The intention is to facilitate cross border finance, obviously trade and investment, but equally in financial service activities which help deepen the economies of emerging markets. That is often the provision by more advanced banks of sophisticated products which are sold to banks in emerging markets.
The remittance market is a more specialised and consumer focussed area and it facilitates the repatriation of money by individuals back to their local societies, for example Pacific Islanders working in Australia sending money back to their families.
The intention of both these businesses is to increase financial flows. Obviously both can also be corrupted and legitimate channels can be used for illegitimate purposes such as money laundering or financing crime.
However, global regulation has now severely impacted both.
Australian banks have effectively closed their remittance businesses in the Pacific largely because of the danger they would be culpable if a remittance was ultimately found to be illicit – under new regulation the primary bank is responsible not just for the intermediary it deals with, which may be a local shop, but the final beneficiary of a transaction.
The penalties can be huge and global banks have already paid fines totalling billions of dollars for transgressions on money laundering or sanctioned countries.
Again, the intention of the regulation is clear. But the collateral damage is immense.
Somewhere around 80 million remittances worth nearly $A50 billion were originating from Australia annually. The intermediary was typically some form of money services business whose client was an individual or small business.
Banks must “know their client” – but increasingly they must now know their client's client and even their client's client's client.
Another consequence of course is that the financing ultimately won't stop. Illicit funds will find another channel, legitimate transfers will become more difficult and more expensive.
As the B20 noted “well-intentioned rules, designed for sophisticated markets, can have powerful unintended effects, particularly when combined with other rigorous standards around new capital and liquidity rules”.
“The three key examples of this impact are small to medium-sized enterprise financing, correspondent banking and remittances.”
In particular: “The combination of Basel III prudential rules, in relation to SME lending, and the manner in which the array of conduct of business regulations are enforced, including AML/CTF, selling standards, and bribery and corruption, are, in some instances, restricting the provision of finance to certain client segments, which are increasingly difficult to service cost-effectively.
“A small cross-border SME will get pushed into accessing finance from the informal sector. Our concern is that this issue is impacting a variety of marginal and underrepresented sectors of society, most commonly higher risk segments in higher risk jurisdictions.”
Even regulation not directly linked to restricting illicit activity is having an impact.
New Basel intra-day liquidity reporting, designed to ensure banks are soundly funded and going concerns, has had an impact on key instruments used in correspondent banking.
This has resulted in many global banks severely culling the number of the correspondent relationships. JP Morgan for example cut ties to over 500 foreign lenders in its 2013 financial year alone, Citi too has announced a major review.
The result inevitably will be more impediments to finance in emerging markets. That means less new business development, less economic growth, less employment. These are not just unfortunate consequences, they potentially contribute to an environment where crime and radicalism are more likely to flourish as economic opportunity diminishes.
One of the contributing factors to weaker financial activity globally is the lingering uncertainty around regulation. There has been growing recognition that the interaction of new measures is not understood and a stock take is necessary.
This is critical. What is happening in the correspondent banking, remittance and SME financing sectors demonstrates collateral impacts are enormous. If they do stifle economic growth and shift finance to unregulated and riskier realms, they will be particularly damaging.
The question then will be whether the cure is worse than the disease.
Photo: Roger Bragg, Personal and Business Banker, ANZ New Zealand.