Large financial institutions like Bank of America (NYSE:BAC), HSBC (NYSE:HSBC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM) have dealt an expensive blow to immigrants and their families. As regulators crack down on money laundering and illicit international transfers of wealth, the world’s largest money movers have scaled back their cash transfer businesses. Most affected has been Mexico, as about half of the total remittances sent from the U.S. go there.
So why did banks decide to pull the plug on this business, which The New York Times calls the “the largest and arguably most effective antipoverty effort in the world”?
For banks, it is regulatory paranoia, among other reasons. Regulators have cracked down on international money transfers as evidence that terrorists and drug traffickers have used the bank route to launder money has surfaced. Consequently, banks are being made fully accountable for international monetary transactions through their channels. They have been required to increase surveillance, closely monitor such transactions both virtually as well as manually, and implement foolproof systems to track and record the end use of transferred funds. And for banks, it is just too much effort for too little pay.
Most banks learned their lesson after paying crippling penalties for their involvement in cases of money laundering in the garb of international money transfer businesses. But now banks have jumped to the other end of the spectrum, deciding to roll back money transfer services, thus affecting genuine transfers made by immigrants working in the U.S. to their families living in other countries. According to Fortune, the cost of sending and receiving money to families through non-banking channels could jump up five times in the absence of the banks.
JPMorgan stopped its Rapid Cash program in November for fear of regulatory reprimand. For its money transfer services, JPMorgan had partnered with Banorte, a large Mexican bank. But the problem, as reported by The New York Times, was that many people picking up remittances in Mexico sent from Chase branches in the United States were not customers of Banorte, making it more difficult to monitor them. In January, JPMorgan agreed to pay $1.7 billion to clear itself of charges that it failed to have effective anti-money laundering controls.
Last year, Bank of America suspended SafeSend, claimed to be one of the cheapest ways for immigrants to send money to Mexico. In May this year, the Securities and Exchange Commission launched a probe to examine claims that Bank of America was not doing enough to check the identities of its clients at its brokerage arm.
Yet another bank that has faced flack for letting through suspicious social elements to launder money is Citigroup. Last year, the Federal Reserve announced an enforcement action against concerns that anti-money laundering checks and balances were lax at Banamax USA, a Citigroup affiliate. Citigroup’s Banamax has shut down unit branches in Texas, California, and Arizona that catered to Mexicans living in the United States and stopped most remittances to Mexico, according to The New York Times. British lender HSBC, which paid $1.9 billion in penalties in 2012 for money laundering charges, has also reportedly stopped remittance services at its Mexican branches.
But it seems rather difficult to believe that regulatory fear of compliance alone can dissuade banks from the money transfer business or, for that matter, any type of business. Another reason for banks shutting down these services is stiff competition from standalone money transfer companies, poor profitability, and a squeeze in margins as cost of remitting money abroad has radically come down. According to a World Bank report published in June, the average cost of sending money from the United States in the second quarter of 2014 was 5.78 percent of the sum sent, down from an average of 7.21 percent about five years ago.
Be it for regulatory reasons or lack of profitability, banks exiting the money transfer business will give almost monopolistic powers to cash transfer companies, and this may hurt immigrants living on the margins and make it far more difficult for them to send money home.