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‘De-risking’ has multiple meanings. Compliance officers need to know them all

English words sometimes change their meanings. Bad, cool, wicked, sick, awesome, literally, and like have undergone recent semantic shifts. But it happens less often with professional lingo, so when it does, we need to pay attention.

A prime example is an important compliance-related word  — de-risking — which has undergone radical shifts that have led to confusion. Catch or pitch the wrong meaning of de-risking and you could inflict serious damage on your company and your career.

Here are three possible and still acceptable meanings of de-risking:

#1. To reduce, remove, or eliminate risk. That’s the classic dictionary definition and how compliance officers originally used and understood the word. Compliance is about identifying and managing risk, so de-risking (reducing, removing, or eliminating risk) was and remains a core function of the job.

#2. To terminate or restrict business relationships with clients or categories of clients to avoid, rather than manage, risk. FATF (the Financial Action Task Force) articulated this definition in a 2014  circular. It describes a pernicious banking practice condemned by regulators around the world. This semantic shift turned de-risking from a positive response to risk (#1 above) into a negative and potentially harmful response.

De-risking this way is about financial service providers trying to avoid their AML responsibilities. Instead of doing know-your-customer due diligence, they drop or refuse to deal with certain categories of customers.

FATF and many others criticize that strategy because it ultimately damages the global financial system. When banks and other businesses terminate account relationships arbitrarily without due diligence, some stymied entities and individuals resort to “less regulated or unregulated channels,” as FATF puts it. That decreases the funds moving through “regulated, traceable channels.”

The Council of Europe said de-risking should never be “an excuse for the private sector to avoid implementing a risk-based approach.”

In an April 2023 release, the U.S. Treasury Department said this de-risking hurts small and medium sized enterprises hardest, along with non-profits trying to operate in high-risk jurisdictions. They’re turned away as unacceptable AML/Combating of Terrorism risks not because of who they are but because of their business or where they operate.

Treasury said it will fight this practice by tracking voluntary compliance with AML/CFT due diligence guidelines or, if necessary, regulation.

The State Department, meanwhile, said it seeks to promote “financial inclusion and transparency” and is monitoring de-risking.

In the UK, where it’s still called de-banking, the Financial Conduct Authority or FCA is reviewing whether domestic politically exposed persons are being treated fairly.

Earlier, a freedom of information request to the FCA revealed that UK banks closed about 343,000 accounts in 2021-2022, “representing well over 1,000 for every business day of the week.”

The Guardian said banks have categorized about 90,000 individuals as PEPs, including some members of Parliament, “leading to some politicians or their families being turned down by banks.”

The FCA review comes after a particularly high-profile de-banking victim and others called for a government investigation into UK de-banking practices.

#3. To disconnect from China enough to reduce the threat of coercion, without encouraging paranoia or rogue behavior that causes unneeded harm (from the New York Times).

This version of de-risking replaces the former U.S. and Western policy of decoupling from China that began under the Trump Administration. Decoupling meant complete disengagement. (I know, it’s about as practical as New Jersey decoupling from New York.)

De-risking’s latest semantic shift emerged in a March 30 speech by European Commission President Ursula von der Leyen.

She said, “I believe it is neither viable — nor in Europe’s interest — to decouple from China. Our relations are not black or white — and our response cannot be either. This is why we need to focus on de-risk — not decouple.”

After that speech, France enthusiastically adopted the diplomatic version of de-risking, as did allies in Asia, and then the United States. “On April 27, the U.S. national security adviser, Jake Sullivan, used the word in a major policy speech,” the NYT said.

A result of this de-risking will be an increasingly complex web of sanctions and trade policies. The aim is to remain engaged with China while disrupting the transfer to it of crucial technology and military applications and relocating the production of critical goods to friendlier countries.

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