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Banks ditching correspondent model amid compliance woes

Anti-money laundering requirements have prompted some banks to pull back from correspondent banking, according to a report by PwC.

When banks perceive that the cost of compliance associated with certain accounts outweighs the business benefits of correspondent banking, they can take the step of closing those accounts, a process dubbed 'de-risking'. There may not be any proven financial misconduct associated with the closed accounts, they may simply be operating in the wrong jurisdiction or have the wrong type of customer profile.

According to the Economist (June 2014), banks may have ended as many as a third of their correspondent relationships already. The PwC report – Correspondence course: charting a future for US-dollar clearing and correspondent banking through analytics – refers to a bank executive whose bank has closed more than 100,000 accounts following money laundering screening.

The report states that “the retreat from this line of business constitutes an existential crisis for the financial services industry.”

However, it argues that effective risk management and controls – not a decimating 'de-risking' approach – is how financial institutions should be addressing this compliance problem. It argues for “greater coordination between front-office relationship managers and compliance officers” so that financial institutions can make more effective use of the information they have. It also states: “Increased front- and back- office collaboration will help financial institutions become more selective in terms of their correspondent-banking relationships, which is critical to the risk-based approach that regulators and intergovernmental bodies like the Financial Action Task Force advocate.”

Moreover, every crisis also presents an opportunity, if only one knows where to look for it. And since so many players have left the correspondence-banking field, there are opportunities for those who remain to capture market share - “provided they can effectively manage the risks”.

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