Correspondent banking lays the groundwork for a healthy international ecosystem of financial services. According to
SWIFT data, however, the number of correspondent banking relationships has been in decline globally for the last decade. Compounding the issue has been a simultaneous rise in the volume and value of cross-border payments – suggesting a higher concentration
of payment flows within the available corridors.
In this article, Finextra underlines the importance of correspondent banking relationships; how they should be established; and the key factors respondent banks must look out for.
What to look for in a correspondent bank
Minimised risk
One of the key challenges for respondent banks is conducting Know Your Client (KYC) due diligence. In most relationships, the correspondent bank relies on the respondent to perform the risk-management function. As such, support and intelligence sharing in
this area is a key differentiator – helping respondents effectively combat serious financial crime, such as money laundering, with their unique expertise and infrastructure. This not only reduces the risks tied to global transactions, but the costs involved
in fraud losses.
Tighter compliance
With the right partner, savings might also come from reducing the risk of fines and penalties. Indeed, a reputable correspondent bank – subject to strict regulatory requirements and compliance standards – is the way to go.
Broad reach
Another consideration is the range of countries and jurisdictions the correspondent bank can offer services in. The best choice here will be different from respondent to respondent, and dependent on where they would like to extend themselves – be it low-income
countries, newly emerging economies, or high-income countries; across Asia, Africa, the Americas, Europe, or Australia.
What to avoid in a correspondent bank
High fees
In line with the theme of cost control, high fees are the first and foremost factor to avoid when establishing a correspondent banking relationship. Most in danger of high fees are small and medium-sized institutions. A small amount of market research and
networking will quickly establish what a fair figure looks like.
Reputational risk
Correspondent banking relationships, while infinitely useful to business, have been known to expose respondents to reputational risk – especially if their partners have in the past been embroiled in sanctions violations or other illicit activity. Once again,
due diligence is an imperative.
Running alongside such considerations is complexity level. If the correspondent relationship involves too many parties, it becomes increasingly challenging to conduct the necessary checks.
Dependency
While correspondent banking relationships are the glue that holds together financial ecosystems, overexposure or reliance on partners for critical services can have disastrous consequences – especially if the correspondent runs into financial difficulty.
In the last decade, the extent of this dependence has been revealed by the hobbling of economic progress in those regions which are suffering a reduction in the number of correspondent relationships.
Establishing the relationship: A 10-point checklist
With a sketch of the ideal correspondent bank drawn, we now consider the steps that should be undertaken to set up the relationship. Here is a 10 point, inexhaustive due-diligence checklist.
- Run checks: Before approaching a correspondent, ensure preliminary background checks are conducted. This will surface obvious issues, such as sanctions violations or legal problems.
- Investigate the financial performance: As part of further checks, consider the financial performance of the bank. This will be a good barometer of the correspondent’s long-term stability.
- Understand AML and counter-terrorist policies: The bank’s anti-money laundering (AML) and counter-terrorist financing policies should be evaluated in depth. This will help triage the partners that are robust
and those that are not.
- Evaluate technology and infrastructure: Providing the previous steps have yielded satisfactory results, consider to what extent the prospective partner is systemically up-to-date, and can meet all the respondent’s
needs – particularly when it comes to cross-border transactions and other services.
- Consider an on-site visit:
Before contacts are signed, it may be wise to make an on-site visit. This is an opportunity to see firsthand the correspondents’ processes, systems and procedures. Other questions might include: What are the ownership, control and management structures
of the bank like? What is the experience of the board of directors and executive management? Is there a personality synergy?
- Review contracts: Now it is time to evaluate the agreement with the partner, for optimal legal protection.
- Conduct a self-evaluation:
In parallel, the respondent could be ensuring that its own house is in order. This means ensuring high-risk customers and traffic are documented and disclosed. To help in this effort, an independent audit could be set up to measure financial crime
compliance.
- Provide the best information: By the time the relationship is underway, the respondent should have established a unit whose job it is to collect data, in a standardised manner, that aligns with its partner’s
risk assessment and due diligence process. See Wolfsberg’s
Correspondent Banking Due Diligence Questionnaire, which creates a standard for correspondent banking practices.
- Establish efficient communication channels:
As with any formal relationship, this will be only as effective as the communication that underpins it. Have in place a dedicated point of contact in both banks for streamlined business outcomes.
- Conduct ongoing monitoring:
Correspondent banking relationships are ongoing work. Data must be continually monitored and recorded, on both sides, so that all objectives are achieved, and compliance is upheld.
Correspondent banking relationships are necessary, valuable, and at times, risky. So long as the right partner is selected – and the requisite steps are taken by respondents to ensure due diligence is performed – global marketplaces can flourish with activity,
transactional flows, and abundant corridors to boot.