What Are The Money Laundering Risks In Correspondent Banking?

Blog / What Are The Money Laundering Risks In Correspondent Banking?

What are Correspondent Banks?

Correspondent banks are domestic banks that have been established to provide services to a bank or financial institution in another nation. Money transfers, currency exchange, trade paperwork, and commercial transactions are all services provided by a correspondent bank. A correspondent banking relationship occurs when two banks from different countries agree to create a correspondent account, which allows a domestic bank to make payments or conduct money transfers in domestic currency on behalf of a foreign bank. The following is an example of a correspondent banking transaction.

Correspondent Banking AML Risk

Correspondent banking is a critical component of the global payment system, and it is heavily reliant on international trade. These facilities, on the other hand, are frequently exploited to allow money laundering and terrorist financing. Correspondent banking AML mitigation is a tough undertaking since the domestic bank processing the transaction on behalf of a foreign bank must rely on the foreign bank's ability to identify the client, determine the actual owners, and monitor correspondent banking transactions for risks. The AML compliance processes of a foreign bank may not always be adequate to fulfill the AML standards of a domestic bank.

There have been claims that drug traffickers and other negative actors have utilized overseas correspondent accounts to launder money. Shell corporations are also used frequently in the layering process to conceal the real owners of accounts at overseas correspondent financial institutions. Criminals can easily disguise the source and use of ill-gotten cash due to vast sums of money, numerous transactions, several AML fraud schemes, and a domestic bank's unfamiliarity with the foreign correspondent bank's clients. As a result, governments in correspondent banking relationships must guarantee that their AML/CTF procedures are complementary and robust in order to protect their financial systems. 

FATF Guidelines on Correspondent Banking AML Risk

FATF, the worldwide anti-money laundering and counter-terrorist financing watchdog, has suggested a number of measures to combat money laundering through correspondent banking. According to the FATF, this so-called "de-risking" technique "may result in financial exclusion, less transparency, and increased susceptibility to money laundering and terrorism financing concerns."

The FATF recommends using a risk-based approach to correspondent banking arrangements. The following steps should be taken to prevent money laundering through correspondent banking, according to the report.

  • Respondent institution due diligence: The FATF advises that cross-border correspondent banking arrangements be subjected to extra due diligence. Because cross-border correspondent banking connections are seen to be intrinsically riskier than local correspondent customer interactions, such additional safeguards are necessary.
  • Gathering sufficient information to understand the nature of the respondent institution's business in relation to the risks identified: The correspondent organization should also gather sufficient knowledge to know the nature of the complainant institution's business in relation to the risks recognized.
  • Validating respondent organization information and assessing/documenting greater risks: The correspondent organization may acquire the information directly from the respondent entity when establishing new correspondent banking connections. However, independent sources of information such as corporate registers, registries maintained by competent authorities on the founding or licensing of respondent institutions, and registries of beneficial ownership must be used to verify this data.
  • Continuous transaction monitoring: Continuous AML monitoring of correspondent banking account activity is required to ensure compliance with aimed financial sanctions and to detect any changes in the respondent institutions facilitate that could indicate suspicious activity or potential variations from the correspondent partnership.
  • Demand for transaction information: If the correspondent institution's tracking system flags a transaction that may indicate unusual activity, the correspondent organization should have inner processes to investigate further, including requesting transaction information from the respondent institution to clear up the confusion possibly clear the flag.
  • Clearly defined terms for the correspondent banking relationship: Correspondent institutions can better control their vulnerabilities by engaging in a formal agreement with the respondent institution before receiving correspondent services.
  • Ongoing communication and dialogue: Correspondent institutions should maintain an open and ongoing conversation with respondent organizations, including assisting them in understanding the correspondent's AML/CFT legislation and desires and engaging with them to improve their AML/CFT controls and processes as needed.
  • Adapting mitigation measures to risk evolution: The amount and kind of AML/CFT risk might evolve throughout the life of a connection, and the correspondent institution's risk management approach should be adjusted to reflect these changes.

While correspondent banking is essential for the efficient operation of international commerce and transactions, both respondent banks and correspondent banks should have an effective anti-money laundering and counter-terrorist financing compliance procedures in place to reduce risks. Anti-money laundering software that is both efficient and effective is critical to the success of any AML/CFT compliance program.

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