Correspondent Banking (CB) can be a risky business. There have been a number of fines related to inadequate CB controls and on June 23, 2022 the UK’s Financial Conduct Authority (FCA) issued another one. With criminals exploiting CB networks and the cost of CB compliance rising, it is no wonder that the number of CB relationships are in decline. This is a problem: CB provides essential infrastructure for growth, financial inclusion, and international trade in smaller economies near and far. Some smaller banks are re-considering the risks and rewards of CB, which can reduce competition.
To manage CB risk effectively, correspondents have taken on the nearly impossible task of becoming mini-regulators, ensuring that respondents operate as they claim on an ongoing basis—this involves a cocktail of desk-based reviews and, depending on the risk, site visits and interviews. At times, correspondents identify gaps in the respondent’s framework, ineffective systems, and lack of resources and poor governance. This is not unusual, given how the anti-money laundering regime and supervision thereof differs globally. Much like a regulatory visit, correspondents provide recommendations to improve the framework and must check that implementation occurs on a timely basis, and that the respondents never go back to ineffective systems and controls once the review is complete. The amount of time, effort, and subject matter knowledge required should not be underestimated.
If your firm is still collecting “paperwork” night and day to satisfy know-your-customer requirements, without having experienced people assessing the contents of the documentation provided, you may well have a problem. There are many examples where respondent banks have told the correspondent what they wanted to hear to secure a CB relationship—but these respondent banks, often interested only in the money, are not running compliance functions as stated. Experience tells us that we should trust but verify.
Other lessons to consider:
- Whilst CB is a high-risk activity, firms should understand the different risks within this category to have a truly risk-based approach. CB risk assessment can include factors such as geography, adverse media, risk profile of underlying customers (e.g., politically exposed persons) and the effectiveness of the local supervision regime.
- The policy and procedure framework should be cohesive and provide practical steps so staff can carry out the risk management processes effectively.
- Staff should be trained properly—on the actual processes. Specific training will allow them to perform the right moves at the right time to be effective.
- If you don’t have adequate due diligence, you will likely have ineffective transaction monitoring.
- Listen to your internal auditors and external advisors and avoid fallout. Don’t pay for advice if you are not going to remediate the issues!
- Remediate issues quickly. If not, put in interim controls or restrictions to manage the risk in the meantime. If you are a member of senior management, ensure issues management is effective.
- There is no excuse for failing CB controls—the FCA has repeatedly provided guidance and enforcement in this area. You should have known. And you are being told again!
And finally, for those caught by the Senior Managers Regime, you are the top gun and the buck stops with you. Ensure you have adequate oversight that CB risks are being managed effectively within the firm. Boards should ensure the risk appetite is sufficiently granular to include CB.
Guidehouse Financial Services is expert in reviewing, designing, and enhancing CB frameworks.