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Fintelekt- ABA Webinar on ML/TF Risks in Correspondent Banking: Key Takeaways

Fintelekt Advisory Services and Asian Bankers Association jointly presented the next webinar in the 2020 series on Money Laundering and Terrorist Financing Risks in Correspondent Banking on July 8, 2020.

The webinar was hosted by Shirish Pathak, Managing Director, Fintelekt Advisory Services and the panelists were

  • Dilani Sooriyaarachchi, Head of Compliance, Seylan Bank
  • Theresa Karunakaran, Director Compliance – Regulatory Affairs, Deutsche Bank AG
  • Saurabh Nagar, Director, Business Solutions Group, APAC, Accuity

ML/TF Risks in Correspondent Banking

The panelists discussed the importance of correspondent banking to the overall economic development, especially for developing economies.

“Correspondent banking is essential for developing economies to have access to global markets and foreign investments. De-risking has an impact on livelihoods and on the economy of affected countries.

– Theresa Karunakaran, Director Compliance – Regulatory Affairs, Deutsche Bank AG

However, correspondent banking is considered inherently high-risk for a variety of reasons: A detailed view of the customer’s customer is not always available in a correspondent banking relationship and banks have to rely on the partner bank’s ability to know their customer, conduct due diligence and put in place adequate internal controls.

Enhanced Due Diligence

Because of the high-risk nature of the correspondent banking business, enhanced due diligence at regular frequency is recommended.

The three key questions while conducting due diligence for a correspondent banking transaction are:

  1. Who is my customer?
  2. Should I do business with this customer?
  3. Can I do business with this customer?

Answering these questions involves finding out if the entity is sanctioned or PEPs, establishing ownership structures, identifying beneficial ownership, nested relationships, payable through accounts and other risks that exposes the bank to risks.

This is a time-consuming and expensive process and needs extensive data collection and analysis.

The final decision on whether to do business depends on the risk-based approach by the individual bank.

“Based on our surveys, the time taken to perform due diligence and conclude whether to go ahead with a customer relationship can be anywhere between 12 hours and 28+ hours”

– Saurabh Nagar, Director, Business Solutions Group, APAC, Accuity

The Wolfsberg CBDDQ

The new Wolfsberg Correspondent Banking Due Diligence Questionnaire (CBDDQ) which was introduced in April 2020 is quite exhaustive and has expanded the scope of due diligence significantly by introducing a lot of granularity.

Banks in countries that do not have equally stringent AML measures may find it difficult to meet the standards expected by correspondent banks and may get subjected to de-risking.

De-risking and its Impact

Financial institutions terminate relationships based on reasons such as risk appetite of the organisation, profitability, reputation risk, regulatory burden on AML/CFT compliance, penalties and criminal prosecution.

De-risking is detrimental to the growth of trade. Countries that are completely de-risked and desperate to transact will find other means such as unregulated channels. Other negative consequences on financial institutions as well as economies include reduced payment transparency and ultimately lead to financial exclusion.

Adopting a Risk-Based Approach

Several international bodies such as the Financial Action Task Force (FATF) and the Basel Committee on Banking Supervision have been working to develop robust mechanisms to improve the transparency of international transactions.

In 2016, FATF issued guidelines on correspondent banking focusing on de-risking urging banks to adopt a risk-based approach and to conduct due diligence on correspondent banking customers including assessments of regions, and the products/ services being offered.

Pressure from Correspondent Banks

“In Sri Lanka following the gray listing by FATF in 2017, the regulator took the fear of de-risking very seriously and made tremendous efforts to improve risk-based supervision and outreach to financial institutions, improve international co-operation, strengthen the legal framework, and enhance the implementation of UNSCRs”

– Dilani Sooriyaarachchi, Head of Compliance, Seylan Bank

The fear is that correspondent banking could be used as a channel to move illegal funds to respondent banks in countries with relatively weaker AML policies as they depend on the correspondent bank’s reputation to process the funds. Hence correspondent banks put their respondent partners through higher degree of scrutiny and monitoring to establish the integrity of financial transactions.

Correspondent banks should put in place a mechanism to reach out to the respondent bank when there is a suspicion on the nature of the transaction and get information about the transactions quickly.

The risk-based approach can help eliminate the need for blanket de-risking. The use of latest tools and technology and all available data points can help banks make more efficient decisions.

Responsibilities of Correspondent Banks

As part of the overall financial community, banks on both sides must share the responsibility towards fostering economic opportunity, increase financial inclusion and fight financial crime together.

Due diligence should not be a mere paper-gathering exercise. Banks have a responsibility to use due diligence to adopt a risk-based approach in a holistic manner while making their decisions.

Regulators in jurisdictions with stronger AML controls often advise extra caution when banks enter cross border transactions, however they do not advise blanket de-risking. Often times they are open to and willing to support efforts to bring AML processes in respondent banks up to speed.

Best Practices for Correspondent Banking Due Diligence

  • People – invest in skilled personnel and provide on-going training
  • Risk assessment – maintain a strategic profile of the respondent bank with on-going monitoring to provide a holistic risk assessment.  This should consider the country risk, sector or industry risk, name screening on institutions, check beneficial owners, check for nested relations, check against negative lists
  • Technology – use technology to reduce time consuming and manual work which is prone to human errors
  • Work together – have a hand-holding approach with the partner bank – including having pragmatic and reasonable processes that match the need of the respondent bank’s country.

A full recording of this webinar is available on www.fintelekt.academy