Correspondent banking acts like a bridge, linking with third-party financial institutions to ensure Know Your Customer (KYC) due diligence is performed for customers making cross-currency payments, primarily used in international transactions.
Correspondent banking facilitates international trade and investments by allowing banks with limited international reach (respondent banks) to access services provided by banks with a broader network (correspondent banks).
These services include โฌ
- Holding foreign currency deposits
- Facilitating foreign exchange (FX) transactions.
- Trade finance
- International wire transfers (SWIFT)
- Clearing checks and ACH payments.
By acting as intermediaries in a network of banks, correspondent banking becomes more susceptible to money laundering and terrorist financing. โคต
- Complex transaction chains make tracing the origin of funds difficult.
- Lack of transparency and cross-border nature create challenges for investigators.
- Weak due diligence and jurisdictional differences can be exploited by criminals.
Investigators struggle to trace the origin of money laundered through correspondent banking due to the complex layering of funds, creating a labyrinthine maze for investigators to navigate โฌ
* Layering (complex transaction chains)
* Smurfing (splitting large sums into smaller transactions)
* Shell companies (fictitious businesses)
* Weak due diligence
* Exploiting jurisdictional differences
For processing prohibited payments, there are two real-life examples of fines:
๐๐ง๐ข๐๐ซ๐๐๐ข๐ญ ๐๐ซ๐จ๐ฎ๐ฉ (2019): Their $1.3 ๐๐ข๐ฅ๐ฅ๐ข๐จ๐ง ๐๐ข๐ง๐ highlights the significant consequences of failing to comply with regulations on prohibited transactions.
๐๐ฐ๐๐๐๐๐ง๐ค ๐๐๐ญ๐ฏ๐ข๐ (2023): Their $3.4 ๐ฆ๐ข๐ฅ๐ฅ๐ข๐จ๐ง ๐๐ข๐ง๐ demonstrates the specific risks associated with correspondent banking.
FATF's guidance on correspondent banking plays a vital role in reducing the exposure of financial institutions to money laundering and terrorist financing. โฌ
โก Due Diligence on Respondent Banks
โก Understanding their business and risk profile
โก Verifying the information provided by the respondent bank
โก Risk management (ongoing monitoring of transactions and maintaining updated due diligence)
โก Make sure the regulations for the correspondent banking relationship are clear.
Through ๐๐๐๐, correspondent banks can (๐ข) verify the identity and legal existence of their partners, while also (๐ข๐ข) reviewing their AML/CTF procedures and (๐ข๐ข๐ข) assessing their risk management practices.