Correspondent Banking AML/CTF & Sanctions Risk

WHAT IS

Correspondent Banking?

Correspondent banking is a financial arrangement between two banks, usually from different countries, where one bank (the correspondent bank) provides services on behalf of another bank (the respondent bank). These services often involve facilitating international transactions, processing payments, and managing foreign currency exchanges. Correspondent banking helps smaller or less established banks gain access to global financial networks and services, allowing them to conduct cross-border transactions and provide international banking services to their customers.

WHAT IS

Correspondent banking risk?

Correspondent banking risk refers to the potential dangers and challenges associated with the relationship between correspondent banks and respondent banks in the context of international financial transactions. These risks can arise due to various factors, including regulatory compliance, money laundering, terrorist financing, and other illicit activities.

One major concern is that correspondent banks may inadvertently facilitate the movement of funds for illegal purposes through their networks. As a result, banks that engage in correspondent banking need to implement robust due diligence procedures to ensure that the respondent banks they work with are not involved in any suspicious or illegal activities. Failure to adequately manage these risks can lead to reputational damage, legal repercussions, financial losses, and potential disruptions to the global financial system.

WHAT IS A

Correspondent Banking Risk Assessment?

A Correspondent Banking Risk Assessment is a process used by financial institutions, particularly correspondent banks, to evaluate the potential risks associated with their relationships with other banks, especially respondent banks, in the context of cross-border transactions. The purpose of this assessment is to identify and mitigate the various risks that could arise from these banking relationships, including money laundering, terrorist financing, sanctions violations, and other financial crimes.

The assessment involves analysing factors such as the regulatory environment in the respondent bank's country, the bank's financial stability, its anti-money laundering and counter-terrorism financing controls, and its reputation. By conducting such assessments, correspondent banks can make informed decisions about whether to establish or continue relationships with specific respondent banks and how to manage the associated risks effectively. This helps ensure compliance with regulatory requirements, prevent illicit financial activities, and maintain the integrity of the global financial system.

WHO MUST CONDUCT A

Correspondent Banking Risk Assessment?

WHAT ARE THE COMPLIANCE OBLIGATIONS FOR

Banks that have correspondent banking relationships in relation to risk assessments?

Banks that have correspondent banking relationships have specific compliance obligations to ensure they conduct thorough risk assessments and manage the associated risks effectively. These obligations are in place to prevent money laundering, terrorist financing, and other illicit activities. Here are some key compliance obligations:

Customer Due Diligence (CDD)

Correspondent banks must conduct thorough due diligence on their respondent banks, and understand their respondent bank's ownership structure, business activities, customer base, and compliance with AML and CTF regulations.

Ongoing Monitoring

Correspondent banks should continuously monitor the activities of their respondent banks to detect any suspicious or unusual transactions. Regular reviews and updates of risk assessments are essential.

Know Your Customer (KYC)

Correspondent banks must gather sufficient information about the respondent bank's customers to understand their risk profiles and ensure they are not involved in illegal activities.

Reporting

If correspondent banks identify suspicious transactions or other activities that warrant suspicion, they are typically required to report them to the relevant regulatory authorities for further investigation.

Risk Assessment

Correspondent banks must assess risks associated with each respondent bank, considering the respondent bank's location, reputation, regulatory environment, AML/CTF controls, and the nature of its transactions.

Policies and Procedures

Correspondent banks should have well-defined policies and procedures for managing correspondent banking risks. These documents guide staff in conducting risk assessments, due diligence, and reporting.

Enhanced Due Diligence (EDD)

If the correspondent bank identifies higher-risk relationships, it may need to apply enhanced due diligence measures. This could involve more detailed investigations, ongoing monitoring, and stricter controls.

Training

Banks need to ensure that their staff members are properly trained to understand Correspondent Banking Risk Assessment procedures and policies. They must also understand how to comply with them.

Sanctions and Embargoes

Correspondent banks must ensure that their respondent banks do not have relationships with individuals, entities, or countries subject to economic sanctions or embargoes.

Documentation

All risk assessments, due diligence findings, and related documents should be properly documented and maintained for regulatory purposes.

Overall, the compliance obligations for banks with correspondent banking relationships are designed to ensure the integrity of the financial system and prevent the misuse of banking services for illegal purposes. Failure to meet these obligations can result in severe legal, financial, and reputational consequences.

WHY SHOULD I CONDUCT A

Correspondent Banking Risk Assessment?

Conducting a Correspondent Banking Risk Assessment is crucial for several reasons:

Compliance with Regulations

Regulatory authorities, such as financial crime enforcement agencies and international bodies, require financial institutions to have effective risk assessment and risk management processes in place for correspondent banking relationships. Failing to comply can lead to regulatory penalties and reputational damage.

Preventing Financial Crime

Correspondent banking relationships can be exploited for money laundering, terrorist financing, and other illicit activities. By conducting risk assessments, you can identify potential risks and take steps to prevent these activities from occurring within your banking network.

Maintaining Reputation

Involvement in any form of financial crime, even unwittingly, can seriously damage a bank's reputation. Conducting risk assessments demonstrates your commitment to ethical and responsible banking practices, which can help maintain trust among customers, regulators, and partners.

Risk Management

Risk assessments enable you to identify higher-risk relationships and transactions. This allows you to implement appropriate risk mitigation measures, such as enhanced due diligence, ongoing monitoring, and reporting suspicious activities.

Protecting the Financial System

The global financial system's stability relies on the integrity of correspondent banking relationships. By conducting risk assessments, you contribute to safeguarding the system from abuse and illicit activities.

Avoiding Financial Losses

Engaging with high-risk respondent banks without proper risk assessment can lead to financial losses, legal liabilities, and potential disruptions to your own operations.

Adherence to Best Practices

Risk assessments help you adhere to industry best practices for risk management in correspondent banking. This can improve your institution's overall operational efficiency and effectiveness.

Strengthening Due Diligence

A thorough risk assessment process involves gathering comprehensive information about respondent banks, helping you better understand their business operations, customers, and compliance practices.

Regulatory Reporting

Many jurisdictions require banks to report suspicious transactions or activities. A well-conducted risk assessment can help you identify such activities and fulfil reporting obligations.

Legal Compliance

Depending on the jurisdiction, failure to adequately assess correspondent banking risks could result in legal consequences, including fines, sanctions, or legal actions.

HOW TO CONDUCT A

Correspondent Banking Risk Assessment?

Conducting a Correspondent Banking Risk Assessment involves several steps to systematically evaluate and manage the risks associated with your relationships with respondent banks. Here's a general outline of the process:

Identify and Gather Information

Collect relevant information about each respondent bank, including ownership structure, location, business activities, and customers.

Obtain information about the regulatory environment in the respondent bank's country.

Risk Categorization

Categorise your correspondent banking relationships based on risk levels. Consider factors like the respondent bank's location, regulatory environment, AML/CTF controls, and transaction patterns.

Risk Assessment

Evaluate the risks associated with each correspondent banking relationship. Consider the inherent risks (geographical, regulatory, etc.) and the controls the respondent bank has in place to mitigate those risks.

Enhanced Due Diligence (EDD)

For higher-risk relationships, apply enhanced due diligence measures. This may involve conducting more detailed investigations, requesting additional documentation, and verifying the source of funds.

Sanctions and PEP Screening

Screen respondent banks and their customers against sanctions lists and lists of politically exposed persons (PEPs) to ensure compliance with international sanctions and anti-corruption measures.

Ongoing Monitoring

Implement ongoing monitoring of correspondent banking relationships and transactions to detect any suspicious activities or patterns.

Documentation

Document all steps taken during the risk assessment process, including findings, decisions, and actions taken to mitigate risks.

Risk Mitigation

Implement appropriate risk mitigation measures for each relationship. This could include adjusting transaction limits, applying transaction monitoring systems, and conducting periodic reviews.

Internal Reporting

Maintain clear channels of communication with internal compliance teams and management regarding risk assessment findings, potential issues, and mitigation strategies.

Reporting Suspicious Activities

If you identify any suspicious transactions or activities, report them to the relevant regulatory authorities in accordance with regulatory requirements.

Regular Reviews and Updates

Conduct regular reviews of your correspondent banking relationships and risk assessments. Update risk assessments whenever there are significant changes to a respondent bank's operations or regulatory environment.

Training and Awareness

Ensure that your staff members are trained to understand and follow your Correspondent Banking Risk Assessment procedures and policies.

WHAT RISK FACTORS SHOULD BE CONSIDERED WHEN CONDUCTING A

Correspondent Banking Risk Assessment?

When conducting a Correspondent Banking Risk Assessment, it's important to consider a variety of risk factors that could impact your relationships with respondent banks. These factors help you evaluate the potential risks associated with each relationship and determine appropriate risk mitigation measures. Here are some key risk factors to consider:

Geographical Risk

Regulatory Risk

Reputation Risk

Ownership Risk

Business Activity Risk

Transaction Risk

AML/CTF Controls

Customer Risk

Sanctions Risk

Financial Stability

Banking Network

Technology and Cyber Risk

Political Environment

Emerging Risks

These risk factors should be assessed in combination to provide a comprehensive understanding of the risk profile of each correspondent banking relationship. Remember that risk assessments should be ongoing and regularly updated to reflect changes in the regulatory landscape, the respondent bank's operations, and other relevant factors.

Download our Correspondent Banking Risk Fact Sheet

Download Fact Sheet

WHAT IS THE STRUCTURE OF OUR

Correspondent banking risk and control module?

Arctic has developed a Correspondent Banking AML/CTF/Sanctions risk and control module based on the Wolfsberg Correspondent Banking Due Diligence Questionnaire (CBDDQ), the main risk groups, risk categories and risk factors and risk indicators contained in this module covers:

Entity and Ownership Risk: including Organisational Structure, Ownership Type, Applicable Business Areas and the Size, Nature and Complexity.

Products and Services Risk: including Correspondent Banking and Other Higher Risk Services.

AML, CTF and Sanctions Program Risk: including the program scope and governance and oversight arrangements.

Anti-Bribery and Corruption Program Risk: including the program scope, policy, EWRA and training.

Policies and Procedures: including regulations and coverage.

AML/CTF and Sanctions Risk Assessment: including customers, products and services, channels and geographies.

KYC, CDD and EDD: including customer due diligence, politically exposed persons, ongoing customer due diligence and enhanced customer due diligence.

Monitoring and Reporting: including monitoring and reporting procedures.

Payment Transparency: including payment procedures.

Sanctions: including sanctions policies and procedures, as well as, sanctions screening.

Training and Education: including training coverage, competency testing and enhanced training for certain roles and functions.

Quality Assurance and Compliance Testing: including independent reviews and processes for testing the design and operational effectiveness of controls.

Audit: including internal (or external) audit on the effectiveness of the AML/CTF, Sanctions and Anti-Bribery Program.

Declaration Statement: including attestation processes on the veracity and completeness of the compliance program.

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Download our Correspondent Banking Risk and Control Module Brochure

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The content module overview provides an introduction to correspondent banking and outlines the necessity and methods for its implementation.

Additionally, it presents the Arctic Intelligence Risk Assessment Platform, highlighting its potential advantages for your business.

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Correspondent Banking AML/CTF & Sanctions Risk

WHAT IS