Are you ready to be your correspondent bank’s keeper?
Evolving risks and action steps to consider now
Correspondent banking relationships allow foreign banks to offer their customers services in the United States without the bank having to clear the regulatory hurdles necessary to establish operations in the United States. In an increasingly international economy, with customers around the world looking for ways to access banking services in the United States, correspondent banking relationships play a key role in the global economy. With an increasing number of U.S. banks being hit with BSA/AML compliance issues related to correspondent banking, these relationships raise high-risk issues that banks, involved in correspondent banking, must understand and manage.
The location of the bank seeking a correspondent relationship matters. In terms of AML risk, there's a big difference between a correspondent bank in London or Munich and one in Moscow or Tijuana, Mexico. Two groups within the U.S. Department of the Treasury maintain information that any bank considering a correspondent banking relationship should check upfront. The Office of Foreign Assets Control (OFAC), which enforces trade and economic sanctions based on foreign policy and national security goals, maintains a list of entities currently under sanction. The Financial Crimes Enforcement Network (FinCen) maintains a list of foreign financial institutions with which correspondent accounts are prohibited or face special conditions.
Banks considering a correspondent relationship need to look beyond those lists to understand the banking regulations and customs in the home country of any correspondent banking customer. Other countries have differing regulatory regimes, but you still need to ensure that your correspondent bank is taking appropriate steps to secure the data you need for BSA/AML compliance.
Due diligence questions
Here are four key questions you should include in your due diligence before entering into any correspondent banking relationship.
- Start with the bank itself. Who owns the bank and is the evidence of ownership sufficiently transparent that you can place confidence in it? Check the legal and reputational history of the bank's owners. Watch out for banks that are owned by shell corporations.
- How strong is the regulatory environment in the bank's home country? Banks in solid, well-regulated markets present lower risks than those in emerging markets, those with lax regulatory regimes or those with a history of corruption.
- How will you know who is using a correspondent account? Will the correspondent bank be able to provide solid, transparent information on all transactions? Can they assure you that the account will not be used by third parties?
- Does the bank have strong, well-documented internal controls in place? You will want to review these closely before entering into any correspondent banking relationship.
Keeping your eyes open
If a correspondent banking relationship makes sense and the correspondent bank passes your due diligence process, you will still need to keep a close eye on all correspondent activity. You should routinely test correspondent transactions to confirm that the information provided is accurate. You should also follow up immediately on any suspicious activity. This means ensuring that your BSA/AML compliance people, processes and systems are all tuned to collect and test data on correspondent transactions, including the amounts of the transactions and the names and locations of any parties involved. You should also ensure that the information you are collecting matches the information you are getting from the correspondent bank.
Being involved in correspondent banking means that your bank will face heightened scrutiny from BSA/AML regulators. That means that your compliance personnel, policies and tools all must be up to the increased compliance challenge. You will need compliance professionals with the experience and judgment necessary to make appropriate decisions regarding correspondent banks and will need to expand your processes and systems to address the risks involved.
In a global economy, correspondent banking relationships may be an appropriate growth strategy for your bank. Just remember, you now carry the risk not only of your own compliance failures, but those of your customer using your correspondent bank services.