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April 20, 2018
Overview of Correspondent Banking and “De-Risking” Issues
What is Correspondent Banking?
correspondent banking arrangements within Eurozone
countries alone.
In broad terms, correspondent banking refers to formal
agreements or relationships between banks to provide
Although these transactions provide significant benefits, they
payment services for each other. It is often used to effectuate
also present several challenges. Two of the primary policy
cross-border payments, and as such, plays an important role
issues involved with correspondent banking are interrelated:
in the international financial system. Correspondent banking
(1) what types of anti-money laundering (AML) and
underpins trade finance, migrant remittances, and
countering the financing of terrorism (CFT) controls should
humanitarian flows. A typical correspondent banking
be in place to prevent illicit payments? (2) how to prevent
arrangement is one in which two financial institutions
excessive industry reaction to such controls, called “de-
(respondent banks) employ a third party, a separate financial
risking”?
institution known as a correspondent or service-providing
“De-Risking” and Its Implications
bank. The various types of services correspondent banking
provides include wire transfers; check clearing and payment;
International Monetary Fund (IMF) estimates indicate that
trade finance; cash and treasury management; securities,
the global volume of money laundering could amount to as
derivatives, or foreign exchange settlement; and participation
much as 2.7% of the world’s gross domestic product, or $1.6
in large loans, among other services.
trillion annually. To address these concerns, the United States
has a robust AML-CFT framework that also applies to
Figure 1 shows the settlement of a payment from Bank A to
correspondent banks because of these banks’ key role in
Bank C via a correspondent Bank (B). Because Banks A and
international financial transactions.
C do not hold accounts with each other, they use a third
party, Bank B (the service-providing correspondent bank).
Under the current regulatory approach, correspondent banks
Bank B, in this example, holds accounts for both Bank A and
may bear liability, regulatory and reputational risk for AML-
Bank C.
CTF violations by the respondent banks. As a result, in recent
years, concerns on the part of large international banks about
The amount of money moved globally through correspondent
regulatory compliance with AML and customer due diligence
banking relationships is significant. For perspective, in 2016,
(CDD) requirements have led some large banks to shed their
the European Central Bank reported roughly $822 billion
(€880 b
correspondent banking relationships with some smaller
illion) worth of daily transactions channeled through
Figure 1. Correspondent Banking: Illustrative Settlement of Payments
Source: European Central Bank, Tenth Survey On Correspondent Banking In Euro 2016, February 2017, at https://www.ecb.europa.eu/pub/pdf/other/
surveycorrespondentbankingineuro201702.en.pdf?651487aa2ace9afbac36d8d7e7784203.
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Overview of Correspondent Banking and “De-Risking” Issues
banks, often in emerging markets viewed as “high-risk” for
prosecute money laundering and other financial crimes by
AML. This phenomenon is known as “de-risking.” Rising
preserving an information trail about persons sending and
costs and uncertainty about how far CDD should go to avoid
receiving funds through funds transfer systems.
regulatory sanction are cited by banks as among the main
Banks are also required to conduct due diligence on
reasons for cutting back their correspondent relationships,
customers opening accounts, with special attention to foreign
according to the Bank for International Settlements (BIS).
correspondent banking account relationships. Special record-
Other factors in the decision to curtail correspondent banking
keeping and certification requirements apply to foreign
relationships include profitability considerations and
correspondent banking accounts. A bank that maintains a
concerns over potential liability and reputational damage.
correspondent account in the United States for a foreign bank
Also, the need to safeguard against cyber risks has led to the
also must maintain records identifying the individual owners
development of new standards that have increased the cost of
of each foreign bank, and must ensure it is not a “shell bank”
correspondent banking relationships, further reducing their
without bona fide banking activities. Some banks have
appeal.
complained these requirements make it costly to open and
A March 2018 Financial Stability Board (FSB) study on
maintain correspondent accounts, particularly for banks in
correspondent banking found a marked reduction in the
countries with high civil unrest, strife, or criminality―and
number of correspondent banking relationships between
that that has led to de-risking. Others argue that foreign
2011-2017 in all regions of the world, although the
correspondent accounts have been used at times to
reductions varied across regions. At the same time, the total
circumvent U.S. sanctions and in illicit payments, and
volume of payment messaging has not fallen, indicating that
deserve special scrutiny to safeguard the financial system.
banks in smaller countries might be seeking out intermediary
The U.S. sanctions regime can also affect correspondent
banks to conduct correspondent banking for them, in what is
banking. Title III of the 2001 USA PATRIOT Act (P.L. 107-
known as lengthening the payment chain. Moreover, the
56) to a degree extends the obligation to comply with
correspondent banking market continues to be a concentrated
sanctions lists of the Office of Foreign Assets Control to
market, with a few key players accounting for the majority of
some foreign banks, particularly through correspondent
transaction volumes serviced. A 2016 paper by IMF
banking relationships with U.S. banks, thereby increasing the
researchers cautioned that de-risking could potentially disrupt
reach of U.S. regulation. Under Section 311 of the USA
financial services and cross-border flows, such as trade
PATRIOT Act, FinCEN is authorized to impose “special
finance and remittances, which could undermine growth in
measures” on U.S. financial institutions to mitigate money
certain emerging markets. Nationwide impacts thus far have
laundering threats associated with foreign jurisdictions or
been mitigated by affected banks’ ability to find other
institutions found to be “of primary money laundering
correspondent banks or to use alternative means to transfer
concern.” These measures range from additional
funds, the IMF paper concluded.
recordkeeping, reporting, and information collection
The Role of Wire Transfers and SWIFT
requirements to prohibiting the opening or maintaining of
correspondent accounts. According to a 2015 study by the
As discussed, correspondent banking relationships are
nonprofit Center for Global Development, based on their
fundamentally about moving money and effectuating
analysis of AML, CFT, and sanctions-related fines, 25% of
payments as opposed to other banking activities, such as
the 40 largest non-U.S. banks by asset size were fined by
deposit-taking or issuing commercial loans. Many such
U.S. regulators between 2010-2015, underscoring the impact
payments involve wire transfers. Facilitating nearly 30
of U.S. sanctions on foreign banks and correspondent banks.
million transactions daily, the Society for Interbank Financial
Telecommunication (SWIFT) is one of the most commonly
In an attempt to address problems stemming from de-risking,
used means of sending cross-border transactions, so issues
the Office of the Comptroller of the Currency (OCC) issued
affecting SWIFT can impact correspondent banking.
guidance in 2016 to banks regarding the withdrawal of
correspondent banking relationships. It advises banks to
SWIFT is neither a bank nor a clearing and settlement
conduct periodic risk reevaluations of foreign correspondent
institution, and it does not manage accounts or hold funds. It
accounts and to consider any information provided by foreign
is organized as a cooperative under Belgian law and is owned
financial institutions that might mitigate risk, and provide
and controlled by its shareholders. It provides the standards
institutions with “sufficient time to establish alternative
enabling member banks to exchange financial information
banking relationships before terminating accounts, unless
needed to make payments. As of 2017, it served over 200
doing so would be contrary to law, or pose an additional risk
countries and over 11,000 financial and corporate entities.
to the bank or national security, or reveal law enforcement
SWIFT’s regulatory challenges include complying with a
activity.” The guidance, however, does not otherwise relieve
large number of AML/CFT regimes while maintaining
banks of their AML requirements. It notes that the OCC does
neutrality on sensitive policy issues, such as sanctions.
not encourage banks to terminate entire categories of
Regulatory Requirements
customer accounts “without considering the risks presented
by an individual customer or the bank’s ability to manage the
For the United States, a central U.S. requirement for wire
risk.” It is unclear, however, what impact, if any, the OCC’s
transfers and SWIFT payments from the AML/CFT
guidance has had on banks’ practices.
perspective is the so-called travel rule issued by the Financial
Crimes Enforcement Network (FinCEN) in 1996. The travel
Rena S. Miller, Specialist in Financial Economics
rule requires financial institutions to pass on certain
information along with a wire transfer. The rule was designed
IF10873
to help law enforcement agencies detect, investigate and
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Overview of Correspondent Banking and “De-Risking” Issues
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