Fine-Tuning the Correspondent and Respondent … · Fine-Tuning the Correspondent and Respondent Banking Relationship 10 th December 2013 | 9.15 – 10.15 Moderator: Guy Sheppard,

Fine-Tuning the Correspondent and Respondent Banking Relationship

10th December 2013 | 9.15 – 10.1510th December 2013 | 9.15 – 10.15

Moderator:Guy Sheppard, Associate Director, Financial Counterparty KYC Solutions, Accuity

Presenters:

Pattison Boleigha, CAMS, Head, Group Compliance & Internal Control, Access Bank PlcAndre Wentzel, CAMS, Head: Anti Money Laundering, Standard Bank GroupKevin West, Head of Financial Crime: Africa, Barclays Africa Group

Fine-Tuning the Correspondent and

Respondent Banking Relationship Respondent Banking Relationship

Wednesday, 11 December 2013 | 14.30 - 15.30

Speaker:

Pattison Boleigha, Head Group Compliance & Internal

Control, Access Bank Plc

Outline

• New Business Origination And Strategy

• Customer Take On Practices

• Money-laundering Risks In Correspondent Banking

• Risk Assessment Of Respondent Banks

33rd Annual AML & Financial Crime Conference, Africa

• Risk Assessment Of Respondent Banks

• On Going Monitoring Of Transactions

• Conclusion

• Acknowledgement

New Business Origination And Strategy/1

• Ensure there are proper money-laundering

risk assessments in place to address risk


risk assessments in place to address risk

associated specifically with correspondent

banking relationships

• Documented procedures in place to manage

such relationships.

• Provision of banking services to customers of

their foreign parent bank’s group who want to

make overseas payments.

• Traditional Trade Finance Business Locations

• Expanding and developing the services

Reasons For Correspondent Bank Relationships


• Expanding and developing the services

offered to existing customers.

• Cross-selling its product range to acquired

customers.

• Better developed framework and reduced

risks of money laundering.

• Clear responsibility for the CDD process

• EDD for respondents that present greater risks

• Gathering information to understand client details• Ownership and management;• Products and offerings; • Transaction volumes and values;• Client market segments;

Customer Take-on Good Practices/1


• Client market segments; • Client reputation; • AML control environment.

• Screening the names of senior managers, owners and controllers to identify PEPs and assessing the risk that identified PEPs pose.

• Independent quality assurance bank wide CDD

• Discussing with overseas regulators

• Identifying risk in particular business areas

• Visit to discuss AML issues and gather CDD information.

• Sanctions screening, identifying and managing PEPs

• Monitoring account activity and reporting suspicious

Customer Take-on Good Practices/2


• Monitoring account activity and reporting suspicious

activity.

• Managing their own correspondent banking

relationships.

• Senior management/senior Involvement

• Speed and Accuracy

• Absence of direct relationship to verify their identities.

What makes Correspondent Banking Risky?


• Limited information on nature or purpose of transactions

• Complexity of the entities involved

• Apply enhanced customer due

diligence measures on a risk-

sensitive basis.

What to do…?


• Implement appropriate controls for

accepting correspondent banking

relationships and ensure regular

reviews

• Use a risk-based approach to target banks and activities that present the greatest risks such as:• Location of the respondent and/or where its parent is based. • Availability of Public information

• Financial Action Task Force (FATF) countries pose lower risk

• Publicly available and ideally objective; verifiable; recently published; and where possible, international in scope may be useful in

Risk Assessment Of Respondent Banks


and where possible, international in scope may be useful in assessing the risk posed by a respondent

• Information sources include:• national government bodies • non-governmental organisations, • Transparency International CPI and • FATF mutual evaluations

Good Risk Management Practices• Regular assessments of correspondent bank risks

considering;• Country (and its AML regime); • Ownership/management structure (including the possible

impact/influence that ultimate beneficial owners with political connections may have);

• Licensing and appropriate documentation• Products/operations; • Transaction volumes;


• Transaction volumes; • Market segments; • The quality of the respondent’s AML systems and controls• Adverse publicly available information from national government

bodies and non-governmental organisations and other credible sources about the respondent

• Robust Monitoring of high risk respondents

• Risk scores that drive the frequency of review.

Poor Risk Management Practices

Inadequate or no policies and procedures

Failing to consider the money-

laundering risks

Applying a ‘one size fits all’

approach to due


laundering risks

prioritize higher risk customers

and transactions for review

High-risk business types .

size fits all’ approach to due

diligence

• Relying on parent banks to carry out monitoring

of respondents without understanding what

monitoring has been done or what the monitoring

found.

On-Going Monitoring Of Respondent Accounts - Poor Practices


• Failing to take action when respondents do not

provide satisfactory answers to reasonable

questions regarding activity on their account.

� Carrying out ad-hoc reviews in light of material changes to the risk profile of a customer

� Review periods driven by the risk rating of a particular relationship; with review high risk relationships more frequently

� Where appropriate, using intelligence reports to help decide

Ongoing Monitoring Of Respondent Accounts –Good Practices


� Where appropriate, using intelligence reports to help decide whether to maintain or exit a relationship.

� Obtaining an updated picture for the purpose of the account and expected activity.

� Updating screening of respondents and connected individuals to identify individuals/entities with PEP connections or on relevant sanctions lists

Fine-Tuning: The U.K Experience• In the U.K e.g. this approach had led to a reduction

in the number of correspondent accounts in the

past few years

• One major bank had undertaken a major review of

correspondent relationships and SWIFT keys post

9/11.

• About 500 of 2,500 were closed down in the U.K;


• About 500 of 2,500 were closed down in the U.K; • 400 on economic grounds; and

• the remaining 100 for AML reasons.

• Key considerations in establishing and maintaining

correspondent accounts were:• Profitability of an account net of compliance costs

• Reputational/franchise issues

Conclusion• Correspondence banking is High Risk activity.

• Respondents will need to be put under enhanced

monitoring to identify suspicious behaviors that may need

to be addressed in good time.

• A risk based approach should be applied in managing

correspondence banking Money Laundering risks


correspondence banking Money Laundering risks

• Conscious efforts must be made to determine early enough

decisions to exit respondent relationships beyond just

commercial considerations.

Acknowledgments• Banks’ management of high money laundering risk situations How banks

deal with high-risk customers (including PEPs), correspondent banking

relationships and wire transfers. June 2011 The Financial Services

Authority


THANK YOU

Pattison Boleigha, CAMSBsc, MBA, FCA, ACIT, HCIB, CGEIT, CRMAChief Compliance Officer


Access Bank [email protected]; [email protected]

Correspondent Banking

Kevin WestHead of Financial Crime Compliance: Africa

Barclays Africa Group Limited

What is correspondent banking

Correspondent banking relationships play an

important role in the processing of payment

transactions. They ensure that payments flow

between credit institutions, as well as allowing

indirect access to payment systems, thereby


indirect access to payment systems, thereby

representing an important link in the payment

chain.


• In bilateral correspondent banking arrangements, the two financial

institutions handle the sorting and processing of payments themselves,

without involving an intermediary.

• The term “correspondent banking” refers to arrangements where the two

financial institutions employ a third bank – a separate financial institution

known as a “correspondent” bank. One or both institutions forward payment

instructions to the correspondent bank for sorting and processing.

• The correspondent bank holds in its books an account for each bank for


• The correspondent bank holds in its books an account for each bank for

which it provides correspondent banking services. The correspondent bank

regards this as a “vostro” account; the customer bank considers it a “nostro”

account.

• Banks generally provide services to a number of financial institutions, and

these relationships are governed by contracts negotiated bilaterally.


Payers

account

Bank A Bank C Beneficiary

account

Mirror

Account

Bank B

Account

Bank A

Bank B

Mirror

Account

Bank B

Account

Bank C

1

2

3

4

6

5

8

7


Bank B Bank B

1. Debiting of payer’s account with Bank A 2 Crediting of Bank B’s mirror account with Bank A3 Payment message from Bank A to Bank B via financial network 4 Debiting of Bank A’s account with Bank B (vostro account) 5 Crediting of Bank C’s account with Bank B 6 Payment message from Bank B to Bank C via financial network 7 Debiting of Bank B’s mirror account with Bank C8 Crediting of receiver’s account with Bank C

Source: ECB (adapted from Payment Systems in Denmark, Danmarks Nationalbank, Copenhagen, 2005).

Correspondent banking is an attractive business

• This is an attractive business. It is (still) the primary channel to deliver cross-border banking services.

Looking at cross-border customer payments on SWIFT in August 2011, those settled bank-to-bank

were 67% of total volume.

Source: www.SWIFT.com


• The increasing cost of compliance and regulation is on the top of every banker’s agenda. From AML and KYC, Basel III, Dodd Frank, FINCEN and FACTA - as one banker stated, “regulation and compliance will dictate what we do in correspondent banking for the next three to four years

Source: www.swift.com

Regulation and compliance drive up costs

KPMG GLOBAL AML SURVEY KPMG GLOBAL AML SURVEY 20112011


• The Correspondent Bank often has no direct relationship with the underlying parties to a transaction and is therefore not in a position to verify their identities. Correspondent Banks often have limited information regarding the nature of the underlying transactions, particularly when processing electronic payments (wire transfers) or clearing cheques. For these reasons, correspondent banking must be regarded as high-risk from a money laundering/terrorist financing (ML/TF) perspective.

• Correspondent Banking relationships, if poorly controlled, can allow other financial services firms with inadequate AML/TF systems and controls to have direct access to international banking systems. A Correspondent handling transactions which represent the proceeds of criminal activity or terrorist financing risks regulatory censure, fines and/or damage to its reputation.

• Due to the risks involved, correspondent banks should be subjected to due diligence procedures before a relationship is entered into with them. As part of the bank’s due diligence, a Risk Assessment should be conducted in accordance with its own Correspondent Bank Risk Framework.

The risks of correspondent banking


Assessment should be conducted in accordance with its own Correspondent Bank Risk Framework.

The risks of correspondent banking (cont)The screening of SWIFT messages for completeness, and rejecting those that are incomplete, poses challenges given the large volume of messages that must be reviewed. It is especially difficult where the financial institution holds correspondent accounts and is acting only as an intermediary. In such situations, key information on the originator and the beneficiary may be missing. To help overcome this weakness, the new MT202COV message was implemented on 21 November 2009, containing mandatory, standardized originator and beneficiary data fields.

Since the implementation in 2009 and according to KPMG survey, only 50 percent of respondents use the new complete MT202COV SWIFT message .


•

• In their recently published white paper on correspondent banking, SWIFT define correspondent

banking as the banking services – mainly payments, cash management and trade services - provided

by banks to customers via other banks. SWIFT estimates that global payments volumes are

forecasted to grow at an average compound rate of 9% per year through to 2020.

• Provided along with cash management, trade finance, and sometimes foreign exchange or custody

services, payments are at the core of the services provided by a bank’s transaction processing

division and generated USD 590 billion revenues in 2010. Within these, cross-border payments punch

well above their weight.

Understanding the changes in correspondent banking



Transaction banks want to increase their vostro portfolio. But here, compliance is a barrier to developing

the business, as due diligence now extends to a full legal and operational audit of the counterparts’ KYC

and AML Processes and capabilities, causing delays in contract renewal and on-boarding of new clients.

As result, a three-tier segmentation of the correspondent banking network is becoming apparent:

— Partner banks - based on true synergies, with relationships typically based on geography where the

partner bank has a very strong presence in a specific country or region and the ability to transact a high

volume of business across a broad range of products;


— Specialist banks - for capabilities on specific product lines – e.g. using strong domestic retail players

for distribution of pension payments or

consumer remittances;

— Coverage banks - to fill out the geographic footprint of the bank’s capability in areas where it does not

have a presence, but its clients need

to do business.

(Source: SWIFT white paper).

• According to SWIFT in their white paper on correspondent banking, since 2005 the top 80 payments banks reduced their average number of nostro relationships in Europe and the Americas by 16% and 11% respectively, whilst in Asia Pacific they increased by 4%.

• It is clear that banks in future will operate in a smaller correspondent network, that they will know their counter-parts better due to the higher level of scrutiny undertaken at due diligence level and that a better understanding of the broad spectrum of services which is offered will exist.


(cont)

293rd Annual AML & Financial Crime Conference, Africa•

The Basel Committee on Banking Supervision published in December 2011 a consultative paper on the

Core Principles for Effective Banking Supervision. The committee recommends that supervisory entities

must ensure the following:

• Banks have in addition to normal due diligence, specific policies and processes regarding

correspondent banking. Such policies and processes include:

– gathering sufficient information about their respondent banks to understand fully the nature of their business and customer base, and how they are supervised; and

– not establishing or continuing correspondent relationships with those that do not have adequate


(cont)


– not establishing or continuing correspondent relationships with those that do not have adequate controls against criminal activities or that are not effectively supervised by the relevant authorities, or with those banks that are considered to be shell banks.

• The World Bank issued in 2009 a practical guide for bank supervisor which states that cross-border

correspondent banking relationships may be judged a higher-risk activity requiring that the normal due

diligence procedures be enhanced. Banks should obtain sufficient information about a respondent

bank to understand the nature of the business and its reputation and the quality of supervision the

correspondent is subject to.

• In the Financial Action Task Force (FATF)’s Revised Recommendations published in February 2012,

FATF explained in their interpretive note to Recommendation 13 (Correspondent Banking) that similar

relationships to which financial institutions should apply the recommended correspondent banking

due diligence steps (which has not changed from the previous version of Recommendations) as set

out in Recommendation 13 include, for example those established for securities transactions or funds

transfers, whether for the cross-border financial institution as principal or for its customers.


(cont)


Questions

?


?

Thank you


Correspondent Banking Questionnaires

And Interviews To Test Levels Of And Interviews To Test Levels Of

Compliance and AML preparedness

Andre Wentzel, CAMSHead: Anti-Money Laundering

Standard Bank Group

Growth in bespoke AML questionnaires or

interviews on behalf of banks

AML/CFT structure of the organization

• Provide details on the structural composition,

experience and qualifications of members of the

AML/CFT function of the organization

• Provide details of the reporting structure/to whom


• Provide details of the reporting structure/to whom

the AML function reports to, within the organization

• The manner in which AML/CFT issues and ML/TF

risks identified within the organization are

escalated to senior management


interviews on behalf of banks (cont.)

Role of AML/CFT function in the operationalisation of AML/CFT policies• Provide details on the process that the organization

follows in implementing the AML/CFT policies, standards or modules to business


standards or modules to business• Provide details on the manner in which adherence or

compliance to the AML/CFT policies are monitored for compliance in business, by the AML/CFT team

• Provide details on the access business is provided to the AML team to resolve any AML/CFT issues or concerns



AML examinations and internal auditing functions• Date and details relating to the last AML/CFT-specific

internal audit conducted. Include any material findings and corrective action plans developed in response thereto

• As per above, in respect of last AML/CFT regulatory


• As per above, in respect of last AML/CFT regulatory inspection/audit conducted

• Provide details relating to any regulatory AML/CFT action taken against the organization, its affiliates or subsidiaries in the past five (5) years

• Details on the frequency of regulatory interaction, in respect of AML/CFT matters



Business products and service offerings• Provide the factors considered in risk rating the

products and service offerings made available by the organization, from a ML/TF perspective

• Provide details of facilities made available to other correspondent banking customers to determine


correspondent banking customers to determine whether payable-through-accounts and nesting are provided

• Provide details of the market segments from where revenue or turnover is generated by the organization (government, precious gem dealers, etc.)



Customer Due Diligence

• Provide details of the customer due diligence

process followed for all customers

• Provide details on the documents required for

natural and legal persons that are customers. In


natural and legal persons that are customers. In

addition, provide details on the process followed

in the identification of the UBO and the

documents required in relation thereto

• Provide the ML/TF risk rating framework applied

in risk rating all customers



Customer Due Diligence (cont.)

• Provide details of the additional/enhanced due

diligence conducted on customers identified as

posing a high risk to the organization

• Provide details on the transaction monitoring


• Provide details on the transaction monitoring

conducted on all customers and the monitoring

systems that are used by the organization

(automated vs. manual system)



AML/CFT Training provided

• Provide details on the training conducted to areas

of business that operate in high risk jurisdictions,

manage high risk products or service offerings

• Such details include the training material, training


• Such details include the training material, training

registers and the assessments conducted in order

to gauge the understanding of the respective

attendees

Questions

?


?

Thank you


Documents

Fine-Tuning the Correspondent and Respondent … · Fine-Tuning the Correspondent and Respondent Banking Relationship 10 th December 2013 | 9.15 – 10.15 Moderator: Guy Sheppard,