Overview of Correspondent Banking and “De-Risking” Issues

Overview of Correspondent Banking and “De-Risking” Issues

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Updated April 8, 2022
Overview of Correspondent Banking and “De-Risking” Issues
What Is Correspondent Banking?
to prevent illicit payments? (2) how to prevent excessive
In broad terms, correspondent banking refers to formal
industry reaction to such controls, called “de-risking”?
agreements or relationships between banks to provide
“De-Risking” and Its Implications
payment services for each other. It is often used to effectuate
cross-border payments, and as such, plays an important role
The United Nations Office on Drugs and Crime estimates the
in the international financial system. The value of global
amount of money laundered globally in one year is 2-5% of
cross-border payments is estimated to increase from almost
global Gross Domestic Product. An IMF report estimated the
$150 trillion in 2017 to over $250 trillion by 2027, according
amount at $1.6-$4 trillion annually. To address illicit finance
to the Bank of England. Correspondent banking represents a
concerns, the United States has a robust AML-CFT
significant portion of this (e.g., the European Central Bank
framework that also applies to correspondent banks due to
reported roughly $746 billion worth of daily transactions
their key role in international financial transactions.
channeled through correspondent banking arrangements
Under the current regulatory approach, correspondent banks
within Eurozone countries alone in 2019), as it underpins
may bear liability, regulatory and reputational risk for AML-
trade finance, migrant remittances, and humanitarian flows.
CTF violations by the respondent banks. As a result, in recent
A typical correspondent banking arrangement is one in which
years, concerns on the part of large international banks about
two financial institutions (respondent banks) employ a third
regulatory compliance with AML and customer due diligence
party, a separate financial institution known as a
(CDD) requirements have led some banks to shed their
correspondent or service-providing bank. The various types
correspondent banking relationships with some smaller
of services correspondent banking provide include wire
banks, often in emerging markets viewed as “high-risk” for
transfers; check clearing and payment; trade finance; cash
AML. This phenomenon is known as “de-risking,” and
and treasury management; and securities, derivatives, or
according to the Bank for International Settlements (BIS),
foreign exchange settlement, among other services. Figure 1
rising costs and uncertainty about how far CDD should go to
shows the settlement of a payment from respondent Bank A
avoid regulatory sanction are cited by banks as among the
to Bank C via a correspondent Bank B. Because Banks A and
main reasons for it. Other factors in the decision to curtail
C do not hold accounts with each other, they use Bank B,
correspondent relationships include profitability
which holds accounts for both Bank A and Bank C.
considerations and concerns over potential liability and
Although these transactions provide significant benefits, they
reputational damage. Also, the need to safeguard against
also present several challenges. Two interrelated primary
cyber risks has led to the development of new standards that
policy issues involved with correspondent banking are: (1)
have increased the cost of correspondent relationships,
what types of anti-money laundering (AML) and countering
further reducing their appeal.
the financing of terrorism (CFT) controls should be in place
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Overview of Correspondent Banking and “De-Risking” Issues
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.
A 2019 BIS study found a continued decline in the number of
Regulatory Requirements
correspondent banking relationships; between 2012-2019,
active relationships in the global network declined by about
A central U.S. AML/CFT requirement for wire transfers and
20%, though reductions varied across regions. At the same
SWIFT payments is the “travel rule” issued by the Financial
time, the total volume of payment messaging has not fallen,
Crimes Enforcement Network (FinCEN) in 1996, which
indicating that banks in smaller countries might be seeking
requires financial institutions to pass on certain information
out intermediary banks to conduct correspondent banking for
with a wire transfer. It was designed to help law enforcement
them, in what is known as lengthening the payment chain.
agencies detect, investigate and prosecute money laundering
Moreover, the correspondent banking market continues to be
and other financial crimes by preserving an information trail
a concentrated market, with a few key players accounting for
about persons using fund transfer systems.
the majority of transaction volumes serviced. A March 2020
Banks are also required to conduct due diligence on
BIS paper cautioned that a continued decline in
customers opening accounts, with special attention to foreign
correspondent banking could send users into less regulated
correspondent banking account relationships. Special record-
“shadow payments” such as cryptocurrency and cash,
keeping and certification requirements apply to foreign
potentially adversely affecting global financial integrity.
correspondent banking accounts. A bank that maintains a
The Role of Wire Transfers and SWIFT
correspondent account in the United States for a foreign bank
also must maintain records identifying the individual owners
Correspondent banking relationships are fundamentally about
of each foreign bank, and must ensure it is not a “shell bank”
moving money and effectuating payments, and many such
without bona fide banking activities. Some banks have
payments involve wire transfers. The Society for Interbank
complained these requirements make it costly to open and
Financial Telecommunication (SWIFT) is one of the most
maintain correspondent accounts, particularly for banks in
commonly used means of sending cross-border transactions,
countries with high civil unrest, strife, or criminality―and
facilitating over 46 million financial messages daily. Thus,
that that has led to de-risking. Others argue that foreign
issues affecting SWIFT can impact correspondent banking.
correspondent accounts have been used at times to
SWIFT provides the standards enabling member banks to
circumvent U.S. sanctions and in illicit payments, and
exchange financial information needed to make payments. It
deserve special scrutiny to safeguard the financial system.
is organized as a cooperative under Belgian law and is owned
The U.S. sanctions regime can also affect correspondent
and controlled by its shareholders, and as of 2020, it served
banking. Title III of the 2001 USA PATRIOT Act (P.L. 107-
over 11,000 financial and corporate entities in over 200
56) to a degree extends the obligation to comply with
countries. It is neither a bank nor a clearing and settlement
sanctions lists of the Office of Foreign Assets Control to
institution, and does not manage accounts or hold funds.
some foreign banks, particularly through correspondent
SWIFT’s regulatory challenges include complying with a
banking relationships with U.S. banks, thereby increasing the
large number of AML/CFT regimes while trying to remain
reach of U.S. regulation. Under Section 311 of the USA
neutral on sensitive policy issues, such as sanctions. On
PATRIOT Act, FinCEN is authorized to impose “special
March 20, 2022, SWIFT disconnected seven Russian banks
measures” on U.S. financial institutions to mitigate money
from the SWIFT network, citing diplomatic decisions by
laundering threats associated with foreign jurisdictions or
numerous countries regarding Russia’s invasion of Ukraine.
institutions found to be “of primary money laundering
concern.” These measures range from additional
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Overview of Correspondent Banking and “De-Risking” Issues
recordkeeping, reporting, and information collection
correspondent account-related records held by foreign banks
requirements to prohibiting the opening or maintaining of
that maintain correspondent accounts in the United States.
correspondent accounts.
Section 6308 of the Anti-Money Laundering Act of 2020
In an attempt to address problems stemming from de-risking,
(AMLA; P.L. 116-283) significantly amended this provision
the Office of the Comptroller of the Currency (OCC) issued
to expand the scope of the U.S. government’s ability to
guidance in 2016 to banks regarding the withdrawal of
obtain foreign bank records from banks with U.S.
correspondent banking relationships. It advises banks to
correspondent accounts by authorizing the issuance of a
subpoena “to any foreign bank that maintains a
conduct periodic risk reevaluations of foreign correspondent
accounts and to consider any information provided by foreign
correspondent account in the United States and request any
financial institutions that might mitigate risk, and provide
records relating to the correspondent account or any account
institutions with “sufficient time to establish alternative
at the foreign bank (emphasis in italics added), including
records maintained outside of the United States,” that pertain
banking relationships before terminating accounts, unless
doing so would be contrary to law, or pose an additional risk
to a U.S. law enforcement investigation or civil forfeiture
to the bank or national security, or reveal law enforcement
action. The amended provision provides that potential
activity.” The guidance, however, does not otherwise relieve
conflicts with foreign bank secrecy laws cannot be the sole
basis for a foreign bank’s relief from subpoena. The AMLA
banks of their AML requirements. It notes that the OCC does
not encourage banks to terminate entire categories of
also increases civil penalties for failing to terminate a
customer accounts “without considering the risks presented
correspondent relationship, if directed to do so by the
by an individual customer or the bank’s ability to manage the
Treasury Secretary or AG, and for failing to comply with a
risk.” It is unclear, however, what impact, if any, the OCC’s
Section 6308 subpoena.
guidance has had on banks’ practices.
Rena S. Miller, Specialist in Financial Economics
Another Title III of the USA PATRIOT Act provision,
codified at 31 U.S.C. § 5318(k), authorizes the Treasury
IF10873
Secretary and the Attorney General (AG) to subpoena

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