De-Risking or Re-Contracting the Way around Money Laundering Risks

Abstract

Recent research and market effects within the European Union show a rising concern towards the derisking of certain sectors/actors due to the increased anti-money laundering regulation. Because of the enhanced due diligence and monitoring costs related to anti-money laundering and counter-terrorist financing regulation by the AMLD4, several financial institutions now turn to de-risking their corporate client base in order to minimize not only costs from monitoring and onboarding but also the risks of sanctions and reputation. The purpose of this paper is to analyze the incentives behind de-risking as well as the relevant solution models to the de-risking “crisis”. Overall, to find, to what extend de-risking is efficient and when it is not and how to mitigate the concept. The paper applies a functional approach to law and economics with the aim of reaching a higher level of efficiency in combatting money laundering through analyzing present regulatory and economic conditions. It is found that de-risking within the European Union opposes the aim of the present regulatory scheme regarding anti-money laundering. The paper finds that it is needed to divide the analysis of de-risking to a national and regional level. Additionally, the paper establishes that the present strategy of de-risking at national level eventually will result in enhanced regulation to fulfill the aim of the present regulatory framework, which is why a proactive approach by recontracting the client base is recommended. At a regional level, it is found that de-risking is valid, why a solution needs to come from the EU enhancing control, monitoring and sanctions to establish trust and the possibility for financial inclusion.