Non-compliance behavior of de-risking force the EU to enhance anti-money laundering regulation
| DOI | https://doi.org/10.1108/JFRC-12-2020-0113 |
| Published date | 15 July 2021 |
| Date | 15 July 2021 |
| Pages | 477-490 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Kalle Johannes Rose |
Non-compliance behavior of
de-risking force the EU to enhance
anti-money laundering regulation
Kalle Johannes Rose
CBS LAW, Copenhagen Business School, Frederiksberg, Denmark
Abstract
Purpose –Recent researchshows that because of money-laundering risks, there hasbeen an increase in the
off-boarding of certain types of corporate clients in the financial sector. This phenomenon known as “de-
risking”has beenargued to have a negative impact on society, because it increasesthe possible risk of money
laundering. The purpose of this paperis to analyze whether the de-risking strategy of financial institutions
results in an expansion of the regulatory framework concerning anti-money laundering focusing on off-
boardingof clients and, if so, is there a way to avoid further regulationby changing present behavior.
Design/methodology/approach –This paper applies functional methods to law and economics to
achieve higherefficiency in combating money laundering.
Findings –In this paper, it is found that the continuing of de-riskingby financial institutions because of the
avoidance strategyof money-launderingrisks will inevitably result in further regulatory demands regarding
the off-boarding process of clients.The legal basis for the introduction of further regulatory intervention is
that some of the de-riskingconstitutes a direct contradiction to the aim of the presentregulatory framework,
making the behaviornon-compliant to the regulation.
Originality/value –There has beenvery little research concerning de-riskingrelated to money laundering.
The present research has focused on the effect on society and not the relationship between the financial
institutions and the regulator. This paper raises an important and present problem, as the behavior of the
financial institutions constitute a responsefrom the regulator that is contradicting the thoughts behind the
behavior of the financialinstitutions. It is found that the paper is highly relevant if an expansionof regulation
is to be hindered.
Keywords Anti-money laundering, Financial crime, Regulatory compliance, De-risking,
Risk regulation
Paper type Research paper
1. Introduction
In June 2020, the European Banking Authority (hereinafter EBA) issued a call for input to
understand the driversof de-risking related to money laundering (EBA, 2020)[1].The reason
behind the call was that de-risking caused by the financial institutions throughout Europe
has had a negative effecton society, when clients with a higher risk of money laundering are
off-boarded as clients. The consequence of this action is that if all clients with a higher risk
of money laundering are off-boarded, and thereby excluded from the legitimate financial
sector, they must seek toward otherfinancial service operators that might be less regulated
or even outside of the regulatory framework related to the prevention of anti-money
laundering (Rose, 2020b). Theoverall societal effect is less control and monitoring ofclients
with an inherent higher money-laundering risk. Thereby, society is exposed to an even
higher risk of moneylaundering.
The essence of the regulatoryframework regarding the prevention of money laundering,
which is laid out in the fourth and the fifth directive on anti-moneylaundering in the EU, is
Non-compliance
behavior of
de-risking
477
Received11 December 2020
Revised12 March 2021
Accepted13 April 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 5, 2021
pp. 477-490
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2020-0113
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