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Fintelekt-BACEE Webinar on AML Challenges in Correspondent Banking: Key Takeaways

Fintelekt Advisory Services and the Banking Association for Central and Eastern Europe (BACEE) jointly organized a webinar on AML Challenges in Correspondent Banking on May 27, 2021

The webinar was moderated by Shirish Pathak, Managing Director, Fintelekt Advisory Services who welcomed the participants. Istvan Dengyel, Secretary General of the Banking Association for Central and Eastern Europe (BACEE) set the context for the discussion. He highlighted serious problems like de-risking, difficulty in opening new accounts and the high cost of maintaining correspondent accounts and pointed to an urgent need for solutions in order for banks to stay competitive in this business.

The first resource person, Dr. Elena Scherschneva, Independent Trainer/Consultant & Former Head of Austria FIU, provided an overview of the correspondent banking business, its practical challenges and ideas on how to address them.

The 5th Anti-Money Laundering Directive of the European Union enforces Know Your Customer’s Customer (KYCC) as a requirement. Banks are mandated to know the source of funds/wealth (SOW) and beneficial ownership (BO) information and ensure that the documentation is in place, especially when dealing with a third party non-European bank.

The speed of transactions poses a challenge, as in most cases it is not possible to stop transactions in a correspondent banking relationship, despite the lack of documentation. Complex transaction configurations involving complicated company structures to conceal SOW / BO is another challenge.

Elena also explained the problems created for the FIU and law enforcement agencies when information contained in suspicious transaction reports (STRs) is poor, and the lack of documentation or further information available from correspondent banking relationships renders STRs unactionable.

Several large cases of money laundering in the past have involved correspondent banking and criminals have been extensively using this channel so long as it works. 

Areas for improvement

  • Think twice before selecting counterparts: consider all the available information, including geographical risks. Check the potential business partner in a proper way and put in place agreements at the start of the business relationship for acquiring KYC related documentation if needed by authorities or internal investigations.
  • Check correspondent banking chains: Often bank employees do not understand the long chains involved in transactions which necessitates training and internal awareness.
  • Use appropriate screening tools: ensure screening tools that match the requirements of the products that are offered. Some products may need more than name screening, and may require other triggers to be put in place to stop transactions if needed.

“In correspondent banking relationships, banks often focusing on the details such as beneficial ownership information or source of funds/wealth. But what is lost is the big picture – in terms of asking who is the counterparty bank – is it a good bank or is it in the hands of criminals?” – Dr. Elena Scherschneva

The next presentation by Charan Rawat, Head of Compliance, Rabobank was on the relevant FATF recommendations, risks associated with correspondent banking, and the emerging role of financial technology providers (fintechs) in this space.

FATF Recommendations 10 (Customer due diligence), 13 (CDD Obligations for Correspondent Banking) and more recently 14 (Money or Value Transfer Services) and 15 (New technology) are relevant for correspondent banking relationships. The objective of these recommendations is to reduce the financial crime risk in the banking system.

Why is Correspondent Banking Considered Risky?

  • Inadequate appreciation and understanding of the business of the respondent bank
  • Risks associated with products, services, client profile, geographic locations and attendant risks are not factored in periodically
  • Lack of visibility on underlying transactions, end clients or their business
  • Reliance on certifications provided by respondent bank

Correspondent Banking and FinTech

The term fintech refers to the synergy between finance and technology, which is used to enhance business operations and delivery of financial services. Fintechs have been touted as great disruptors, and have emerged as a big business opportunity for banks. And so long as banks are moving money for FinTech clients, banks are accountable for all the regulatory compliances – FATF / Wolfsberg / Sanctions / Transaction Monitoring / SAR filings / local AML laws etc.

The FATF has recommended that banks should assess / re-assess their risks whenever a new product is developed, new technology is used for existing products / services or a new delivery process is used, or a process is changed.

Key considerations for banks in correspondent banking relationships:

  • A sharp focus on policies, procedures, training, monitoring and auditing will help avoid expensive regulatory action.
  • Learn from mistakes of others, continuously update your processes and challenge your own processes / monitoring practices to identify possible loopholes.
  • An end-to-end visibility into transactions and customer details will help avoid ‘siloed approach’ to banking in general.
  • Finally, there is no substitute for eternal vigilance!!

“Sometimes there is a false sense of comfort or security when banks deal with each other, expecting the other bank to be compliant with all the due diligence norms while transacting.” – Charan Rawat

The webinar concluded with an interactive session where questions from the audience were addressed by the speakers. Questions centered around the practical challenges while acquiring detailed KYC information from partner banks, the application of FATF recommendations and regulatory provisions in the European Union.

A recording of the webinar is available on www.fintelekt.academy. Registration on Fintelekt Academy is free and more than 80% of the content is free to view. Visit https://fintelekt.academy/register/