Conference Presentation, Panel, Fireside Chat
Treasury's War on Terror: What It Means for Banking and Global Commerce
Milken InstituteStaci Warden, Timothy Adams, Christine Duhaime, John Dye, Matthew Epstein, Farley Mesko
- The U.S. is expected to maintain sanctions policy as a primary coercive tool against targets like Iran and North Korea, leveraging the central role of the U.N. and the U.S. dollar for the foreseeable future.
- Regulatory bodies including the DOJ and NYDFS are predicted to continue imposing fines in the hundreds of millions to billions of dollars for sanctions violations.
- Treasury and the U.S. government plan to construct a robust infrastructure to track illicit funds over the next 15 years.
- A regulatory environment described as "regulation on top of regulation" is anticipated to require rethinking to address unintended consequences and duplication of due diligence efforts across multiple banks.
- De-risking is forecast to persist as a wholesale process where banks refuse to serve entire sectors or countries due to risk-return asymmetry, with costs in places like Somalia remaining enormous relative to benefits.
- Banks are expected to exit high-risk correspondent banking and even entire continents as part of a broader reversal of financial globalization, driven by compliance costs exceeding revenue and fear of scrutiny similar to that of the past six or seven years.
- Global illicit financial flows estimated at $2 to $6 trillion are predicted to continue largely undetected, with less than 1% detected by the UN and U.S. government seizures remaining a tiny fraction (one-quarter to three-quarters of one tenth of 1%) of the total.
- Financial inclusion is expected to remain critical to prevent the unbanked from using opaque channels like Hawala, though a lack of formal access may contribute to global poverty.
- The U.S. is unlikely to adopt a legal "right to a bank account" model similar to Europe, despite expectations that the banking system should be treated as a contractual obligation rather than a privilege.
- Countries like Russia are expected to view expulsion from SWIFT as an act of war should sanctions escalate further.
- AI and fintech are predicted to replace significant portions of traditional compliance jobs, while mobile banking and cellular onboarding are expected to become the future standard for global financial inclusion.
- High technology costs for reinventing legacy systems (e.g., migrating from COBOL) are anticipated to remain a major barrier, preventing smaller institutions from affording necessary compliance solutions.
- Technology sandboxes in jurisdictions like London and Australia are expected to encourage fintech startups to develop solutions, provided they account for heavy regulatory landscapes including AML laws.
- Joint Money Laundering Initiative (JMLI) models are predicted to need replication in the U.S. and other jurisdictions, with pilot programs involving banks and law enforcement seen as a primary step toward stopping financial crime.
- Examining bodies are expected to continue having significant latitude to advise banks to de-risk, contributing to the problem alongside a lack of clear guidance from regulators like the FATF, Treasury, OCC, and FDIC.
- Banks are predicted to continue prioritizing other lines of business over high-risk correspondent banking, filing Suspicious Activity Reports (SARs) at extraordinary volumes that render their value questionable.
- The UK government is anticipated to attempt to prevent banks from exiting relationships without documented reasons, though the enforceability of such measures remains uncertain.
- Future cooperation between the government and private sector is expected to require two-way trust, with central banks theoretically aligning on on-boarding and AML checks if they communicate directly.
- The asymmetry between risk and reward is predicted to continue discouraging banks from banking the underbanked without specific incentives like CRA credits.