BAFT has updated its playbook to help respondents establish and maintain correspondent banking relationships — not an easy feat under current stringent financial crime compliance regimes.
Via The Banker by Joy Macknight
According to a 2018 Financial Stability Board report, the number of correspondent accounts declined by 15.5% from 2011 to 2017, which is of growing concern worldwide.
According to the Bank for International Settlements, de-risking could push users to less regulated or unregulated channels such as cryptocurrency and cash, potentially adversely affecting global financial integrity.
While regulators have been mindful of the adverse impact of bank de-risking on correspondent banking worldwide, there are no obvious and easy solutions to reversing the trend, according to John Everington’s recent article. Yet something needs to be done.
To address this problem, BAFT (Bankers Association for Finance and Trade) has released an updated version of its 2019 ‘Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship’.
As the largest global correspondent banks generally set the standard expectations for all respondent banks, BAFT convened a core working group of 10 global correspondent banks and one industry body that collectively represents 13 of the largest global correspondent banks. The association canvassed their advice for when respondents are looking to establish a new relationship or maintain an existing relationship, as well as options for respondents unable to obtain or maintain a relationship.
For example, when establishing a new relationship, BAFT research found that approximately two-thirds of surveyed correspondent banks consider three major commercial factors when evaluating a prospective partnership: potential profitability; expected costs (including financial crime compliance costs) of service delivery; and the creditworthiness of the respondent.
One suggested best practice for respondents is to ensure that there is sufficient opportunity for the correspondent with respect to the book of business being offered, including a good mix of transaction flows and associated risks. As such, a respondent should concentrate its business on fewer correspondents.
Maintaining a relationship may prove difficult, as correspondents are expected to conduct a periodic review and refresh of customer due diligence information. At any point, a correspondent could change its business strategy and exit a jurisdiction, a respondent could fail to meet the correspondent’s commercial expectations, or the respondent’s risk profile could adversely change. In such cases, regular and open communication is key, according to the playbook, including proactively identifying the increasing risk and notifying the correspondent.
But what if circumstances make it challenging for a respondent bank to obtain or maintain a correspondent relationship? This could be because the respondent doesn’t generate enough revenue for the correspondent, or the jurisdiction or respondent present an exceptionally high risk for financial crime.
In the former instance, one suggestion is for the respondent to convince the jurisdiction’s central bank or an organisation that covers several jurisdictions within a region to establish an institution to serve small banks in the jurisdiction or region. For respondent banks located in jurisdictions that do not have sufficient regimes for combatting financial crime, the playbook’s recommendation is to join a national or global banking association to promote awareness and adoption of best practices, as well as encourage the government to engage in capacity building.
The Respondent’s Playbook 2.0 incorporates current regulatory changes in the marketplace around international anti-money laundering and combating the financing of terrorism standards. The updated version also features a new section on the migration to the ISO 20022 messaging standard.
BAFT forewarns that a respondent’s use of the playbook does not guarantee its ability to secure a correspondent relationship. However, its aim is to provide constructive guidance for respondents to reduce their perceived financial crime compliance risk.
