Will Banks Now Open Their Doors?

Diamonds may be a girl's best friend, but they can also be a criminal's. There are so many different ways to exploit rough or polished gems, at so many points along the pipeline. But are banks and financial institutions using an over-sized hammer to crack a medium-sized nut by imposing a blanket set of AML (anti-money laundering) rules on all diamond traders - and beyond - with little regard for the welfare of the many innocent parties who suffer as a result?

The European Banking Authority (EBA), a Paris-based arm of the EU, seems to think so. In a legal opinion published earlier this month it suggested they'd gone too far in closing the door to entire sectors - not just diamonds but also gambling operators, FinTech firms and even embassy staff.
And it warned that the rush by banks across Europe to de-risk could actually prove to be counter-productive, leading to the creation of a shadow financial system that is actually harder to regulate.
Diamonds have a unique and enduring appeal for criminals. They are a liquid and transferable asset with a huge value to mass ratio. They can be easily concealed and easily smuggled. Unlike gold bars or any other valuable commodity, their price is not fixed, which opens up a whole world of illegal opportunities. Diamonds are also used as currency by drug traffickers all the way from Pablo Escobar to street dealers - and to finance war and terror.
The Financial Action Task Force (FATF) an independent inter-governmental body, catalogues some of the many methods used by criminals in its 2013 report Money Laundering and Terrorist Financing through Trade in Diamonds.  Here's just a small sample of its 38 case studies, although it's important to note that in the intervening years some practices have been effectively outlawed: Financing drugs trafficking with diamonds and ML through retail level;  Placing diamonds bought with proceeds of crime in safes as a mean to store wealth; Laundering the proceeds of narcotics through a celebrity jeweler; Commingling proceeds of theft in an account of a diamond trade company;  Laundering of tax fraud proceeds through the diamond industry; Overvaluation of imports and round-tripping of diamonds.
Banks have, as a result, always eyed the diamond trade with some suspicion. That and the fact that they believe traders are unduly secretive and will seal a multi-million dollar on a handshake.  But the financial crisis of 2008-9 made matters much worse. It saw the rise and rise of compliance departments, with less time to build relationships and trust, and more inclination to simply de-risk by ditching dealers.
Many of those adversely affected by the heavy-handed implementation of new regulations, against both money laundering (ML) and the financing of terror (TF) came forward to speak to the EBA. They told how they'd been denied access to bank accounts, credit card, loans, mortgage and overdrafts. How they were refused the right to appeal these decisions and on the rare occasion when a bank did take them back, it was with a hefty increase in fees. Some told of being fined by suppliers because the bank had delayed payments. Most said they'd been unable to access financial services or had ended up going to India or Dubai. Some resorted to cash payments as a temporary workaround, others used PSPs (third-party payment service providers) or forex accounts.
The EBA conclusion is a common sense conclusion:  You can't tar everyone with the same brush. Yes, there will always be rogues, that's no justification for penalizing the innocent. Banks and financial institutions may lack the expertise or resources to gauge how risky individual customers are, the EBA says. Erring on the side of caution may protect their own reputation from possible scandal, but it does nothing to help the vast majority of honest dealers and legitimate businesses who find they simply can't open a bank account in Europe. As an industry we should welcome the fact that the EBA understands our plight, and hope the banks now take note.

Have a fabulous weekend.