Written by David Povey on Tuesday April 19, 2022
Correspondent banking is a vital part of the global economy. But when incorrectly managed, correspondent banking relationships can present considerable financial crime risks. With recent high-profile failings seeing many international banks scale back such relationships, a recent ICA webinar looked at how they can be managed successfully (the webinar can be viewed here).
Hosted by ICA Vice President Pekka Dare, the webinar included panellists Luma Zitani, Senior Manager at Accenture; Julia Chin, Head of Compliance at Hugo Save; and Tyrone Griffiths, FICA and Managing Director at FinCrime Protection Limited.
The webinar’s global audience left with four key takeaways.
1. A risk-based approach doesn’t mean exiting all relationships in a country or sector.
2. Ongoing relationship management makes annual reviews much easier.
3. Technology is important, but you still need the best people in place for monitoring.
4. Communication and openness will help foster closer relationships.
The webinar began with a discussion on de-risking and financial inclusion. Chin explained that correspondent banking challenges are typically felt ‘lower down the food chain’ and that the impact of de-risking can be severe.
Drawing on her experience of working with international banks and global advisory boards, including her background as a registered partner with Bankers Without Borders, Chin made the case for stronger cooperation between all parties and the building of a robust financial ecosystem.
Zitani agreed that, while risk profiles and risk management have always been important, an awareness of de-risking is crucial given its impact on developing economies, which can be cut off from international payment systems.
Dare explained that this is a subject with which ICA is actively engaged, highlighting ICA’s relationship with the European Bank for Reconstruction and Development and the work that ICA undertakes to encourage discussion on correspondent banking.
At this point the audience was asked: ‘Do you see a contraction in correspondent banking relationships?’
The result was emphatic: 54% voting ‘yes’, 15% ‘no’, and 30% opting for ‘maybe’. The remaining discussion sought to discover why this contraction is taking place.
Zitani noted that the challenges facing smaller operators in opening and maintaining new relationships has been a feature of the last few years, rather than a more recent trend. Due to the increased requirements around opening and maintaining correspondent banking relationships, financial institutions have been seeking to rationalise their number of accounts, defaulting to a primary and possibly a secondary account in the place of former multiple sterling and US dollar accounts. Larger banks offering correspondent banking are now also stipulating minimum volumes for relationships.
The number of fines issued in recent years has also made financial institutions nervous about providing correspondent relationships, particularly in US dollars due to the higher regulatory expectations. However, that trend has slowed as several multinational banks, the International Monetary Fund, and European boards have argued that de-risking isn’t the right approach, and that a risk-based approach doesn’t mean that you exit all relationships in a country or a sector. Relationships can exist, but they must be managed carefully.
The panellists then moved on to the Wolfsberg Group and the CBDD questionnaire, which legal entities are encouraged to complete on a regular basis.
The Wolfsberg Principles set a benchmark, which is useful for new entries; but the danger is that completing it becomes a ‘tick-box’ exercise. The Wolfsberg Group has thus identified the need to educate people on the questionnaire, disseminating training guides and videos. These explain what each section covers, certain terminology and what ‘good’ looks like.
Some larger banks providing correspondent banking relationships have gone further. Standard Chartered, for instance, has a correspondent banking academy which includes their relationship managers. This allows them to have meaningful conversations with their clients and foster better relationships.
Complicating matters, however, is the number of different types of correspondent banking relationships – from just exchanging SWIFT keys through to payable accounts, each carries different risks. A risk-based approach, and an understanding of the specific relationship in question, is therefore vital.
Correspondent banking is one of the oldest banking services and yet the panellists noted that many people are still thinking in the old ways of NOSTRO and VOSTRO accounts. The panellists emphasised that it’s not just a case of filling in the CBDD questionnaire or completing the onboarding process: it’s what you do with the relationship that is significant. By managing it shrewdly, you can prevent a party having to do a full annual review of the relationship, saving time and resources and fostering more robust relationships.
Is the perceived increase in de-risking linked to the rise in compliance costs in maintaining these relationships?
Zitani began answering this by saying that it is a respondent’s responsibility to manage the cost of maintaining multiple relationships with correspondent banks. This economic calculation is important: weighing up the cost vs. fee generation can mean it’s not viable to maintain many relationships. This includes time and effort, which smaller organisations often don’t possess. Larger organisations have the same issue, and it’s wise to remember that it’s not just about the financial cost – a smaller, but better quality, number of relationships to maintain might be the best option.
Chin agreed with Zitani, stating that cost is a major factor when deciding whether to de-risk. When we think about compliance cost, we need to consider both the financial crime risk and the financial crime compliance cost; we have to strike a balance between risk management, managing the risk itself and managing compliance risk.
What about the SWIFT KYC registry? How is this beneficial for smaller respondents, and the holding of information?
The panel agreed that the registry is an excellent idea. As SWIFT is the platform through which much of the traffic of these relationships travels, it makes sense that they hold a register of all the parties involved. By having an entry on the continually updated registry, it shows (especially for a smaller respondent) your openness and transparency, and how good you are at maintaining your controls. Chin added that as long as the data is up to date, then the registry can save a lot of time, allowing focus on the real part of risk management.
What are some of the challenges in monitoring these ongoing relationships?
Technology is a big challenge and the tools used to monitor relationships simply aren’t as advanced when compared to other modern services. The challenge is in fine tuning your monitoring to identify unusual traffic, particularly for larger institutions that might be in the middle of a large payment process chain.
The concern is that not every risk is identified. Your correspondent, for example, might claim that they don’t have any of these riskier relationships – but they may not have the controls to allow them to identify all the relationships that sit with them. The is especially common in smaller and local jurisdictions (dealing with MSBs and Hawala for example) and the end result can be an ignorance of who is in the chain.
In contrast to transaction monitoring, where it is possible to complete a KYC check, correspondent banking is a networking game, so your monitoring needs to be looking around those flows across the network, across multiple correspondents. But the tools just aren’t there yet.
Chin noted the progress seen in terms of tools and AI. However, this comes with a warning: these tools still need fully trained people to monitor and use them. Training, the panellists agreed, is absolutely key to successfully monitoring and managing relationships.
Does the panel know what we as FinTechs can do to make counterparties happy? Do we just double the number of people doing AML?
FinTechs are deemed to be high-risk, so banks are understandably more vigilant when doing business with them. To overcome a bank’s anxiety, managing the relationship with the relationship manager is often more important than any technological solution. When a relationship manager understands a FinTech’s business, it increases trust and assurance.
Many large banks are open to working with FinTechs and are keen to help them develop their controls and control framework. A willingness to collaborate will always foster stronger relationships.
Does the panel consider ‘relationship managed application-only correspondent banking relationships’ akin to real correspondent banking relationships? Do the normal rules not apply?
The [RMA] is a SWIFT-mandated filter that enables financial institutions to define which counterparties can send them FIN messages. With this in mind, it is only messages being sent and received so it is more of a communication channel. The panel agreed that the challenge is to ensure a ‘RMA-only relationship’ remains that way and doesn’t morph into a different service and then a correspondent.
Can you elaborate on those risks specific to correspondent relationships for digital banks?
The fundamentals of AML remain the same – it’s just who the entity is that may change. The environment of the bank and what it does must therefore be understood. One concern is that because FinTechs and digital banks are new, do they have the experience and controls around AML? Are they up to the same standards as larger banks? The key is for a correspondent bank to have the controls in place and in being able to evidence these.
It is also worth considering the perception that digital banks are higher risk due to their younger age. We need to be careful, as a lot of them are arms of well-established banks, and so many be better informed than we think.
From a pure risk profile point of view, the only difference is that digital banks don’t have face-to-face relationships with their clients. However, is that high-risk compared to someone walking into the branch on a high street when even traditional banks are now offering non-face-to-face relationships? The Wolfsberg Group glossary is a good resource on this issue.
What challenges are we seeing in the correspondent world relating to sanctions?
The ongoing war in Ukraine has seen sanctions issued regularly, and with ever-changing severity. Griffiths explained that at this moment correspondent banking relationships are extremely vulnerable, with some banks applying a blanket approach to certain areas.
Sanctions concerns are rightfully high, but we must also consider that the risk of reputational damage has been magnified during the conflict. Normal banking activities are also being strained due to the complex nature of the sanctions being issued.
Even though sanctions regimes are covering the majority of international and global markets, they are not being issued by the UN and so aren’t globally binding. This means that while they do impact global markets, a number of jurisdictions haven’t imposed any sanctions. The challenges are thus in managing the sanctions restrictions of those designated, their connections and identifying them.
What emerged from the webinar is how central managing relationships is to correspondent banking. Advances in technology are significant, alongside the need to respond to changing global developments. But without the right people in place, relationships are doomed to fail.
Amidst concerns around de-risking, and with banks reducing their number of correspondent relationships, a strong risk-based approach should be adopted. Developing excellent relationship managers, too, is key: by doing so, institutions will be able to maintain and grow relationships throughout the payment process.
 The Wolfsberg Group, Wolfsberg Group Correspondent Banking Due Diligence Questionnaire (CBDDQ) V1.3, 2020: https://www.wolfsberg-principles.com/sites/default/files/wb/CBDDQ_V1.3_SC09_Final_Version_16APR2020.pdf – accessed April 2022
 The Wolfsberg Group, Wolfsberg Group Correspondent Banking Due Diligence Questionnaire (CBDDQ) V1.3
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