FX International Payments
By Bill Camarda
As awareness of the issue has grown, international regulators and stakeholders have increasingly sought ways to stanch the decline of correspondent banking without compromising the tougher anti-money laundering (AML) and know-your-customer (KYC) rules that helped trigger it.
Correspondent banks provide services as agents for other financial institutions, typically acting on their behalf in other countries where the financial institutions don’t or can’t operate. Correspondent banks handle wire transfers, take deposits, collect local documentation, conduct transactions, and perform other tasks.2 When a bank serving a local business has wide correspondent banking relationships, it’s easier for that business to serve global customers and use far-flung supply chain partners.
In recent years, financial institutions have grown sensitive to the costs and risks of correspondent banking relationships, and many have pulled back. Many are especially concerned about compliance with KYC and Know Your Customer’s Customer (KYCC) rules in unfamiliar regions. Banks have become especially suspect of jurisdictions viewed as susceptible to money laundering, where terrorism has often been financed, or where compliance costs aren’t offset by sufficient transaction volume.3
As the Bank for International Settlements (BIS) and others have worried, if correspondent banks retrench, their former partners – i.e., the “respondent banks” for which correspondent banks provide services – might be cut off from international payment networks. Local businesses would have fewer options for international transactions, and the remaining options might grow costlier, according to BIS.4 Similarly, according to the World Bank, correspondent banking relationships also underpin cross-border remittances and humanitarian financial flows: if they are lost, emerging economies could especially suffer.5
Other observers have pointed out that banks seeking to de-risk by cutting correspondent banking relationships may actually worsen risk instead. They can easily find themselves moving money through different intermediaries less likely to follow the strict KYC/AML due diligence used by their previous respondent banks.6
According to FSB’s March 2018 report, the total number of active correspondents declined again across the 12-month period ending June 30, 2017, with declines continuing throughout the first half of 2017.7
FSB’s report, based on SWIFT data from more than 11,000 financial institutions worldwide, showed meaningful regional differences. The number of “active corridors” (country pairs where correspondent banking communications were exchanged) actually grew in North America, Eastern Europe, and Oceania. But the rate of decline increased throughout the Caribbean, Central and South America, and Asia; and messages were down overall worldwide. (Declines in Europe were partly attributable to the introduction of the regional Single European Payment Area (SEPA), which reduced the need for correspondent banks there.)
FSB did not find fewer payment messages or a lower underlying value of the transactions it measured. This may suggest that payment chains are getting longer, as banks add intermediaries to reach customers in countries where they no longer have direct correspondent relationships.
It may also suggest increased concentration in correspondent banking, which could drive up costs over time. The World Bank’s recent study of correspondent banking reductions in eight countries generally agrees. To date, it has found that banks and money transfer services have often absorbed increased costs associated with finding new correspondent banks, with some major exceptions – e.g., one bank whose costs rose from $9 to $50-$60 per transaction.8
Cash-oriented money transfer services have faced disproportionate impact in many countries surveyed by the World Bank. Many of the local respondent banks in these countries have been required by their correspondents not to service these operators at all. To stay in business, some money transfer services have resorted to sending cash between countries by commercial courier, or relying on the owner’s personal accounts.9
No silver bullets have been identified to reverse reductions in correspondent banking relationships. But several partial solutions can make correspondent banking more viable for financial institutions that have been reducing their exposure to it.
Some of these involve reducing risk by improving local transparency and compliance. For example, some countries perceived as higher-risk have been beefing up their own AML/KYC laws and enforcement. The World Bank and a leading organization of AML professionals have recommended harmonizing regulations, clarifying the regulators’ real-world expectations, and establishing more direct communication between correspondent and respondent banks’ compliance teams.
Local respondent banks have been encouraged to join international KYC utilities that simplify the exchange of information about customers.10 Several global financial organizations have also welcomed The Wolfsberg Group’s Correspondent Banking Due Diligence Questionnaire (CBDDQ) as an opportunity to standardize customer information collection and simplify KYC/AML processes for everyone involved in international transactions.11
The World Bank also suggests that emerging fintech solutions may help reduce the costs and risks of correspondent banking. These may include e-KYC and related technologies to automate compliance and cross-checking activities that have typically been performed manually; and machine learning/big data advances to streamline transaction monitoring and due diligence.12
Reductions in correspondent banking relationships continue to complicate international trade and money transfers throughout much of the world. Key figures in the international financial community are paying greater attention to the problem, and proposing several solutions for safeguarding these relationships and the businesses that depend on them.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “FSB Correspondent Banking Data Report – Update,” Financial Stability Board; http://www.fsb.org/wp-content/uploads/P060318.pdf
2. “Correspondent Bank,” Investopedia; https://www.investopedia.com/terms/c/correspondent-bank.asp#ixzz5IPiBnzYT
3. “Correspondent banking,” Committee on Payments and Market Infrastructures, Bank for International Settlements; https://www.bis.org/cpmi/publ/d147.pdf
5. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions,” The World Bank; http://pubdocs.worldbank.org/en/786671524166274491/TheDeclineReportlow.pdf
6. “Why Correspondent Banking’s Shrinkage Means Risky Business For FIs,” PYMNTS.COM; https://www.pymnts.com/news/b2b-payments/2018/cbr-financial-regulation-aml/
7. “FSB Correspondent Banking Data Report – Update,” Financial Stability Board; http://www.fsb.org/wp-content/uploads/P060318.pdf
8. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions,” The World Bank; http://pubdocs.worldbank.org/en/786671524166274491/TheDeclineReportlow.pdf
10. “De-Risking and Financial Inclusion,” ACAMS Today; https://www.acamstoday.org/de-risking-and-financial-inclusion/
11. “BCBS, CPMI, FATF and FSB welcome industry initiative facilitating correspondent banking,” Financial Stability Board; http://www.fsb.org/2018/03/bcbs-cpmi-fatf-and-fsb-welcome-industry-initiative-facilitating-correspondent-banking/
12. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions,” The World Bank; http://pubdocs.worldbank.org/en/786671524166274491/TheDeclineReportlow.pdf