Foreign Correspondent Banking – The Good, The Bad and The Ugly
21 February 2016, Bachir El Nakib (CAMS) 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.
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.”
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.
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.
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.
The Committee on Payments and Market Infrastructures (CPMI) under Basel issued earlier on 6 October 2015 a consultative report onCorrespondent banking.
Consultative report on correspondent banking is issued by CPMI
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6 October 2015
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Press release
The Committee on Payments and Market Infrastructures (CPMI) today issued a consultative report on Correspondent 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.
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.
The CPMI consultative report provides some basic definitions, outlines the main types of correspondent banking arrangement, summarises recent developments and touches on the underlying drivers. The report then reviews certain technical measures relating to (i) know-your-customer (KYC) utilities; (ii) increased use of the Legal Entity Identifier (LEI); (iii) information-sharing mechanisms; and (iv) improvements in payment messages. Following a detailed assessment of the advantages and disadvantages of each of these technical measures, the report puts forward four recommendations for consideration by the industry and authorities.
As a next step before any potential implementation, these measures will be subject to a formal consultation and further analysed by all relevant stakeholders in order to gauge the potential impact of each measure and to avoid unintended consequences. Therefore, the report seeks comments on the recommended technical measures by 7 December 2015, to be sent to the CPMI secretariat.
Notes
- The CPMI promotes the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy. The CPMI monitors and analyses developments in these arrangements, both within and across jurisdictions. It also serves as a forum for central bank cooperation in related oversight, policy and operational matters, including the provision of central bank services. The CPMI is a global standard setter in this area. It aims at strengthening regulation, policy and practices regarding such arrangements worldwide. The CPMI secretariat is hosted by the BIS. More information about the CPMI, and all its publications, can be found on the BIS website.
- The report on Correspondent banking has been prepared for the CPMI by a working group comprising representatives from CPMI central banks. The working group was chaired by Jochen Metzger (Head of Payments and Settlement Systems Department, Deutsche Bundesbank).