Abu Snina Writes About the Federal Reserve’s Warning to the Central Bank of Libya on Reviewing Dollar Transactions

Economic expert Mohammed Abu Snina wrote about the warning issued to the Central Bank by the U.S. Federal Reserve regarding the review and audit of its dollar-denominated transactions:

This measure falls under what is known as D-Risking, a procedure adopted by international financial institutions when they perceive financial risks associated with their transactions with certain banks or financial institutions. This often leads to suspending transactions with them.

Typically, the risks necessitating the review of financial transactions of a central bank or a financial institution operating in international markets include money laundering and terrorist financing risks (AML-CTF), as well as weak “Know Your Customer” (KYC) procedures applied by financial institutions under scrutiny for financial risks.

The measure reflects doubts about the financial institution’s ability to manage its funds transparently, implying a loss of trust in its management. This loss of trust is the worst scenario any financial institution can face.

The Federal Reserve’s decision to request the involvement of a third party to review financial operations with the Central Bank indicates that the Federal Reserve faces challenges in managing risks associated with financial transactions with the Central Bank and the Libyan banking sector in general or in managing these risks efficiently.

Naturally, the procedures adopted by international financial institutions to hedge against financial risks resulting from their dealings with various institutions vary from one institution to another, depending on the level of expected financial risks.

To continue financial transactions with high-risk institutions, third-party financial institutions with robust risk management systems are often engaged. These institutions are chosen based on their reputation and the financial risk management system they adopt.

According to the Financial Action Task Force (FATF), the application of D-Risking to any institution indicates a complex situation that goes beyond merely complying with anti-money laundering and terrorist financing procedures. It requires adherence to the full forty recommendations and standards of FATF directed at financial institutions. Notably, institutions implementing D-Risking policies with their clients are not obligated to justify the procedure or base it on judicial rulings. Risk management is an internal matter determined by the financial institution itself. The institution subjected to this procedure or ban (the customer or client) is only required to comply and rectify its situation.

Underestimating or downplaying the significance and seriousness of subjecting the Central Bank to D-Risking risks does not serve the national economy or the future of the Libyan banking and financial sector. This issue should be taken seriously and requires a strategy to ensure the sustainability of financial transactions with the external world. Such a strategy is necessary to avoid delays and disruptions to dollar-denominated transactions with correspondent banks abroad, including the collection of oil revenues in dollars. These disruptions would affect economic stability, the supply of consumer goods, the state’s ability to meet its external obligations, and result in losses for the Central Bank and the Libyan banking sector as a whole.