Correspondent Banking AML Challenges: The Good, The Bad, and The Ugly
By Bachir El Nakib, Founder, Senior Consultant, Compliance Alert (LLC)
Foreign correspondent accounts have long been used by financial institutions to facilitate cross-border transactions. However, as a result of its susceptibility to money laundering and terrorist financing, this practice is encountering heightened concern among U.S. banking regulators. In this rigorous environment, it is increasingly important for financial institutions to take positive actions designed both to safeguard their operations against illicit transactions and, in the event their correspondent business comes under regulatory scrutiny, to establish a defensible position.
What is a foreign correspondent account?
A “correspondent account” is statutorily defined as “an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.”1 Laying the foundation for its Anti-Money Laundering (AML) guidance on foreign correspondent accounts, an ‘account’ means any formal banking or business relationship established to provide regular services, dealings, and other financial transactions. It includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit.”2 Foreign financial institutions maintain accounts at U.S. banks to gain access to the U.S. financial system and to take advantage of services and products that may not be available in the foreign financial institution’s jurisdiction. These services may be performed more economically or efficiently by the U.S. bank or may be necessary for other reasons, such as the facilitation of international trade.3
Correspondent banking may include various services, such as international funds transfers, cash management services, check clearing, loans and letters of credit or foreign exchange services. There are several ways of providing these services:
• In traditional correspondent banking, a respondent bank enters into an agreement with the correspondent bank in order to execute payments on behalf of the respondent bank and its customers. The respondent bank’s customers do not have direct access to the correspondent account, but they transact business indirectly.
• Nested correspondent banking refers to the use of a bank’s correspondent relationship by a number of respondent banks. The latter have no direct account relationship with the correspondent bank but conduct business through their relationships with the bank’s direct respondent bank to execute transactions and obtain access to other financial services (eg a local bank conducts correspondent banking business indirectly via its regional savings bank).
• Payable-through accounts, also known as “pass-through” or “pass-by” accounts, are similar to nested correspondent banking but, in this case, the respondent bank allows its customers to directly access the correspondent account to conduct business on their own behalf.
Recent developments in correspondent banking
As correspondent banking services are a key element in cross-border transactions, they might be expected to grow in parallel with the expansion of international trade and cross-border financial activity. However, there are increasing indications of an overall cutback in the number of correspondent banking relationships and, for smaller banks in some specific jurisdictions, difficulties seem to exist in establishing new relationships. In particular, during the informal fact-finding carried out by the CPMI working group the following trends have been identified:
·Cutbacks in the number of relationships: Correspondent banking relationships are being reduced in number, especially for respondent banks that (i) do not generate sufficient volumes to recover compliance costs; (ii) are located in jurisdictions perceived to be very risky; or (iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.
· Changes in relationships: Those types of correspondent banking services that are perceived to have higher associated risks (nested correspondent banking, payable-through accounts) are being scaled back, so that traditional correspondent banking clearly predominates in the remaining relationships. These remaining relationships are often retained only to support the cross-selling of other products to respondent banks (ie the profit is made in other business areas and correspondent services are considered as a necessary ancillary service).
·Concentration of relationships: Cutbacks in the number of relationships as well as changes in their nature have resulted in a significant concentration of relationships in a relatively small number of service-providing institutions, which increasingly dominate this market. In addition, a concentration of correspondent banking activities within affiliated banks was observed.
· Increasing costs: The establishment and maintenance of a correspondent banking relationship are perceived to be increasingly costly both for correspondent and respondent banks.
· Cutbacks to correspondent banking services in specific foreign currencies: Some correspondent banks are increasingly reluctant to provide correspondent banking services in certain foreign currencies in which the perceived risk of economic sanctions, the regulatory burden related to AML/CFT or the uncertainties related to the implementation of these requirements and the potential reputational risk in case of non-compliance seem to be higher. There are indications that correspondent banking activities in USD are increasingly concentrated in US banks and that non-US banks are increasingly withdrawing from providing services in this currency except for some ancillary services. Simultaneously, the very same non-US correspondent banks might still be willing to provide correspondent banking services in their domestic currency.
· Geographical imbalances: Not all jurisdictions and currencies are affected equally. Respondent banks, in particular smaller banks located in jurisdictions perceived to be very risky, are especially affected by the reduction in the number of relationships.
Major banks face new requirements for transaction-related compliance from the start of this year as the state's financial regulator puts in place a new rule for those doing business in the state that go beyond federal requirements. New York's Department of Financial Services said the new rules follow investigations that have exposed shortcomings in bank systems for monitoring transactions for violations of anti-money laundering and sanctions laws. In recent months the state has fined China's Agricultural Bank and Italy's Intesa Sanpaolo banks over $200 million each for AML violations. Many U.S. bank must report The new rule being imposed by the New York regulator has stricter requirements to have staff and programs in place and to document compliance programs. The numerous top U.S. bank holding companies that are domiciled in the U.S., as well as the vast number of non-New York-based U.S. and foreign banks that operate in the U.S. financial centres.
Deutsche Bank AG agreed to pay $95 million to resolve a U.S. government lawsuit accusing the German bank of tax fraud for using "insolvent" shell companies to hide significant tax liabilities from the Internal Revenue Service in 2000. Under the accord described in papers filed on Wednesday with the federal court in Manhattan, Deutsche Bank also admitted to trying to stick the shell companies with the tax bill for its then-new stake in drugmaker Bristol-Myers Squibb Co. The settlement resolves a lawsuit filed in December 2014 that had sought to recoup more than $190 million in taxes, penalties and interest. "The government, through this action and settlement, has made Deutsche Bank admit to its actions designed to avoid taxes," U.S. Attorney Preet Bharara in Manhattan said in a statement. Deutsche Bank spokeswoman Amanda Williams said in a statement: "We are pleased to resolve this claim and put these events from more than 16 years ago behind us.
A U.S. banking regulator fined HSBC $33 million on Monday for past failings in its administration of some bank accounts, and ended business restrictions it had placed on the lender because of the problem. The Office of the Comptroller of the Currency (OCC), which oversees leading national banks, said it assessed the civil penalty against HSBC for failing to correct deficiencies in how it administers so-called payment change notices on some accounts. The OCC had originally issued an order for the bank to change its practices in 2011. The bank had exhibited "unsafe and unsound practices" in how it notified customers about changes in mortgage payments, the OCC said. In a statement, the bank said it was glad that regulators were satisfied with its work to improve mortgage servicing.
KYC utilities in Correspondent Banking
Know-your-customer (KYC) due diligence is an essential element of banking, including correspondent banking. Customer due diligence is applied by all banks providing a
service in the correspondent banking chain to the institutions or customers with which they directly interact. This section focuses on the KYC activities performed by correspondent banks on their respondent banks (KYC activities performed by respondent banks on their customers are not specific to correspondent banking and are not covered in this section).10 Customer due diligence requires that correspondent banks identify and understand their respondents’ banking activities and know if the respondents maintain additional correspondent banking relationships.11
This process often leads to a massive exchange of documents. According to SWIFT, the 7,000 banks that use the SWIFT network for correspondent banking have more than 1 million individual relationships, so the number of documents exchanged is presumably much higher.12
This setup creates several problems: first, the same or very similar information needs to be sent to all correspondents; second, correspondents may have differing information requirements, as this is a risk-based process that is not standardised. Finally, it has to be taken into account that information is exchanged not only at the outset of a relationship, but that continuous updates are necessary. As a result, the KYC due diligence process is complex, costly, time-consuming and labour-intensive. To improve this situation, several providers have developed or are developing KYC utilities, with the aim of storing in a single repository relevant due diligence information. These utilities may help correspondent banks to identify and mitigate the risks associated with respondent banks. Respondent banks would access such a utility to provide the initial information and then provide updates as necessary in line with a standardised template, whereas correspondent banks would access it to retrieve the necessary information. Information-providing banks (respondents) maintain full control over their data and determine which banks have access to it.
The use of KYC utilities would provide several advantages:
- the number of times a bank must send the same information could be greatly reduced;
- the accuracy and consistency of the information could improve, as banks would only maintain one set of updated information;
- the use of a single template might promote the standardisation of the information that banks provide to other institutions as a starting point for KYC obligations;
- the use of a central KYC utility might speed up the process; and
- the costs could be reduced thanks to a lesser amount of documentation being exchanged. In view of this, authorities may wish to promote the use of KYC utilities.
A brief description of some KYC utilities Bankers Almanac This utility focuses on financial institution KYC and is therefore designed to meet the needs of correspondent banking. In order to be included, financial institutions must be able to demonstrate a legitimate physical address, appropriate licences and a confirmation that they are regulated by a regulator of international repute. Ahead of publication, all data collected are quality-assured by a content team at Bankers Almanac
SWIFT KYC Registry
The SWIFT KYC Registry went live in December 2014. It focuses on banks active in correspondent banking, but not on customers. The SWIFT KYC Registry allows banks active in correspondent banking to use a central utility to provide information needed for compliance requirements. This information can be used by correspondent banks to conduct adequate due diligence with regard to their customers (ie the respective respondent bank). All information stored is checked and validated by a dedicated operational team at SWIFT. Each bank that provides data always retains the ownership of its data. Other banks can only access data of another bank when permission to do so has been granted by the data-owning party. In addition, SWIFT is also introducing the so-called ”SWIFT Profile”. This profile provides a standardised portrait of a bank’s traffic activity with sanctioned or high risk countries (as per FATF/OFAC/EU lists) on SWIFT. Banks can share this profile with selected counterparties by using the SWIFT KYC Registry.
In principle, the implementation of KYC utilities is a positive development. However, there are some limitations that have to be acknowledged:
• KYC utilities may facilitate the access to a basic set of information, but they do not alter the basic responsibility of correspondent banks to perform due diligence on their customers (ie the respondent banks). Correspondent banks cannot simply delegate their responsibility as KYC utilities cannot perform due diligence on behalf of third parties and the ultimate responsibility always lies with the correspondent banks.13 Thus, even if KYC due diligence procedures are facilitated, resources will still be necessary for the analysis and management of the risks involved in a relationship.
• KYC utilities use agreed templates, but templates differ across utilities.
• KYC utilities may not collect all the information that a correspondent needs for its internal assessment. Additionally, these processes cannot be easily standardised, as they are risk-based. The data stored in a KYC utility would need to be complemented with additional data transmitted bilaterally, and thus these utilities should be seen more as a useful starting point for due diligence obligations rather than as eliminating the need for due diligence by the correspondent bank.
• KYC utilities need to be updated routinely by the respondent bank with fresh information in order to remain useful to the correspondent bank for the on-going monitoring of an existing relationship or for the opening of a new relationship. Providers of the KYC utilities need to set adequate parameters regarding which events will trigger a requirement to update information.
• The privacy laws of some jurisdictions may prohibit sharing, storing or mining of basic information in KYC utilities, such as other correspondent relationships and details of geographical areas served. Operators of KYC utilities need to check carefully and in line with applicable laws what information should and could be shared in the KYC utilities, especially when information is transmitted across borders.
• Additionally, to the extent that some institutions are not participating in any utility, there would be a need to maintain bilateral exchanges of information. In order to increase efficiency, both respondent and correspondent banks need to have access to a utility with a broad coverage of relevant participants. While KYC utilities may facilitate customer due diligence on respondent banks, they may not address all information needs related to where a respondent does business and with whom.
In summary, KYC utilities are a promising tool for speeding up KYC compliance and cutting its costs. Although a complete standardisation of the information seems unfeasible (especially due to the risk-based approach for AML/CFT), the utility template, if designed appropriately could help defining an acceptable minimum set of data that any bank should be ready to provide to banks requiring the information. This minimum set of information could be augmented bilaterally as necessary.
The use of KYC utilities in general - provided that they store at least a minimum set of up-to-date and accurate information - can be supported as an effective means to reduce the burden of compliance with some KYC procedures for banks active in correspondent banking business. Relevant stakeholders (eg the Wolfsberg Group), may review the templates and procedures used by the different utilities and identify the most appropriate data fields to compile a data set that all utilities should collect as best practice and that all banks have to be ready to provide to banks which require the information.
The Good: Benefits of foreign correspondent banking
The concept of foreign correspondent banking is an accepted practice that can be very beneficial to financial institutions and their customers. Correspondent banks essentially act as a domestic bank’s agent abroad in order to service transactions originating in foreign countries. Championing a positive view, the Bank for International Settlements observes, “Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion”.4
The Bad: Challenges of foreign correspondent banking
Notwithstanding the benefits related to foreign correspondent banking, this practice also presents significant challenges, with regulatory burden featured prominently. Extensive rules governing foreign correspondent accounts implement the provisions found in USA PATRIOT Act sections 312 (imposing due diligence and enhanced due diligence requirements on U.S. financial institutions maintaining foreign correspondent accounts), section 313 (preventing foreign shell banks from having access to the U.S. financial system) and section 319(b) (authorizing federal law enforcement to investigate any foreign bank maintaining a U.S. correspondent account). The decline in correspondent banking relationships has much to do with the challenge of regulatory compliance, as recently noted by the American Bankers Association, “[O]ne key factor leading to the decline in correspondent/respondent banking relationships is the heightened regulatory burden on banks related to anti-money laundering and counter terrorism compliance.”5
The Ugly: Foreign correspondent banking as a means to launder money and finance terrorism
The regulatory strictures are not without good reason. There have been instances of foreign correspondent accounts being used to launder money and to potentially finance terrorism. Even in the early rush to implement the USA PATRIOT Act, the OCC, though taking a balanced view, expressed its concern, stating, “Although [correspondent] accounts were developed and are used primarily for legitimate purposes, international correspondent bank accounts may pose increased risk of illicit activities.”6
In recent years, the U.S. government has sent a strong message to financial institutions that fail to create a process to prevent criminal behavior. Financial institutions that disregard their obligations under the Bank Secrecy Act or operate without effective anti-money laundering programs have been the subject of enforcement actions resulting in hefty penalties. In 2012, a Virginia-based bank (HSBC) that allowed itself to be used to launder drug money flowing out of Mexico agreed to pay a record $1.92 billion to U.S. authorities, including hundreds of millions of dollars in civil money penalties to the Office of the Comptroller of the Currency, the Federal Reserve, and the Treasury Department.7
In 2015, a German-based bank and its U.S. branch accused of violating laws barring transactions with Iran, Sudan, Cuba and Myanmar, as well as abetting a multi-billion dollar securities fraud, agreed to pay $1.45 billion in fines.8 In both of these high-profile cases, government authorities cited Bank Secrecy Act violations including:
(1) failure to have an effective AML program,
(2) failure to conduct adequate due diligence or to obtain “know your customer” information with respect to foreign correspondent bank accounts, and
(3) failure to detect and adequately report evidence of money laundering and other illicit activity.
Mirroring the U.S. actions, the international Financial Action Task Force has sounded this stern warning in addressing the cross-border financial activities of Iran and North Korea: “Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices … .”9
How financial institutions can best protect themselves from a harmful correspondent banking relationship
A Bank in order to meet its obligations to measure, monitor and control risks, a financial institution should consider the following actions:
1.Ensure AML/CFT policies and procedures are reviewed at least annually and adjusted to address any new risks related to correspondent banking activities.
2.Perform an annual risk assessment to determine the adequacy of its AML/Sanction program, especially as it relates to correspondent banking.
3.Conduct enhanced due diligence on counterparties to understand the nature and extent of the various aspects of the correspondent’s business, including, but not limited to, ownership, products, services, customers, locations, etc. Due diligence should be on-going based upon the nature and scope of the correspondent activities and should include periodic validation of the counterparties and their activities by the correspondent bank.
4.Ensure that adequate expertise and resources are available to establish a AML/Sanction program capable of effectively and timely monitoring the volume and nature of activities processed through the correspondent account.
5.Ensure that the correspondent bank, and not the initiating bank, administers the systems used to process correspondent banking transactions, thus allowing the correspondent bank to independently identify exceptions, generate reports and analyze data to support its AML/Sanction program.
6.Perform monitoring of processed correspondent banking transactions in a timely manner, preferably through the use of an automated system that can effectively aggregate transactions and create “alerts” in order to identify potentially suspicious transactions.
7.Ensure that the correspondent bank establishes an enhanced due diligence (EDD) protocol that will be followed for investigative purposes when transactions trigger a AML alert in the monitoring system.
The Organisation of Correspondent Banking Department is part of the organization of a Bank, either under international banking division or institutional banking, or for the specialised correspondent banks, under institutional and corporate banking.
Correspondent banking is an essential component of the global payment system, especially for cross-border transactions. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting, inter alia, international trade and financial inclusion. In addition, most of the payment solutions that do not involve a bank account at customer level (eg remittances), rely on correspondent banking for the actual transfer of funds. Until recently, banks have maintained a broad network of correspondent relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are cutting back the number of relationships they maintain and are establishing few new ones.
Initiatives on correspondent banking Recent work and current initiatives in the field of correspondent banking by different international bodies and institutions include the following:
• The Financial Stability Board (FSB) is closely cooperating with the World Bank mainly to analyse the impact of the reduction of correspondent banking relationships on financial inclusion. In this respect, the FSB Chair’s letter to the G20 on financial reforms of 9 April 2015 stated that “[…] the FSB has agreed a work plan that will examine […] together with the World Bank and other relevant bodies, the extent of potential withdrawal from correspondent banking, its implications for financial exclusion, as well as possible steps to address this issue.”
• The World Bank is conducting surveys to better understand the evolution and drivers of bank account closures or restrictions, in the context of correspondent banking relationships and Money and Value Transfer services (remittances). Under the G20’s Global Partnership for Financial Inclusion (GPFI), the World Bank collected information on whether and why far banks are terminating or restricting business relationships with remittance service providers. In partnership with the FSB and CPMI, the World Bank is leading another to obtain data on whether correspondent banking relationships are being terminated or restricted, the net effect of these developments and the underlying causes. This data-gathering will include non-CPMI jurisdictions.
• The Financial Action Task Force (FATF) issued two subsequent public statements on de-risking1 in October 2014 and in June 2015 in order to clarify its approach to “de-risking”, which is based on the risk-based approach as a central element of the FATF Recommendations.
The risk-based approach requires financial institutions to identify, assess and understand their money laundering and terrorist financing risks, and implement AML/CFT measures that are commensurate with the risks identified.
The June 2015 public statement on “de-risking” provides additional clarification on customer due diligence for correspondent banking relationships:
“[…]When establishing correspondent banking relationships, banks are required to perform normal customer due diligence on the respondent bank. Additionally,
“Banks are required to gather sufficient information about the respondent bank to understand the respondent bank’s business, reputation and the quality of its supervision, including whether it has been subject to a money laundering or terrorist financing investigation or regulatory action, and to assess the respondent bank’s AML/CFT controls.
Although there will be exceptions in high risk scenarios, the FATF Recommendations do not require banks to perform, as a matter of course, normal customer due diligence on the customers of their respondent banks when establishing and maintaining correspondent banking relationships[…]”..
As a next step, the FATF agreed in June 2015 to undertake work to further clarify the interplay between the FATF standards on correspondent banking and other intermediated relationships, and the FATF standards on customer due diligence and wire transfers. In doing so, the FATF will consult with regulators and the private sector, and will take into account relevant work on correspondent banking and account closure being undertaken by the CPMI, the FSB, the Global Partnership for Financial Inclusion (GPFI), International Monetary Fund (IMF) and Union of Arab Banks (UAB), the World Bank Group, and the World Trade Organisation (WTO).
• The Basel Committee on Banking Supervision (BCBS) published in January 2014 its Sound management of risks related to money laundering and financing of terrorism, which contains an annex on correspondent banking (including money laundering/financing of terrorism risk assessments and customer due diligence requirements in correspondent banking).
Concept of correspondent banking
Correspondent banking can be defined, in general terms as “an arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks”.2 The ECB uses a similar basic definition in its correspondent banking survey, referring to “agreements or contractual relationships between banks to provide payment services for each other.”3
A more detailed definition by the Wolfsberg Group4 establishes that “correspondent Banking is the provision of a current or other liability account, and related services, to another financial institution, including affiliates, used for the execution of third-party payments and trade finance, as well as its own cash clearing, liquidity management and short-term borrowing or investment needs in a particular currency”.5 At the most basic level, correspondent banking requires the opening of accounts by respondent banks in the correspondent banks’ books and the exchange of messages to settle transactions by crediting and debiting those accounts.
All these definitions highlight the main components of correspondent banking:
1. a bilateral agreement between two banks by which one of them provides services to the other;
2. the opening of accounts (by the respondent in the books of the correspondent) for the provision of services and the importance of payment services as a core function of correspondent banking.
As the ECB definition highlights, these relationships are frequently reciprocal, in that each institution provides services to the other, normally in different currencies. Correspondent banking is especially important for cross-border transactions, as its importance for domestic payments within a single jurisdiction has diminished greatly due to the use of financial market infrastructures. On a cross-border level, however, correspondent banking is essential for customer payments and for the access of banks themselves to foreign financial systems for services and products that may not be available in the banks’ own jurisdictions. This report analyses only cross-border correspondent banking activities6 with a focus on payment aspects.
Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion.
In view of the importance of correspondent banking, the keen interest of central banks in this activity and the trends that point to risks to its safe and efficient functioning, the BIS Economic Consultative Committee (ECC) Governors have mandated the CPMI to produce a report on this issue.
In response, the CPMI Working Group on Correspondent Banking has prepared this technical report describing current trends and analysing technical measures that might alleviate some of the concerns and cost issues related to correspondent banking.
Banks have traditionally maintained broad networks of correspondent banking relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are reducing the number of relationships they maintain and are establishing few new ones.
The impact of this trend is uneven across jurisdictions and banks. As a result, some respondent banks are likely to maintain relationships, whereas others might risk being cut off from international payment networks. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow. Rising costs and uncertainty about how far customer due diligence should go in order to ensure regulatory compliance (ie to what extent banks need to know their customers’ customers - the so-called “KYCC”-) are cited by banks as among the main reasons for cutting back their correspondent relationships.
To avoid penalties and the related reputational damage correspondent banks have developed an increased sensitivity to the risks associated with correspondent banking. As a consequence, they have cut back services for respondent banks that:
(i) do not generate sufficient volumes to overcome compliance costs;
(ii) are located in jurisdictions perceived as very risky; or
(iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.
The regulatory framework, and in particular the AML/CFT requirements and the related implementing legislation and regulations in different jurisdictions, are taken as given in this report. It is acknowledged that these requirements, as agreed by the competent authorities, along with strict implementation, are necessary to prevent and detect criminal activities and ensure a healthy financial system.
Recommendation on the use of KYC utilities:
The use of KYC utilities in general - provided that they store at least a minimum set of up-to-date and accurate information - can be supported as an effective means to reduce the burden of compliance with some KYC procedures for banks active in correspondent banking business. Relevant stakeholders (e.g. the Wolfsberg Group) may review the templates and procedures used by the different utilities and identify the most appropriate data fields to compile a data set that all utilities should collect as best practice and that all banks have to be ready to provide to banks which require the information.
Recommendation on the use of the LEI in correspondent banking:
In addition to the general promotion of LEIs for legal entities, relevant stakeholders may consider specifically promoting the use of the LEI for all banks involved in correspondent banking as a means of identification which should be provided in KYC utilities and information-sharing arrangements. In a cross-border context, this measure is ideally to be coordinated and applied simultaneously in a high number of jurisdictions. In addition, authorities and relevant stakeholders (eg the Wolfsberg Group) may consider promoting BIC to LEI mapping facilities which allow for an easy mapping of routing information available in the payment message to the relevant LEI.
Recommendation on information-sharing initiatives:
The work already conducted by the authorities with responsibility for AML/CFT (ie the Financial Action Task Force (FATF) and the Basel Committee on Banking Supervision AML/CFT Expert Group (AMLEG)) is very much appreciated. It is recommended that the FATF and AMLEG be invited to:
1.provide additional clarity on due diligence recommendations for upstream banks, in particular to what extent banks need to know their customers’ customers (“KYCC”);
2. further clarify data privacy concerns in the area of correspondent banking; and
3. detail, to the extent possible, the type of data that information-sharing mechanisms could store and distribute in order to be a useful source of information.
In order to facilitate compliance with FATF customer due diligence recommendations,
(i) the use of information-sharing mechanisms (if they exist in a given jurisdiction and data privacy laws allow this) for knowing your customers’ customers could be promoted as the first source of information by default, which
(ii) could be complemented bilaterally with enhanced information should there be a need. In order to support information-sharing in general, the respondent bank may include provisions in its contractual framework with its customers (e.g. in the terms and conditions or in a supplementary agreement) which allow the bank to provide such information on request to other banks for AML/CFT compliance purposes.
Recommendation on payment messages:
It is recommended that the relevant stakeholders determine whether the MT 202 COV payment message is as efficient and effective as intended or whether relying only on the MT 103 and the serial processing method would better serve the needs of clients, the industry and law enforcement in light of the fee structure, technological changes and payment capabilities for processing correspondent banking payments. The Wolfsberg Group seems to be the most appropriate body to review the issue and to initiate a recommendation in this field and lead any consequential changes if required.
* M.H. Bouldoukian, The Management of Correspondent Banking, 4th Edition,p174
* Walter Donaldon II, Frank Mayer, Richard Berman, Jonathan Levin, Molly Lampe, Steven Szaroleta
* Bachir El Nakib, De-Risking - Foreign Correspondent Banking (Barclays Bank - Dahabshiil)
1 31 U.S. Code § 5318A(e)(1)(B)
11.CPMI, “A glossary of terms used in payments and settlement systems”, March 2003 (updated June 2015), www.bis.org/cpmi/publ/d00b.htm?m=3%7C16%7C266.
12.ECB, “Ninth survey on correspondent banking in euro”, February 2015, www.ecb.europa.eu/pub/pdf/other/surveycorrespondentbankingineuro201502.en.pdf.
13.The Wolfsberg Group is an association of 13 global banks which aims to develop guidance and frameworks for the management of financial crime risks with respect to KYC, AML and CFT policies.
14.The Wolfsberg Group, “Wolfsberg Anti-Money Laundering Principles for Correspondent Banking”, 2014, www.wolfsbergprinciples.com/pdf/home/Wolfsberg-Correspondent-Banking-Principles-2014.pdf.
15.Some innovative payment service providers, including non-banks, offer services that could be an alternative to correspondent banking for specific types of retail payments. These types of services and providers have been analysed in previous CPMI reports (Innovations in retail payments (2012) and Non-banks in retail payments (2014)).