Michael Corkery, New York Times, July 6, 2014
As government regulators crack down on the financing of terrorists and drug traffickers, many big banks are abandoning the business of transferring money from the United States to other countries, moves that are expected to reverse years of declines in the cost of immigrants sending money home to their families.
While Mexico may be most affected–nearly half of the $51.1 billion in remittances sent from the United States in 2012 ended up in that country–the banks’ broad retreat over the last year is affecting other countries in Latin America and parts of Africa as well. The banks are being held accountable not only for the customers who directly use their money transfer services but also for their role in collecting remittances from money transmitting companies and wiring them abroad.
“This is transforming the business and may increase the costs of international money transfers,” said Manuel Orozco, a senior fellow at the Inter-American Dialogue, a research group in Washington.
JPMorgan Chase and Bank of America have scrapped low-cost services that allowed Mexican immigrants to send money to their families across the border. The Spanish bank BBVA is reportedly exploring the sale of its unit that wires money to Mexico and across Latin America. And in perhaps the deepest retrenchment by a bank, Citigroup’s Banamex USA unit has now closed many of its branches in Texas, California and Arizona that catered to Mexicans living in the United States and stopped most remittances to Mexico as it faces a federal investigation related to money laundering controls.
Regulators say the banking system was being exploited by terrorists and drug lords seeking to launder money. While they have not banned banks from engaging in higher-risk businesses like money transfers to certain countries, they acknowledge that banks must now invest significantly more to monitor the money moving through their systems or face substantial penalties.
A World Bank report on remittances found that the costs had been steadily falling over the last five years. But industry experts are expecting that trend to reverse.
Many banks had considered remittances an attractive business because they generated steady fees and required little capital. In some cases, remittances could satisfy Community Reinvestment Act requirements to serve a certain percentage of low-income customers.
But the regulatory pressures and increased costs of compliance have started to outweigh the potential profits.
Even if banks invested in new software to screen for worrisome transactions, they would still have to manually investigate many suspicious activities and report them to regulators. Banks fear that a single mistake could lead to costly penalties like the $1.9 billion settlement that the British bank HSBC agreed to pay over money laundering issues in 2012. HSBC has stopped paying out remittances at its Mexican branches.
In reality, it may be nearly impossible to fully monitor money flowing through some parts of the world. Regulators worry, in particular, about remittances to Somalia, a haven for terrorist groups with no formal banking system. Banks in the United States have had to wire money to banks in Dubai. Much of the money is then moved into Somalia through a network of traders.
One of the few banks willing to take that risk is Merchants Bank of California. But in the face of scrutiny from regulators, the bank has told some money transfer companies in cities with large Somali enclaves like Minneapolis that it may no longer be able to provide them with banking services.
Merchants Bank’s exit could be a big blow to Somalia, where remittances are a major source of income for a country that has suffered from recent famine, according to the antipoverty group Oxfam.