Strong compliance management can address correspondent bank risks
Leveraging foreign correspondent banking relationships can be an important growth opportunity for U.S. banks, providing customers and domestic banks a way to engage in an ever-expanding global marketplace. However, despite the benefits to customers and banking partners alike, there are significant risk areas to address as well. These risks could include regulatory noncompliance, corruption and money laundering, high-risk geographies, shell institutions, third- and fourth-party relationships, customer fraud, and more.
How can U.S. banks stay ahead of these challenges while realizing the benefits of a positive and enduring correspondent relationship? Rigorous due diligence of foreign financial institutions during the vetting phase is a must, and after the selection, an ongoing regulatory compliance management and monitoring program as well as overall enterprise governance are equally essential to stay on top of emerging risks and threats.
In a search for the appropriate foreign correspondent bank, the following due diligence questions should be part of your initial approach. Likewise, an even more robust due diligence assessment should also be completed to fully understand respondent, intermediary and correspondent banking relationships, business interactions, appropriate fit, Bank Secrecy Act and anti-money laundering risks, issues of hidden beneficial ownership, and more. Questions could include:
- What country or countries will the correspondent bank be located in? For reference on entities and countries, check out two lists: the Office of Foreign Assets Control, which enforces trade and economic sanctions based on foreign policy and national security goals, maintains a list of entities under sanction; and the Financial Crimes Enforcement Network maintains a list of foreign financial institutions with which correspondent accounts are prohibited or face special conditions.
- Who is the beneficial owner of the bank? Can you identify specific persons who are the actual owners?
- Is the evidence of ownership sufficiently transparent that you can place confidence in it?
- How strong is the regulatory environment in the bank's home country?
- How will you know who is using a correspondent account? What are the current policies and procedures to confirm this?
- Will the correspondent bank be able to provide solid, transparent information on all money or value transfer transactions?
- Can owners assure you that the account will not be used by unauthorized counterparties?
- Does the bank have strong, well-documented internal controls in place?
- Has the respondent bank made use of the Wolfsberg Group’s correspondent banking due diligence questionnaire published in February 2018, which aims to set an enhanced and reasonable standard for cross-border and other higher-risk correspondent banking due diligence?
Upon completion of a robust due diligence effort and selection, and prior to the launch of the correspondent bank relationship, a compliance management system framework with enterprise governance oversight should be applied to stay in step and connected with the foreign bank. This will help the domestic bank anticipate evolving challenges, mitigate risks and uncover potential nefarious activities. Areas to consider include:
- Established controls between banking relationships
- Continuous monitoring of risk profiles for customers and foreign bank jurisdictions
- Monitoring of scheduled versus irregular currency transactions
- Ongoing risk and regulatory assessments
- Key performance and risk indicators tracking
- Management, regulatory and governance oversight reporting
- Knowledge of your customer’s customer due diligence
- Security and threat protections over money and value transactions
- Business continuity steps
Continuous management and monitoring of correspondent banking relationships is a living and breathing discipline that requires scheduled assessment (sometimes quarterly, if warranted), and ongoing fine-tuning to include foreseen and unforeseen challenges to ensure that the correspondent banking relationship is a sound and fruitful one for customers and the financial institution.
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