developing economies. De-risking, as defined by the Financial Action Task Force (FATF), is the termination or restriction of business relationships to avoid risk rather than managing it according to a risk-based approach.

This practice, often driven by the colossal costs and perceived reputational dangers of non-compliance with complex Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) regulations, is creating an invisible wall around entire jurisdictions. When correspondent banks withdraw, local banks are effectively cut off from the global system, severely hampering legitimate cross-border payments, trade, and even the flow of humanitarian aid. The challenge is finding a delicate balance: maintaining the integrity of the global financial system while ensuring that legitimate actors are not penalized with financial exclusion.

🔍 Focus on Reality: The Mechanics of Financial Isolation

To truly grasp the issue, one must look beyond the headlines to the operational reality faced by local financial institutions. When a large global bank decides that a jurisdiction or a specific class of customer (like Money Transfer Operators or non-profit organizations) presents an unacceptable compliance risk, it terminates the CBR. This immediate termination has devastating and tangible consequences. For businesses, it means the inability to settle import/export invoices, leading to stalled trade. For individuals, it means remittances—money sent home by family members working abroad—either don't arrive, are severely delayed, or are forced into unregulated and opaque channels.

The core of the problem lies in the information asymmetry and compliance costs. International correspondent banks operate under immense regulatory pressure from their home jurisdictions. They face crippling fines if they inadvertently process illicit funds. Rather than investing heavily in the specific due diligence required for every respondent bank in potentially high-risk areas, the economically rational—though socially harmful—decision is to abandon the relationship entirely. This is often termed "risk avoidance" rather than true "risk management." The respondent bank, suddenly without an international gateway, scrambles to find a new correspondent, often at a much higher cost, if one can be found at all. This dynamic forces legitimate financial activity into the shadows, ironically increasing the region's overall risk profile by pushing transactions outside the regulated and monitorable system. The local entity has to absorb higher operational costs, which are inevitably passed on to the end-user, directly impacting the cost of living and financial inclusion efforts.

📊 Numbers Overview: The Tangible Cost of Exit

The effects of de-risking are felt most acutely where data collection is patchy, but the available figures paint a clear picture of the financial impact. Although precise, real-time global data on CBR terminations remain elusive due to their sensitive nature, reports from multilateral organizations highlight the severity of the trend in Emerging and Developing Economies (EMDEs).

Metric	Observation/Data Point	Context & Source	Implication
Remittance Costs	Potential reversal of decades of fee reduction.	World Bank / FATF Insights	Higher fees directly reduce household income, impacting financial inclusion targets.
Trade Finance Impact	Stalled shipments and inability to secure Letters of Credit.	Trade Finance Industry Reports	Directly inhibits GDP growth by disrupting legitimate international trade.
Affected Jurisdictions	Over 60 countries reported facing some degree of de-risking, notably in the Caribbean and parts of Africa/Asia.	IADB / IMF Analysis	Global scale of the problem; not limited to isolated cases.
Informal Channels	Increased reliance on unregulated mechanisms.	Security/AML Think Tanks	Reduced transparency, ironically making it easier to hide illicit funds, contradicting AML/CFT goals.

Source: Analysis compiled based on data from the Inter-American Development Bank (IADB), the World Bank, and FATF discussions on unintended consequences.

The numbers reveal that de-risking acts as a regressive tax on developing economies. It shrinks the reach of the formal financial sector, pushing activity into less secure and less transparent channels. The financial penalty—higher costs, lower trade volumes—is measurable, but the risk of securitization (the risk of criminal funds entering the system because legitimate channels are closed) is perhaps the greatest invisible cost.

💬 What They Say: Narratives from the Field

The dialogue surrounding de-risking is polarized, reflecting the tension between global compliance imperatives and local economic survival.

The Correspondent Bank Narrative (The Risk Manager's View):

Large international banks often speak in terms of "regulatory burden" and "risk appetite." Their position is often summarized as: "The cost of compliance—hiring thousands of AML agents, deploying complex monitoring software, and facing million-dollar fines for single errors—far outweighs the low profit margins from maintaining numerous low-volume CBRs in what is perceived as a high-risk environment." They argue they are simply following the rules set by global bodies and their home regulators.

The Respondent Bank/Jurisdiction Narrative (The Inclusion Advocate's View):

Local institutions and regulators express deep frustration. They invest heavily in improving their AML/CFT frameworks, only to be cut off anyway, suggesting the decision is often "indiscriminate" or based on "geopolitical profiling" rather than specific, actionable risk data. As one finance official stated in industry forums: "We built state-of-the-art compliance walls, but the correspondent bank simply walks away, saying the view isn't profitable enough." This narrative emphasizes that de-risking punishes the diligent and threatens financial inclusion by cutting off the most vulnerable populations who depend on formal remittance channels.

The FATF / International Body Stance:

International organizations consistently emphasize that de-risking is an unintended consequence and runs counter to the spirit of the FATF's own risk-based approach. They advocate for dialogue, stressing that cutting off entire sectors drives crime underground, making the global system less safe. Their message is a call to correspondent banks to "manage, not avoid" risk.

🧭 Possible Paths: De-risking Mitigation Strategies

The challenge is immense, but solutions are being actively debated and implemented, focusing on increasing transparency, improving data sharing, and creating regulatory clarity. There is no single "silver bullet," but a multi-faceted strategy is essential.

Enhancing Regulatory Clarity and Consistency: A primary driver of de-risking is the lack of clarity on what constitutes "sufficient" due diligence across various jurisdictions. International bodies need to provide clearer, standardized guidance that correspondent banks can implement consistently, reducing the incentive for blanket termination. Furthermore, home country regulators must clearly signal when a jurisdiction has met standards, making it easier for respondent banks to prove their compliance strength.

Utility and Shared Due Diligence: An innovative path involves creating shared utility models. If multiple international banks could securely access a common, verified source of due diligence data on a respondent bank (with appropriate privacy controls), the cost of onboarding and ongoing monitoring would drop drastically for each individual correspondent bank. This reduces the cost-benefit imbalance that leads to exit.
Targeted Risk Management and Segmentation: Instead of de-risking entire countries or sectors, institutions must be encouraged (or required) to move toward granular risk assessment. This means applying rigorous due diligence where necessary, but maintaining relationships with compliant, low-risk entities within that jurisdiction. Initiatives often call for creating "simplified due diligence" frameworks for low-risk clients, balancing the need for vigilance with the economic necessity of maintaining relationships.
Strengthening Local AML/CFT Capacity: Correspondent banks are often hesitant due to perceived weaknesses in the local supervision of the respondent. International support for strengthening local supervisory capacity, technology adoption, and AML expertise in developing nations is a long-term solution that builds trust from the ground up.

🧠 For Reflection... The Morality of Financial Control

The debate over de-risking forces us to confront a difficult ethical question: Is the pursuit of perfect financial security worth the cost of imposing financial paralysis on the vulnerable?

When a large international bank closes a vital link, it is making a decision based on a cost-benefit analysis that often externalizes the true human cost onto third parties. It is a form of financial control where the gates are guarded not by malice, but by an algorithmic aversion to complex risk. The consequence is that individuals operating entirely within the law—the small business owner needing to pay a foreign supplier, a family trying to receive legitimate aid—are penalized as if they were high-risk criminals.

We must consider the morality here. Is a system that pushes the poor and honest into the unregulated cash economy truly achieving its goal of combating crime, or is it simply making illicit activity harder for regulated entities to see? The principle of financial inclusion is not just an economic development goal; it is increasingly recognized as a social justice imperative. When we talk about de-risking, we are talking about decisions made in boardrooms thousands of miles away that directly impact a community's ability to thrive or even survive. The philosophical challenge for the future is to design compliance frameworks that are ethically weighted—frameworks that demand rigorous risk management but refuse to accept mass exclusion as an acceptable side effect.

📚 Starting Point: From SWIFT to AML/CFT

To frame the current challenge, one must understand the regulatory environment that necessitates robust CBRs and paradoxically causes their withdrawal. The starting point for modern de-risking lies in the strengthening of global standards following major financial crimes and the rise of sophisticated terrorism financing methods. Specifically, FATF Recommendations have become the global benchmark for Know Your Customer (KYC) obligations, transaction monitoring, and record-keeping.

Correspondent banking, due to its opacity—where the correspondent bank is essentially trusting the respondent bank's due diligence without directly seeing the end customer—became an area of intense regulatory focus. The complexity of tracing transactions across multiple intermediaries, often relying on messaging systems like SWIFT, created the perfect environment for illicit actors to layer funds. Consequently, the requirements placed on correspondent banks became exponentially higher. They were tasked with conducting Enhanced Due Diligence (EDD) not just on their direct respondent client, but often needing assurances about that respondent’s own customers (KYCC), creating an impossible compliance burden. This regulatory tightening, coupled with increased capital requirements post-2008 financial crisis, made many CBRs unprofitable. The starting point for today's crisis is this regulatory encroachment meeting commercial reality: the cost of regulatory compliance has outstripped the revenue generated by these essential international links.

📦 Information Box 📚 Did You Know? The Distinction Between De-risking and Divestment

While the term de-risking is often used broadly, it's essential to distinguish it from standard business decisions or genuine risk-based management.

De-risking vs. Genuine Risk Management:

Genuine Risk Management: This involves applying the Risk-Based Approach (RBA). If a respondent bank is genuinely engaged in money laundering, cutting ties is a necessary regulatory action. Furthermore, if the relationship is unprofitable despite adequate compliance, a bank may seek to renegotiate terms or increase fees to match the compliance cost. This is a transparency-based business decision.
De-risking (The Problematic Practice): This is the indiscriminate termination. It occurs when a correspondent bank terminates relationships with an entire category of clients (e.g., all banks in Country X, all Money Service Businesses) or an entire jurisdiction without a granular, case-by-case risk assessment. It is a wholesale avoidance strategy, often based on generalized reputational fears or simplified profitability models, rather than a detailed analysis of the specific respondent's compliance controls.

The FATF explicitly states that de-risking is not in line with the RBA because it drives activity out of the regulated system, thereby decreasing transparency. This distinction is vital: the goal is not to stop banks from managing risk, but to stop them from using risk management as an excuse for financial exclusion.

🗺️ From Here, Where To? Building Resilient and Borderless Finance

The logical trajectory for addressing the de-risking crisis involves leveraging the very technology that often exacerbates compliance fears to create more resilient financial connections. The path forward must aggressively pursue technological solutions to lower the cost of compliance while simultaneously increasing transparency.

The future lies in creating trusted, shared digital infrastructure that standardizes due diligence evidence. This involves:

Blockchain/Distributed Ledger Technology (DLT): While complex, DLT offers the potential for correspondent banks to share verified, immutable records of a respondent bank's compliance status, significantly reducing the manual, redundant checks currently required. This shifts the focus from proving compliance repeatedly to verifying a shared, trusted record.
Smart Contracts for Compliance: Programming compliance rules directly into payment instructions via smart contracts can automate the initial screening process, instantly flagging or approving transactions based on pre-agreed criteria, thus reducing false positives and the need for human intervention in routine, low-risk scenarios.
Advocacy for Regulatory Sandboxes: Jurisdictions need to create regulatory sandboxes where local banks and their international partners can pilot technology-driven compliance solutions under regulatory oversight, proving their effectiveness before large-scale adoption.

The ultimate goal is a financial world where international payments are as seamless and low-cost as a domestic transfer, regardless of borders. This requires correspondent banks to shift their mindset from, "Is this relationship profitable enough to risk a fine?" to "Can we manage the risk efficiently using modern technology?" This transition is critical for global trade and for ensuring that emerging economies are not relegated to the financial periphery.

🌐 It's Online, People Are Posting, We Reflect: The Public Voice

The frustration with de-risking manifests vividly online, particularly concerning international remittances and essential service payments. The public conversation is less about the technical FATF guidelines and more about the immediate, tangible impact.

In forums dedicated to expatriate communities or international trade, the language is direct. Posts complaining about the sudden closure of an account tied to a vital service are common. A frequent theme is the impact on Non-Profit Organizations (NPOs), which are often the first to be de-risked due to their work in frequently complex humanitarian zones. A user might post a thread titled: "My charity lost its banking partner—now what?" highlighting the immediate halt of aid distribution. Furthermore, there is a cynical consensus that de-risking is often a smokescreen for profitability decisions. Users observe that banks quickly find new relationships with high fees elsewhere, leading to comments like: "De-risking isn't about crime; it's about the cost of my paperwork being higher than my profit margin." This public sentiment forces a necessary critique: if the global compliance framework pushes legitimate actors into the shadows, is it actively undermining the very security goals it seeks to achieve? The online community demands accountability and transparency from correspondent banks making these high-stakes decisions.

🔗 Knowledge Anchor

The complex interplay between international compliance, correspondent banking, and global financial integrity is a fascinating and critical subject. To delve deeper into how these international banking dynamics relate directly to sovereign financial tools and national policy development—especially in the context of evolving digital currency—I strongly encourage exploring further critical analysis on related topics. For a deeper dive into these structural issues affecting national finances, click here to continue reading.

Final Reflection: From Gatekeeper to Enabler

The challenge of de-risking in correspondent banking is a modern paradox: the global effort to shield the financial system from illicit flows is simultaneously creating global financial exclusion. It is a clear example of well-intentioned regulation creating toxic, unintended consequences when applied without nuance. Institutions tasked with safeguarding global capital have become gatekeepers, often ejecting entire segments of the economy—the diligent local bank, the vital NPO, the struggling small exporter—simply because the cost of proving their innocence outweighs the profit of doing business with them.

Concluding this reflection, I, Carlos Santos, find the mandate clear: we must move beyond the era of "wholesale avoidance." The future of resilient global finance is not built with fewer, more risk-averse relationships, but with smarter, more transparent ones. This requires a courageous commitment from correspondent banks to innovate their due diligence processes, a proactive stance from regulators to offer crystal-clear expectations, and a global recognition that financial integrity and financial inclusion are not opposing forces—they are two sides of the same necessary coin. A world that excludes its honest participants from the formal system is inherently a less secure world.

Highlighted Resources and Sources/Bibliography

Financial Action Task Force (FATF): Guidance on Correspondent Banking Services and reports on Unintended Consequences of De-risking. The primary source for regulatory definitions and best practices.
Inter-American Development Bank (IADB): Publications addressing the impact of de-risking in the Caribbean and Latin America.
World Bank / International Monetary Fund (IMF): Reports on Correspondent Banking Relationships (CBRs), financial stability, and trade finance in Emerging Markets and Developing Economies (EMDEs).
Academic Research & Industry Papers: Studies detailing the costs of AML/CFT compliance and case studies on CBR closures across various sectors (e.g., remittances, NPOs).
SWIFT/Industry Bodies: White papers on KYC challenges for correspondent banks and risk management solutions.

⚖️ Editorial Disclaimer

This article reflects a critical and opinionated analysis produced for Diário do Carlos Santos, based on public information, news reports, and insight from confidential sources. It does not represent an official communication or institutional position of any other companies or entities mentioned herein.