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Bank derisking

NRC's Dialogue series on solutions to bank derisking

Bank derisking has become an increasingly prominent challenge for non-governmental organisations (NGOs) in recent decades. In the past decade,there have been over 40 initiatives and research projects as of 2023 that discuss the challenges faced by NGOs as a result of derisking practices. Multi-stakeholder dialogues have been merited as an effective mechanism to address the challenges and solutions to the issue of bank derisking. 

To advance the conversation on derisking NRC held a four-part 'dialogue series on solutions to bank derisking' between 2022-2023. It brought together experts from the financial sector, governments, non-governmental organisations, and academia to identify concrete solutions. Each dialogue centred on a different topic covering protecting humanitarian banking channels; the use of money and value transfer services; FinTech and the role of tri-sector working groups. Find the outcome of each dialogue below. 

Iraq cash programmes

Safeguarding humanitarian banking channels: how, why and by whom?

The rapid decline in global correspondent banking relationships can leave some countries partially or fully ‘unbanked’. This can impact the activities of humanitarian organisations and limit a countries' access to global trade and finance. This is ultimately detrimental to vulnerable populations. Through case studies, an stakeholder consultations, the dialogue explored a range of risk mitigation strategies and new policy developments that could help to protect humanitarian banking channels. 

Read the report here. 

  1. Improve sanctions design across all multilateral and autonomous regimes to anticipate and mitigate their impacts on humanitarian banking channels
  2. Develop an understanding of existing and shifting correspondent banking relationships (CBRs) to sanctioned jurisdictions, to allow policymakers to anticipate how they are likely to affected by direct sanctioning action and indirect impacts of derisking. This might involve a tracking tool to monitor CBRs to high-risk jurisdictions, which could serve as a traffic-light system in highlighting declines in active channels and risks of a country becoming entirely financially excluded
  3. Provide clear guidance and explore a more proactive use of incentives to Financial Institutions (FIs), particularly correspondent banks, to help them retain banking relations in high-risk jurisdictions

Use of Money or Value Transfer Services by Non-Governmental Organisations

Non-governmental organisations (NGOs) rely on money value transfer services (MVTS) as an essential tool of last resort to make financial transfers into countries suffering from bank derisking but challenges exist using these mechanisms. 

This payment mechanism has been the preferred and trusted means of transferring funds between communities in many parts of the world for centuries. It can be fully or partially regulated and will often be part of a payment chain involving banks, Money Transfer Operators ( like Western Union or Moneygram) or innovative digital payment platforms.

Many donors regard MVTS as as legal and legitimate payment modality of last resort but views can vary greatly. This leaves NGOs and banks without clear regulations and guidance, even when no other payment modalities are available. Most international banks consider payments associated with MVTS an unacceptable risk. But the declining number of regulated humanitarian payment channels means that NGOs’ use of MVTS is likely to remain essential for humanitarian operations. 

NGOs establish due diligence procedures that track humanitarian funds through MVTS in ways that donors and banks deem to be legally compliant. The platform Amanacard also supports NGOs to use MVTS in countries including Syria, Iraq and Afghanistan.

Read the report here. 

  1. Change regulations and improve guidance on NGO use of MVTS: The use of MVTS is outlawed in some donor countries, but NGOs may need to use it as a tool of last resort to disperse donor funds. Donors should work with NGO partners to produce and improve guidance on NGOs’ use of MVTS, recognising it is an essential fund transfer mechanism. 
  2. Provide support for existing platforms that use MVTS as part of humanitarian payment chains, including pilots in new jurisdictions. 
  3. Engage with the Financial Action Task Force (FATF): Following on from FATF’s 2013 report on the role of MVTS and similar service providers in money laundering and terrorist financing, a more accurate and up-to-date picture should be presented to the task force on NGOs’ need to use MVTS as a legitimate and necessary tool of last resort in certain humanitarian situations, including in relation to Recommendation 8. 
  4. Establish a forum for global trisector dialogue on financial sector derisking in humanitarian situations equipped to cover MVTS-related challenges. Nothing of this kind appears to exist that is able to take a global look at the overarching challenges, best practice and required policy change. The group could also serve as a bridge for discussions underway with a national or regional focus (e.g. the Afghanistan Cash and Voucher Working Group, or CVWG). 
  5. Raise awareness: Extensive engagement and advocacy efforts are needed to increase banks’ understanding of what MVTS are, and how they are regulated and used, and to clarify real versus perceived risks. 
  6. Revise terminology: Guidance on how NGOs should frame their engagement with, and messaging to, banks to increase acceptance of MVTS is key. The term ‘hawala’ is associated with diversion risks for some stakeholders, but it can now be conducted via established and regulated FSPs in several countries. The term ‘informal’ is also not appropriate given that MVTS may sometimes be regulated. Using terms such as MVTS or FSP would make for less charged discussions

Mitigating Financial Sector Derisking through Innovation: The Role of Digital Technologies in Humanitarian Fund Transfers 

With appropriate safeguards in place, digital technologies – including Blockchain platforms and digital currencies – have the potential to streamline and facilitate humanitarian fund transfers in poorly banked jurisdictions. Benefits can include speed, cost, accessibility, transparency, accountability, security, and mitigation of risks associated with fraud, money laundering and financing of terrorism.  

The use of tech solutions for cross-border humanitarian fund transfers remains in its infancy. Some successes have been observed in the use of Circle’s United States Digital Currency (USDC) – a regulated, fully-reserved dollar digital currency – to transfer funds across borders without the need for correspondent banks. These types of transfers could play a transformative and significant role in facilitating finaicail transfers when the formal banking sector is inaccessible.

However, questions remain as to whether bank-free transactions will be an option for humanitarian fund transfers in the foreseeable future. Further research and support for pilot projects are needed to understand how technology can be harnessed for humanitarian fund transfers. 

Read the report here. 

  1. Engage in constructive dialogue, research, awareness-raising and multi-partner collaborations on the potential role played by fintech in humanitarian fund transfers in countries suffering from derisking, especially in relation to cross-border transfers, the middle-mile and as an alternative to corresponding banking relations.
  2. Prioritise the piloting of initiatives in problematic banking routes for cross-border, as well as domestic, humanitarian fund transfers.  
  3. Regulators and governments should assist tech companies to assess and foster the readiness of payment ecosystems and infrastructure for use of payments via digital in poorly banked jurisdictions suffering from marked humanitarian needs and in addressing the data privacy and protection concerns.  

The developing role of national tri-sector groups in addressing financial sector derisking

Several national tri-sector groups have been established over the past decade to enhance dialogue and problem solving between international NGOs, financial institutions and governments. They focus on ways to reduce barriers to humanitarian assistance while ensuring economic resources are not made available to third parties in violation of counterterrorism legislation and domestic or international sanctions. 

The consultation focused on capturing best practices among tri-sector groups, exploring the scope for bridging work across national tri-sector groups, and generating recommendations to support the creation of new tri-sector groups. The discussion also aimed to identify opportunities to put into practice the recommendations stemming from the first three workshops in the dialogue series on 1) safeguarding humanitarian banking channels, 2) NGOs’ use of money or value transfer services (MVTS), and 3) the role of digital technologies humanitarian fund transfers.

Read the report here. 

Government commitment and wide participation across government ministries: A variety of stakeholders must be represented within the group, including NGOs of different sizes and diverse mandates. Government departments must play a central role as responsibility lies with them to design sanctions and enforce compliance, which can inavertedly lead to derisking challenges.  

Building trust and shared understanding: It can take time to build trust between the different stakeholders, especially when there is a diverse membership in the group. The sectors involved in tri-sector groups approach derisking from various perspectives. Investment is needed to build a shared understanding of different risks. 

Formalisation: Longer-standing groups have found benefits in institutionalising the format of their trisector groups to ensure they are as sustainable, productive and effective as possible.  

Accountability: It is important to ensure that all stakeholders within the group are actively engaged and committed to developing collective solutions. To address this, some tri-sector groups have created smaller working groups tackling specific issues to encourage accountability and exchange between sectors.  

Resourcing: Tri-sector groups require adequate resources to make progress on identified solutions and may require focal points to dedicate an increasing amount of time to engagement and outputs.  

Going beyond humanitarian carveouts: While the operationalisation and harmonisation of United Nations Security Council Resolution 2664 and similar carveouts under autonomous sanctions regimes requires further engagement, tri-sector groups should also focus on addressing other challenges, such as financial sector derisking. 

Broaden stakeholder participation on an ad-hoc basis: This could include development banks, the wider private sector (beyond financial institutions), the financial technology community, including those able to support the sending of personal remittances and humanitarian fund transfers.  

Operationalising recommendations: Moving from dialogue to tangible change is key. Ensuring that recommendations are given careful considerations by stakeholders is important and could benefit from resourcing and capacity to monitor successes as well as bottlenecks.  

Bridging national groups: Calls have been made for the creation of an umbrella platform to provide capacity, resourcing and facilitate coordination across national trisector groups. Benefits could include the sharing of information and best practice, guidance and avoidance of replication.