BIS issue recommendations to combat de-risking in correspondent banking
14 July 2016, Bachir El Nakib (CAMS), Senior Consultant Compliance Alert LLC
A central bankers' body on Wednesday made several recommendations aimed at making it easier for banks to manage risks associated with correspondent banking. It urged a prompt response, as the world's central banks try to find more efficient ways to conduct anti-money laundering due diligence in cross-border banking relationships, while keeping banks in developed countries from simply cutting ties to regions seen as posing high-risk with regard to money laundering and terror finance.
The word "de-risking" – the increasingly common practice in which banks exit whole lines of business or geographic areas seen as offering more risk than profitability – is mentioned 15 times in the 62-page report issued by the Committee on Payments and Market Infrastructures (CPMI). The group, under the Bank for International Settlements (BIS), is made up of central bankers from across the world.
The specter of de-risking, which among other things may exclude people in impoverished countries from receiving needed remittances from abroad, was a driving force behind the production of the document.
"The CPMI believes that its recommendations might alleviate some of the costs and concerns connected with correspondent banking activities. However, the members are aware and would like to stress that, in isolation, these measures will not resolve all the issues," according to the report, which was mandated by the BIS.
The CPMI said it expects "relevant stakeholders" to initiate "any necessary reviews or investigations as soon as possible."
A key issue is that banks want greater clarity on how to comply with mandatory anti-money laundering checks of customers. Banks have said rising costs and uncertainty about how far customer due diligence should go to ensure compliance with anti-money laundering rules – the degree to they must know their customers' customers – as their main reasons for trimming correspondent relationships.
The primary recommendation offered in the report is to make more useful the "know-your-customer" utilities, or databases, that several providers now offer. These utilities warehouse information on customers from across the banking sector for use by all banks, saving time and money by avoiding many checks on the same customer.
CPMI said it would ask the International Organization for Standardisation to define the basic set of information that all such utilities collect and that all banks have to be ready to provide to other banks.
"In addition to standardising information and data with a view to making KYC utilities more effective in reducing the customer due diligence costs associated with correspondent banking, the authorities with responsibility for anti-money laundering/combating the financing of terrorism … are invited to consider developing a set of issues that financial institutions should consider when using KYC utilities, to support an appropriate use of these utilities," the report states.
In response to bank concerns regarding the degree to which they can rely on utilities, the report said the Financial Action Task Force, the international AML standard-setter and Basel Committee experts "are invited to consider developing a set of issues that financial institutions should consider when using KYC utilities, to support an appropriate use of these utilities."
The report also encouraged global bodies "to elaborate further" regarding the extent to which banks can rely on the Legal Entity Identifiers (LEIs) as a means of accessing reliable information to support customer due diligence in correspondent banking, as well as their use as "additional information" in payment messages.
It also recommended exploring ways "to tackle obstacles to information-sharing" across borders within institutions, between institutions, and between the public and private sectors.
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International Basel regulators recommended new banking rules on Wednesday for checking whether a potential customer poses money-laundering or terrorist financing risks,
The move is part of efforts by the world's central banks to stop cross-border banking from fragmenting under the weight of tougher anti-money-laundering rules which have prompted some lenders to pull out of markets.
The Committee on Payments and Market Infrastructures (CPMI), made up of central bankers under the Bank for International Settlements in Basel, said that lenders want greater clarity on how to comply with mandatory anti-money laundering checks of customers.
CPMI published five recommendations to address fragmentation in so-called correspondent banking, the cross-border web that allows people to move money from one country to another. The recommendations cover the issue of "know your customer" utilities, the use of Legal Entity Identifiers (LEIs) in correspondent banking, information-sharing initiatives, payment messages and the use of LEIs as additional information in payment messages.
"The CPMI expects that the relevant stakeholders will initiate any necessary reviews or investigations in the light of the five recommendations as soon as possible," it said in a statement.
"Know-your-customer" (KYC) utilities, or data bases, have gained interest as a way to obtain information on customers from across the banking sector for use by all banks. This would save time and money by avoiding many checks on the same customer. CPMI said it would ask the International Organization for Standardisation to define the basic set of information that all such utilities would collect and that all banks have to be ready to provide to other banks.
Banks have also asked for assurances from regulators and law enforcement authorities that lenders can rely on information from utilities for complying with anti-money-laundering and terrorist financing rules.
CPMI said the Basel Committee of banking supervisors and the global Financial Action Task Force will look at ways to support the use of utilities.
Tougher rules to stop money-laundering and other illegal activities have prompted banks to cut links and reduce the cost of stringent checks on who is using their systems.
Such checks are harder in less developed countries that are perceived as very risky, or not worthwhile when the volume of business is too low to cover compliance costs.
Central bankers worry these trends are fragmenting the global financial system and excluding people or even countries from the benefits of cross-border payments, especially where remittances are a significant portion of a nation's economy.
The word "de-risking" – the increasingly common practice in which banks exit whole lines of business or geographic areas seen as offering more risk than profitability – is mentioned 15 times in the 62-page report issued by the Committee on Payments and Market Infrastructures (CPMI). The group, under the Bank for International Settlements (BIS), is made up of central bankers from across the world.
The specter of de-risking, which among other things may exclude people in impoverished countries from receiving needed remittances from abroad, was a driving force behind the production of the document.
"The CPMI believes that its recommendations might alleviate some of the costs and concerns connected with correspondent banking activities. However, the members are aware and would like to stress that, in isolation, these measures will not resolve all the issues," according to the report, which was mandated by the BIS.
The CPMI said it expects "relevant stakeholders" to initiate "any necessary reviews or investigations as soon as possible."
A key issue is that banks want greater clarity on how to comply with mandatory anti-money laundering checks of customers. Banks have said rising costs and uncertainty about how far customer due diligence should go to ensure compliance with anti-money laundering rules – the degree to they must know their customers' customers – as their main reasons for trimming correspondent relationships.
The primary recommendation offered in the report is to make more useful the "know-your-customer" utilities, or databases, that several providers now offer. These utilities warehouse information on customers from across the banking sector for use by all banks, saving time and money by avoiding many checks on the same customer.
CPMI said it would ask the International Organization for Standardisation to define the basic set of information that all such utilities collect and that all banks have to be ready to provide to other banks.
"In addition to standardising information and data with a view to making KYC utilities more effective in reducing the customer due diligence costs associated with correspondent banking, the authorities with responsibility for anti-money laundering/combating the financing of terrorism … are invited to consider developing a set of issues that financial institutions should consider when using KYC utilities, to support an appropriate use of these utilities," the report states.
In response to bank concerns regarding the degree to which they can rely on utilities, the report said the Financial Action Task Force, the international AML standard-setter and Basel Committee experts "are invited to consider developing a set of issues that financial institutions should consider when using KYC utilities, to support an appropriate use of these utilities."
The report also encouraged global bodies "to elaborate further" regarding the extent to which banks can rely on the Legal Entity Identifiers (LEIs) as a means of accessing reliable information to support customer due diligence in correspondent banking, as well as their use as "additional information" in payment messages.
It also recommended exploring ways "to tackle obstacles to information-sharing" across borders within institutions, between institutions, and between the public and private sectors.
xxx
International Basel regulators recommended new banking rules on Wednesday for checking whether a potential customer poses money-laundering or terrorist financing risks,
The move is part of efforts by the world's central banks to stop cross-border banking from fragmenting under the weight of tougher anti-money-laundering rules which have prompted some lenders to pull out of markets.
The Committee on Payments and Market Infrastructures (CPMI), made up of central bankers under the Bank for International Settlements in Basel, said that lenders want greater clarity on how to comply with mandatory anti-money laundering checks of customers.
CPMI published five recommendations to address fragmentation in so-called correspondent banking, the cross-border web that allows people to move money from one country to another. The recommendations cover the issue of "know your customer" utilities, the use of Legal Entity Identifiers (LEIs) in correspondent banking, information-sharing initiatives, payment messages and the use of LEIs as additional information in payment messages.
"The CPMI expects that the relevant stakeholders will initiate any necessary reviews or investigations in the light of the five recommendations as soon as possible," it said in a statement.
"Know-your-customer" (KYC) utilities, or data bases, have gained interest as a way to obtain information on customers from across the banking sector for use by all banks. This would save time and money by avoiding many checks on the same customer. CPMI said it would ask the International Organization for Standardisation to define the basic set of information that all such utilities would collect and that all banks have to be ready to provide to other banks.
Banks have also asked for assurances from regulators and law enforcement authorities that lenders can rely on information from utilities for complying with anti-money-laundering and terrorist financing rules.
CPMI said the Basel Committee of banking supervisors and the global Financial Action Task Force will look at ways to support the use of utilities.
Tougher rules to stop money-laundering and other illegal activities have prompted banks to cut links and reduce the cost of stringent checks on who is using their systems.
Such checks are harder in less developed countries that are perceived as very risky, or not worthwhile when the volume of business is too low to cover compliance costs.
Central bankers worry these trends are fragmenting the global financial system and excluding people or even countries from the benefits of cross-border payments, especially where remittances are a significant portion of a nation's economy.
Analysis of CPMI Five Recommendations
The Committee on Payments and Market Infrastructures of the Bank for International Settlements published technical report on correspondent banking made a series of recommendations to help to ensure the efficient provision of international cross-border payment services.
Correspondent banking is seen as an essential component of the international 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 and providing the mechanism for both international trade and financial inclusion. This is particularly important since most payment solutions which do not involve a bank account at customer level rely on correspondent banking for the actual transfer of funds.
Banks have traditionally maintained a broad network of correspondent relationships, but there are growing indications that firms are cutting back the number of relationships they maintain and are establishing fewer new ones. There are a number of root causes for the decline in correspondent banking. The major reason cited has been uncertainty about how far customer due diligence should go to ensure regulatory compliance; in effect, to what practical extent banks need to know their customers' customers (KYCC). As a result correspondent banking has been subject to de-risking, with the associated withdrawal of services which:
Banks have been rightly nervous about the increasing risks associated with correspondent banking. As a small snapshot of recent fines imposed in the United States:
De-risking in correspondent banking could be seen as an inevitable consequence of greater regulatory intrusiveness combined with the stricter approach to enforcement. Firms around the world have been reviewing their business models and activities and choosing to divest themselves of anything perceived to carry too much regulatory or other risk.
The point is made crystal clear with the example of HSBC, which since 2011 is reported to have withdrawn from or disposed of 74 businesses which were all considered to be too risky, particularly in the light of U.S. enforcement action.
The CPMI is keen to turn back the tide and to alleviate some of the costs and concerns connected with correspondent banking activities. Even so, it has stressed that, in isolation, these measures will not resolve all the issues. Indeed, it has acknowledged that the issues surrounding the withdrawal from correspondent banking are "very complex and that costs related to AML/CFT compliance are only one of the elements that have to be considered in order to understand recent trends".
The CPMI has said that, as a next step before any potential implementation, the measures should be further analysed by all relevant authorities and stakeholders to gauge the potential impact of each measure and to avoid unintended consequences.
It has also said it "expects that the relevant stakeholders will initiate any necessary reviews or investigations in the light of the five recommendations as soon as possible".
All firms involved in correspondent banking should ensure that they take advantage of the next iteration of consideration, particularly with regard to the development of practical regulatory guidance or safe harbour as to how far customer due diligence, both KYC and KYCC, should go and what associated level of documentation or other evidence is required for regulatory certainty.
(This article updates the initially posted version with a new author and additional details and background)
Correspondent banking is seen as an essential component of the international 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 and providing the mechanism for both international trade and financial inclusion. This is particularly important since most payment solutions which do not involve a bank account at customer level rely on correspondent banking for the actual transfer of funds.
Banks have traditionally maintained a broad network of correspondent relationships, but there are growing indications that firms are cutting back the number of relationships they maintain and are establishing fewer new ones. There are a number of root causes for the decline in correspondent banking. The major reason cited has been uncertainty about how far customer due diligence should go to ensure regulatory compliance; in effect, to what practical extent banks need to know their customers' customers (KYCC). As a result correspondent banking has been subject to de-risking, with the associated withdrawal of services which:
- do not generate sufficient volumes to overcome compliance costs;
- are located in jurisdictions perceived as too risky;
- provide payment services to customers about which the necessary information for an adequate risk assessment is not available; or
- offer products or services or have customers that pose a higher risk for anti-money laundering/combating the financing of terrorism (AML/CFT) and are therefore more difficult to manage.
- Use of know your customer (KYC) utilities At the moment there is no standardisation in the type and format of information in different KYC utilities. Such inconsistencies in the gathering of information limit the value of KYC utilities.
The CPMI is therefore inviting relevant standard setters to consider defining a standardised minimum set of information and data (including the format) that all utilities should collect and that all banks have to be ready to provide to other banks which require the information and data.
In addition, banks need assurances from relevant authorities (such as the regulatory, supervisory or law enforcement authorities) with respect to the appropriateness of and reliance upon any such utility for the purposes of AML/CFT compliance.
The CPMI has therefore invited those authorities with responsibility for AML/CFT (i.e., the Financial Action Task Force (FATF) and the Basel Committee on Banking Supervision AML/CFT Expert Group (AMLEG)) to consider developing a set of issues that financial institutions should consider when using KYC utilities, to support an appropriate use of those utilities.
- Legal entity identifier (LEI) All authorities and relevant stakeholders are invited to consider promoting business identifier code (BIC) to LEI mapping facilities, which allow for an easy mapping of routing information available in the payment message to the relevant LEI. In addition, relevant authorities (for example, the LEI Regulatory Oversight Committee (LEI ROC) and AMLEG) are encouraged to elaborate further as to what extent banks can rely on the LEI as a means of accessing reliable information to support customer due diligence in correspondent banking.
- Information-sharing initiatives There are a number of data privacy concerns in the area of correspondent banking which highlight the potential conflicts between the sharing of relevant information across jurisdictions and existing national data privacy regulations. The FATF and AMLEG have therefore been invited to explore further ways to tackle obstacles to information-sharing, with the aim of identifying potential best practices (in the enterprise-wide context; among financial institutions not part of the same financial group; and between the public and the private sector).
- Payment messages The CPMI has decided to modify its initial recommendation and leave the decision to individual banks as to which method should be used. Given the importance of ensuring the transparency and accuracy of information in payment messages, however, the CPMI has decided to invite the relevant stakeholders (i.e., the Wolfsberg Group and the Payments Market Practice Group (PMPG)) to review their principles governing the use-cases for payment messages, what information should be included and which data fields should be used. In addition, the AMLEG has been asked to consider developing further guidance on supervisors' role in ensuring that banks meet FATF Recommendations and guidance on the quality of payment message content.
- Use of the LEI as additional information in payment messages Before the use of LEIs becomes widespread or even compulsory for banks and corporate customers, relevant stakeholders should start analysing how the LEI might be used on an optional basis in a more structured way within the current relevant messages. The CPMI has recommended that relevant stakeholders (e.g., the PMPG) should work to define a common market practice for how to include the LEI in the existing relevant payment messages without changing the existing message structure. Other relevant stakeholders (in this case, ISO and SWIFT) have been encouraged to consider developing dedicated codes or data items for the inclusion of the LEI in these payment messages.
Banks have been rightly nervous about the increasing risks associated with correspondent banking. As a small snapshot of recent fines imposed in the United States:
- In November 2014 the New York branch of the Bank of Tokyo-Mitsubishi (BTMU) was fined an additional $315 million and disciplinary action was meted out to three BTMU employees. This brought the fines for the same "wire-stripping" offences to $565 million.
- In March 2015 Commerzbank was fined $1.45 billion, required to dismiss employees, had an independent monitor installed and entered into a deferred prosecution agreement under which, among other things, it admitted that its New York branch had wilfully failed to establish due diligence for foreign correspondent accounts.
- In May 2015 BNP Paribas was fined $8.9 billion for wire-stripping transactions with Sudan, Iran and Cuba.
De-risking in correspondent banking could be seen as an inevitable consequence of greater regulatory intrusiveness combined with the stricter approach to enforcement. Firms around the world have been reviewing their business models and activities and choosing to divest themselves of anything perceived to carry too much regulatory or other risk.
The point is made crystal clear with the example of HSBC, which since 2011 is reported to have withdrawn from or disposed of 74 businesses which were all considered to be too risky, particularly in the light of U.S. enforcement action.
The CPMI is keen to turn back the tide and to alleviate some of the costs and concerns connected with correspondent banking activities. Even so, it has stressed that, in isolation, these measures will not resolve all the issues. Indeed, it has acknowledged that the issues surrounding the withdrawal from correspondent banking are "very complex and that costs related to AML/CFT compliance are only one of the elements that have to be considered in order to understand recent trends".
The CPMI has said that, as a next step before any potential implementation, the measures should be further analysed by all relevant authorities and stakeholders to gauge the potential impact of each measure and to avoid unintended consequences.
It has also said it "expects that the relevant stakeholders will initiate any necessary reviews or investigations in the light of the five recommendations as soon as possible".
All firms involved in correspondent banking should ensure that they take advantage of the next iteration of consideration, particularly with regard to the development of practical regulatory guidance or safe harbour as to how far customer due diligence, both KYC and KYCC, should go and what associated level of documentation or other evidence is required for regulatory certainty.
(This article updates the initially posted version with a new author and additional details and background)
Sources:
1) Bank of International Settlement, Correspondent Banking Jly 2016, 2) Reuters Regulatory Intelligence, Brett Wolf (AML analyst based in St. Louis, Missouri)