Risk-based approach of Correspondent Banks

Correspondent banking refers to a banking relationship between two banks, where one bank (the “correspondent bank”) provides banking services to another bank (the “respondent bank”), allowing the respondent banks to access services in foreign markets. Correspondent Banking relationships are essential in facilitating the cross-border payment system and vital to international trade and investments.

A risk-based approach means that countries, competent authorities, and banks identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures by the level of risk.

The relationship between Correspondent banks and respondent banks is subject to anti-money laundering / counter-terrorist financing measures. As per FATF recommendations, financial institutions are required to identify and manage the risks associated with these business relationships and to apply specific due diligence measures when they are conducted on a cross-border basis.

However, in recent years, it was observed that some financial institutions have increasingly decided to avoid, rather than to manage, possible money laundering or terrorist financing risks, by terminating business relationships with entire regions or classes of customers. This type of avoiding relationships with entire regions or classes of customers is known as the ‘de-risking practice’ which has negatively impacted correspondent banking. More so, De-risking is not in line with the FATF recommendations and is a serious concern to the international community, including the FATF and the FATF-Style Regional Bodies. De-risking can result in financial exclusion, less transparency, and greater exposure to money laundering and terrorist financing risks.

In June 2015, the FATF clarified the application of the risk-based approach to correspondent banking relationships. Though the financial sector welcomed the clarification from FATF, they sought further clarification on regulatory expectations in terms of customer due diligence.

Guidance Correspondent Banking Services:

In this connection, FATF developed further guidance for correspondent and respondent banks with the input received from the private sector, and in collaboration with other interested international bodies, including the Financial Stability Board (FSB), which is coordinating a four-point action plan to assess the extent of de-risking problem and identify possible policy responses.

This guidance consists of three sections:

Section I explains the key elements of the risk-based approach

Section II provides specific guidance for banking supervisors

Section III provides specific guidance for banks

The above guidance will help in the design and implementation of the approach for the banking sector, taking into account national risk assessments and the national legal and regulatory framework. It will help develop a common understanding of the risk-based approach between supervisory authorities and banks.

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