De-Risking vs Financial Inclusion - The Conflict

This is the central paradox in modern AML/CFT regulation.

1. What is De-Risking?

FATF Definition: "The phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF's risk-based approach."

It is not risk management, it is risk avoidance. Instead of applying Enhanced Due Diligence, monitoring, limits - the bank exits the entire class.

Drivers:

• Compliance Pressure: Fear of FCA, FinCEN, OFAC penalties
• Cost: EDD for Money Service Businesses (MSBs), NGOs, crypto, correspondent banks is resource-intensive
• Reputational risk
• Low profitability of high-risk segments

What is Financial Inclusion?
UN, World Bank, RBI objective to provide access to affordable, usable financial services to underserved populations. FATF itself said in 2025: Financial exclusion is a direct risk to financial integrity

2. Why They Conflict

The IMF warns widespread de-risking poses risks to global financial stability, and FATF stresses its Standards do not envisage cutting-off entire classes of customers. Excluded customers don't disappear, they move to informal, unregulated, invisible channels - which increases ML/FT risk. World Bank: "Financial inclusion is a necessary precondition to effectively mitigate risks."

FATF 2025 Guidance now makes it explicit:

Wholesale de-risking is contrary to the Risk-Based Approach (RBA) and contributes to broader financial exclusion
De-risking contradicts the RBA

The required approach is RBA, not wholesale exit: case-by-case, proportionate, documented.

3. Detailed Case Laws

A. The Landmark De-Risking Case - UK

Dahabshiil Transfer Services Ltd v Barclays Bank plc EWHC 3379 (Ch)[2013]

Facts: In 2013, Barclays decided to close accounts of 250 Money Service Businesses after HSBC was fined $1.9bn. Largest target was Dahabshiil, largest African MTO serving Somali diaspora. Barclays cited lack of "strong anti-money laundering governance structures."

Judgment: On 5 Nov 2013, High Court granted interim injunction preventing Barclays from terminating services. Judge Henderson called decision "unfair" and demanded detailed examination.

Principle Established:

1. Bank cannot terminate without adequate notice and justification if it causes irreparable harm to public.
2. De-risking entire sector without individual risk assessment may breach competition law and public interest.
3. Settlement in April 2014 - Barclays agreed to keep account open for defined period to allow alternative arrangements.

This case is cited globally as Understanding Bank De-Risking and its Effects on Financial Inclusion.

B. N v S (2015) - UK

Court was willing to grant injunction against a bank where its ML risk management was not considered effective. Shows courts will intervene if de-risking is used as excuse for ineffective controls.

C. EU Proportionality Limit - Most Recent

Case C-81/24 Jenec - CJEU Judgment 11 June 2026

This is the new EU standard for limits of automatic de-risking.

Facts: Slovenian bank refused to open basic payment account because applicant was on US OFAC list, though not on UN, EU or Slovenian sanctions and not convicted.

Held:

A bank may not refuse to open a payment account with basic features solely because applicant appears on sanctions list issued by third country such as OFAC

Court confirmed EU law grants legally resident consumers right to open payment account with basic features under Payment Accounts Directive 2014/92/EU. This right is connected to financial inclusion but subject to AML/CFT rules.

Key Test:

1. OFAC listing is relevant risk factor but cannot automatically replace bank's risk assessment.
2. Bank must do individual, documented assessment: nature of account, intended use, source of funds, controls available
3. Must consider proportionate measures: EDD, monitoring, restrictions before refusal.

Cyprus transposition relevance: Institutions should not implement policies resulting in general refusal of entire categories perceived as higher risk.

D. Indian Jurisprudence on Financial Inclusion as Right

1. Supreme Court on Barrier-Free Banking (2024-25) - Disabled Persons Right

Supreme Court held:

Financial inclusion is a fundamental part of social inclusion and the right to open and operate a bank account is integral to dignity and independence

Followed by RBI circular to all regulated entities to review KYC policies. This establishes financial access as part of Article 21 dignity.

2. State Bank of India v. Rajesh Agarwal (2023) & SBI v. Amit Iron (2026) - Civil Death Doctrine

SC held classification of borrower account as 'fraud' under RBI Master Directions results in serious civil consequences - debarring from institutional finance.

It is elementary that person impacted should be given opportunity of being heard because it impacts fundamental right to carry on business.

Link to De-risking: Blanket de-risking without hearing is akin to "civil death" - exclusion from financial system without due process.

3. RBI Financial Inclusion Directives

RBI Basic Savings Bank Deposit Account (BSBDA) and 2005 policy of no-frills account mandate banks cannot deny account opening for inability to produce elaborate KYC - simplified KYC allowed for low-risk under RBA, fully aligned with FATF 2025 guidance that countries must allow and encourage simplified measures in lower risk scenarios.

4. Regulatory Resolution Framework

FATF, World Bank, RBI now converge on:

1. RBA not wholesale exit: Risk assessment must be case-by-case, not sectoral ban. Reserve Bank of New Zealand stated de-risking to avoid rather than manage risks is inconsistent with AML/CFT Act intent.
2. Proportionality: Limited functionality product (basic account) reduces risk - Jenec logic.
3. Tiered KYC: Simplified Due Diligence for low-risk financial inclusion accounts.
4. RegTech: Customer screening, transaction monitoring to manage rather than avoid.

Bottom Line: De-risking is legal as individual risk decision, illegal/unacceptable as wholesale policy. The conflict is resolved by forcing banks to manage risk rather than evade it. Courts globally are now treating access to basic financial services as a quasi-fundamental right that can only be denied after a reasoned, documented, proportionate assessment.