A growing regulatory pressure on the financial services industry continues to build. The FinCEN Files, a leak of thousands of Suspicious Activity Reports in 2020, was a stark reminder of the role financial institutions hold as gatekeepers of the financial system and suggested how banks must go further to report financial crime risks more effectively.
The present expectations in correspondent banking include that correspondent banks extend their customer due diligence on respondent banks (KYC) to also include a deeper monitoring and understanding of the underlying correspondent banking transactions and possibly the identities of the originator and final beneficiary. This approach is informally referred to as “know your customer's customer.”
Customer due diligence requires that correspondent banks identify and understand their respondents' banking activities and know if the respondents maintain additional correspondent banking relationships. This process often leads to a massive exchange of documents. According to SWIFT, the 7,000 banks that use the SWIFT network for correspondent banking have more than 1 million individual relationships, so the number of documents exchanged is presumably much higher.
Bankers Almanac Enhanced Due Diligence to give all banks access to a KYC solution that provides both automation and auditability in risk-based decision making, without the substantial investment of building and maintaining a complex in-house solution.
The Almanac on Bangladeshi banks and financial institutions have been regularly compiled and published beginning from the year 2016 and latest edition of 2020-21 has recently been unveiled. The Almanac has been published under the guidance of the editorial board consisting of specialists in the banking sector, economists, and eminent researchers.
The Banking Almanac is a research project by Shikkha Bichitra. It has a dedicated content team who source our data directly from banks and regulatory authorities across the globe, rigorously verifying the data prior to publishing.
The ‘correspondent banking' relationship
Banks have traditionally maintained broad networks of correspondent banking relationships. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion.
Correspondent banking is the provision of a current or other liability account, and related services, to another financial institution, including affiliates, used for the execution of third-party payments and trade finance, as well as its own cash clearing, liquidity management, and short-term borrowing or investment needs in a particular currency. At the most basic level, correspondent banking requires the opening of accounts by respondent banks in the correspondent banks' books and the exchange of messages to settle transactions by crediting and debiting those accounts.
Correspondent banking is especially important for cross-border transactions, as its importance for domestic payments within a single jurisdiction has diminished greatly due to the use of financial market infrastructures. When forming new correspondent banking relationships or reviewing existing partnerships, banks are required to perform due diligence, including sanctions, politically exposed persons (PEP) and adverse media screening, to create a risk profile for each financial counterparty.
This risk-based approach requires financial institutions to identify, assess, and understand their money laundering and terrorist financing risks.
To avoid penalties and the related reputational damage, correspondent banks have developed an increased sensitivity to the risks associated with correspondent banking. As a consequence, they have cut back services for respondent banks that (i) do not generate sufficient volumes to overcome compliance costs; (ii) are located in jurisdictions perceived as very risky; or (iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.
Correspondent banking services are an essential component of the global payment system, especially for cross-border transactions.
Suggestions for improvement
Bankers use the Banking Almanac for the available information to make relationships of corresponding banking with overseas banks. Bankers Almanac Enhanced Due Diligence helps banks meet ever-increasing regulatory expectations, while improving operational efficiency and minimizing the mounting cost of compliance.
The almanac may address these issues by: (1) Providing detailed documentation of the risk identification process for greater transparency, including an electronic audit trail of all actions taken; (2) automating the financial counterparty KYC and financial crime screening processes within a single interface; (3) bringing down the total cost of ownership of the KYC process by streamlining systems and reducing manual tasks.
The Banking Almanac of Bangladesh has been edited by some of the most credit-worthy personalities who wish to be popular in the global financial market to promote the appropriate use of the Almanac. It is a challenge to reach out to the appropriate financial institutions with only a printed version.
It must go online for easy excess of the users.
MS Siddiqui is Non-Government Adviser, Bangladesh Competition Commission.