The Bank of International Settlement said in a press release yesterday that, “A decline in the number of correspondent banking relationships has been a source of concern for the international community for some time. In affected jurisdictions, this decline may impact the ability to send and receive international payments, or drive some payment flows underground, with potential adverse consequences on international trade, growth, financial inclusion, as well as the stability and integrity of the financial system.”
No wonder there are several initiatives underway to stop this decline in correspondent banking which is primarily being caused by the high fixed costs, particularly in on-boarding new customers, which are making it unprofitable.
Improving due diligence processes
A Correspondent Banking Due Diligence Questionnaire has been published by the Wolfsberg Group, aimed at improving and facilitating due diligence processes. The questionnaire aims to standardise:
- the collection of information that correspondent banks ask from other banks when opening and maintaining these relationships, such as their ownership, the products and services they offer
- banks programmes for Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) as well as compliance with sanction regimes and Anti-Bribery and Corruption (ABC) programmes.
The questionnaire is part of a cooperative effort by the public and private sectors to recognise Know-Your-Customer (KYC) utilities as an effective and efficient tool to support due diligence processes.
Co-ordinated action plan to improve KYC systems and processes
The Financial Stability Board (FSB) is coordinating an action plan to assess and address the issue, including measures by the Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI), the Financial Action Task Force which include:
- The development of KYC utilities, which would contribute to reduce costs of correspondent banking relationships while maintaining the effective application of KYC requirements which would require industry to define a standardised data set (including the format) that all utilities should collect and that all banks must be ready to provide
- The FATF has taken initiatives to make sure that the application of AML/CFT measures do not contribute to de-risking. Also they are encouraging greater collaboration and sharing of information within and among financial institutions which is why they are issuing the questionnaire.
CTMfile take: As the BIS pointed out correspondent banking is vital to many economies, but relying on standardising KYC to stop the decline is unlikely to succeed. Standardising the continually changing KYC fields, let alone processes, is one of the most difficult problems in banking and business today. Bloomberg have concluded that it is impossible (AND will continue to be). In their KYC utility, see, Bloomberg accept any standard that a bank uses and match it to any other bank’s or FI’s.
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Accuity Research shows de-risking by US and European banks driving the decline with certain geographic regions are being de-risked, leaving local businesses without access to the international financial community
BIS - 5 recommendations to ease correspondent banking costs/concerns = revolution
Committee on Payments and Market Infrastructures recommendations on KYC, use of LEI, info sharing, payment messages in compliance with AML/CFT, and use of LEI in payment messages, could transform banking