De-risking Correspondent Banking

Correspondent banking AML CFT Risk Management

Despite global progress in financial inclusion, de-risking in correspondent banking poses significant challenges. Adetoyese Adedokun shares insights into these risks and best practices.

Correspondent banking is critical for global trade and financial inclusion, particularly for emerging markets. This involves financial institutions (correspondent) providing services on behalf of other banks (respondent), usually in different countries. These services mainly include conducting transactions, processing wire transfers, and document collection. However, increased Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) compliance requirements have led to the phenomenon known as "de-risking."

Understanding the AML/CFT Compliance Challenge

AML/CFT compliance is foundational to correspondent banking relationships and has become increasingly stringent since the global financial crisis. Financial institutions, particularly in developing economies, face challenges maintaining compliant relationships due to limited resources, expertise, and technology

Key AML/CFT Risks in Correspondent Banking:

• Regulatory Scrutiny: Increased oversight from FATF, OFAC, and Basel III heightens compliance obligations.

• Expensive Due Diligence: Comprehensive KYC, CDD, and EDD requirements, particularly challenging in high-risk jurisdictions.

• Diverse Regulatory Standards: Variations in AML/CFT guidelines across regions elevate compliance complexity.

• Financial and Reputational Risk: Severe penalties and reputational damage from AML/CFT non-compliance.

To illustrate these challenges, let's examine a case study from Eastern Europe.

Case Study: Impact of De-risking on Emerging Economies

Situation:

A 2023 study of correspondent banking in Eastern Europe revealed significant trade disruption due to AML/CFT compliance issues causing the termination of correspondent banking relationships.

Analysis:

• Trade volumes declined 20-40% due to the withdrawal of correspondent banking services.

• Significant drop in employment and revenues directly attributed to de-risking.

• Primary causes were inadequate AML/CFT frameworks and weak technological infrastructure.

Practical Steps for AML/KYC Compliance Officers:

Robust and standardized AML/CFT compliance practices reduce risks of losing critical correspondent banking services.

Practical Steps for AML/KYC Compliance Officers:

1. Comprehensive Risk Assessment and Information Sharing

• Regularly update risk assessment frameworks to reflect evolving AML/CFT risks.

• Participate in or develop centralized KYC/EDD utilities to standardize and streamline customer data.

• Leverage advance regtech with AI and machine learning technologies to automate suspicious activity detection.

• Engage regularly in cross-border data sharing platforms with clearly defined data privacy and FATF-compliant protocols.

  
  

2. Capacity Building and Continuous Training

• Enroll compliance staff in specialized training programs by ACAMS, ICA, or similar institutions.

• Develop and certify internal training programs aligned with international AML/CFT standards.

• Perform routine mock audits and compliance drills to ensure regulatory readiness.

  
  

3. Harmonizing and Standardizing Regional Regulatory Practices

• Actively engage with regional regulatory bodies to standardize AML/CFT protocols across jurisdictions.

• Advocate for consistent regional interpretation and implementation of global AML/CFT standards.

• Publish clear and concise compliance handbooks or guidelines for consistent practices.

​In recent years, financial institutions have faced significant penalties related to deficiencies in correspondent banking practices. Here are three notable cases:​

1. Nordea Bank Abp – $35 Million Fine (August 2024): The New York State Department of Financial Services (NYDFS) imposed a $35 million penalty on Nordea Bank for substantial compliance failures concerning the Bank Secrecy Act and Anti-Money Laundering (BSA/AML) requirements. The violations included inadequate due diligence of correspondent banking partners, leading to heightened risks of illicit financial activities. ​Department of Financial Services+1Money Laundering Watch+1

2. Deutsche Bank – $186 Million Penalty (July 2023): Deutsche Bank was fined $186 million by U.S. regulators for failing to address deficiencies in its AML control framework, particularly related to its correspondent banking relationship with Danske Bank Estonia. This oversight was linked to one of Europe's largest money laundering scandals, involving suspicious transactions amounting to billions of dollars. ​Federal reserve

3. Swedbank Latvia – $3.4 Million Fine (2023): Swedbank Latvia faced a $3.4 million fine for processing transactions connected to Crimea through U.S. correspondent banks. This action violated international sanctions and highlighted the critical importance of rigorous compliance measures in correspondent banking relationships. ​OFAC

These cases underscore the necessity for financial institutions to implement robust compliance frameworks and conduct thorough due diligence in their correspondent banking operations to mitigate regulatory risks and prevent financial misconduct.

Conclusion

AML/CFT compliance poses significant challenges for correspondent banking, especially within emerging markets. Compliance and GRC professionals are crucial in mitigating risks through strategic risk assessments, capacity-building, regulatory standardization, and technological innovation. Implementing these practical steps will safeguard correspondent banking relationships, fostering robust financial integrity and inclusive growth.

How Complia can help?

Complia leverages innovative technologies and expert insights to assist financial institutions in managing AML/CFT risks in correspondent banking. Our offerings include advanced risk management solutions with real-time assessments, comprehensive training, support for compliance officers, and regulatory harmonization assistance to align local practices with global standards.

We would love to hear from you, so please contact us to discuss your KYC and AML processes.