WORKING WITH U.S. CORRESPONDENT BANKS Scott Nance Langley Compliance/BSCN Langley Compliance Correspondent Banking FATF defines correspondent banking as the provision of banking services by one bank (the correspondent bank) to another bank (the respondent bank) Correspondent banking may include Cash management International payments Foreign exchange Payable-through accounts
Correspondent banking does not include One-off transactions The exchange of SWIFT keys 11 December 2018 Langley Compliance 2 How U.S. Correspondent Banks See the World 11 December 2018 Langley Compliance 3 U.S. Banks and Their Correspondents U.S. banks offer their respondent banks
Access to the U.S. financial system The ability to perform transactions in U.S. dollars As a U.S. bank, providing correspondent banking services means your respondent banks could use your internal systems to Launder money Evade sanctions Circumvent export controls Hide corruption Correspondent banking is a low-margin business Due diligence on respondent banks can be very expensive and time-consuming U.S. regulators have repeatedly fined U.S. banks for failure to apply appropriate due diligence and controls to their correspondent banking relationships As a consequence, U.S. banks have been systematically de-risking by shedding some correspondent relationships and declining to establish others
The ongoing Danske Bank and Deutsche Bank situations are likely to make U.S. banks even more reluctant to offer correspondent banking services 11 December 2018 Langley Compliance 4 U.S. Requirements for Correspondent Banks The USA PATRIOT Act imposes strict requirements on U.S. banks that offer correspondent banking services U.S. banks cannot provide correspondent services, directly or indirectly, to foreign shell banks The U.S. bank must maintain ownership information on its respondent banks (certification process) U.S. banks must perform a risk assessment of the AML and sanctions risks presented by the potential respondent bank The U.S. bank must determine whether the foreign bank requires enhanced due diligence (EDD)
The U.S. bank must apply a risk-based system to detect money laundering and sanctions violations This must include monitoring of transactions (though not necessarily all transactions) 11 December 2018 Langley Compliance 5 Specific U.S. Requirements U.S. depository institutions that maintain correspondent accounts for foreign financial institutions (FFI) are required to establish appropriate, specific, and risk-based due diligence policies, procedures, and processes that are reasonably designed to assess and manage the risks inherent with these relationships. The U.S. bank must develop a risk profile of the potential customer In particular, the U.S. bank must examine
The FFIs business and markets The type, purpose and anticipated activity on the account The nature and duration of the relationship with the FFI The supervisory regime of the jurisdiction in which the FFI is licensed There are no specific CDD requirements regarding respondent banks The U.S. bank must tailor its informational requirements to the specific situation The U.S. bank must design and implement controls to manage the risks it has identified effectively, including Periodic renewal of CDD Monitoring transactions 11 December 2018 Langley Compliance 6 FATF Guidance U.S. correspondent banks generally follow the FATF guidance on
correspondent banking as well The starting point for FATFs guidance is that cross-border correspondent banking relationships are inherently higher risk than domestic correspondent customer relationships FATF Recommendation 13 requires correspondent banks to Gather sufficient information about a respondent institution to understand fully the nature of the respondents business Assess the respondent institutions AML/CFT controls; Clearly understand the respective responsibilities of each institution With respect to payable-through accounts, be satisfied that the respondent bank has conducted CDD on the customers having direct access to accounts of the correspondent bank 11 December 2018 Langley Compliance 7 Wolfsberg Guidance The Wolfsberg Anti-Money Laundering Principles for Correspondent Banking require that correspondent banks apply risk-based due diligence to
their respondent bank customers The principles identify a number of risk factors, which are largely reflected in the Wolfsberg questionnaire Potential customers who are subject to certain types of risks should be subject to EDD PEP involvement Downstream correspondents (nesting accounts) Correspondent banks should monitor the activity of their respondent bank customers This monitoring should be incorporated into the banks overall AML program 11 December 2018 Langley Compliance 8 Wolfsberg Questionnaire Many U.S. correspondent banks will require potential respondent bank customers to fill out the Wolfsberg correspondent banking questionnaire This questionnaire reflects the various risk factors identified in the correspondent banking
principles Ownership and ownership structure Business lines and activities Customer base AML and sanctions risk assessment AML, sanctions, and anti-bribery policies and procedures AML, sanctions, and anti-bribery compliance systems KYC, CDD, and EDD policies and procedures Transaction monitoring and AML and sanctions reporting Regulatory history, including any violations
Because of its length, some wonder how much attention banks actually pay to the Wolfsberg Questionnaire 11 December 2018 Langley Compliance 9 Bank Policies Individual U.S. will have their own informational requirements U.S. banks will also have their own policies and procedures for periodically reviewing respondent customers At the least, you will need to issue your confirmation of ownership every three years If the U.S. bank applies EDD, you may be subject to review on an annual basis U.S. banks may also have their own policies regarding what transactions they will process For example, banks may decline to perform any transactions involving Iran, even if they are permissible under U.S. law Knowing these policies in advance can help prevent rejected or blocked transactions
Before entering into the correspondent relationship or undertaking transactions, you should confirm the banks policies 11 December 2018 Langley Compliance 10 Demonstrating Your Compliance System In initiating and maintain the correspondent relationship, you should determine exactly what information the U.S. correspondent bank requires The relationship will probably be initiated by the business rather than Compliance, but it is Compliance that will have much of the necessary information Compliance should work closely with the business in providing the required information In particular, Compliance should provide a full description of your AML and sanctions compliance systems The description should provide enough detail regarding CDD and transaction monitoring, as well as sanctions policies and procedures, for the U.S. bank to see that you are mitigating your risks If you have not benchmarked your system lately, this might be a good time to do so,
especially with respect to international best practices Your description should also address areas of concern that you know the U.S. bank is going to want to know more about 11 December 2018 Langley Compliance 11 Addressing Specific Issues U.S. banks may be especially sensitive if you Are located in certain geographic areas (including much of Eastern and Central Europe) Focus on potentially risky business lines, such as high-worth non-resident customers or private banking Do a lot of business in Russia, the Middle East, or much of Africa Be aware of your countrys rating by Moneyval or FATF, and be prepared to show that your compliance system compensates for your countrys regulatory deficiencies Explain the procedures you have implemented to ensure that you have mitigated these intrinsic risks (geography, business, customer base) to the greatest extent possible
If you have been cited by your regulator for AML or sanctions violations, be ready to show how you have corrected the situation If you work with banks that have been having sanctions or AML problems, you should be prepared to answer questions about those relationships 11 December 2018 Langley Compliance 12 Working with Your U.S. Correspondents Once the correspondent relationship has been established, you want to take steps to ensure open communication and cooperation between you and the U.S. bank A good first step is to identify individuals in your U.S. correspondent banks compliance department and establish contact with them This will allow you to respond quickly if transactions are rejected or frozen by requesting information from the U.S. banks Compliance Department about the reasons for their action It will enable them to request information from you if they have problems with a transaction Establishing lines of communication will also allow you to
Find out in advance whether the bank will process certain types of transactions Inform the U.S. bank in advance of potentially problematic or complicated transactions Once you establish a good relationship, you and the U.S. bank will be able to exchange information, benefitting you both 11 December 2018 Langley Compliance 13 Investigating a Rejected Transaction The US correspondent bank rejected a transaction involving a Jordanian company, stating there was a connection with Syria First we re-examined the transaction, to see if there was anything we might have missed Our banks records showed the originator was a Jordanian company with Jordanian ownership, and no visible ties to Syria When we (politely) asked our US correspondent why they had rejected the transaction, they stated that their office in the Jordan had discovered that the Jordanian company was in fact associated with a
Syrian company, and they provided us with their evidence We added the name of the Jordanian company to our filters, so that any future transactions with it would be rejected 11 December 2018 Langley Compliance 14 Clearing Transactions in Advance There was some question as to whether a Latvian bank was owned 50% by an SDN The Latvian bank said it no longer had any Russian ownership Our Russian office confirmed the change of ownership as reflected in Russian records OFAC had not made any official pronouncement If the US correspondent bank believed there was still SDN ownership, it would block the transaction and freeze the funds, to the detriment of our customer We contacted the U.S. correspondent, explained our basis for concluding that there was no SDN ownership, and asked whether it would process a transaction involving the Latvian bank
The US correspondent replied that it had reached the same conclusion, and would process the transaction Clearing transactions in advance can be especially useful if the transaction involves a country such as Iran, but is authorized by a U.S. exemption or license 11 December 2018 Langley Compliance 15 Things Not to Do If your U.S. correspondent rejects a transaction, do not Argue with the U.S. correspondent bank Resubmit the transaction without explanation Ever, ever, ever delete or change information and then resubmit the transaction But if you think youre right, explain exactly what your reasoning is Remember that, if a U.S. bank freezes funds, even by mistake, it cannot unfreeze them without a license from the U.S. authorities If you are going to send the transaction to another U.S. correspondent bank, make sure
in advance that they will accept it Having a transaction rejected by multiple correspondent banks could give the wrong impression It may be unwise to Rely on risky correspondents, such as smaller community banks in the United States Work through other foreign banks, such as Chinese banks, in an attempt to find a back door into the U.S. financial system 11 December 2018 Langley Compliance 16 Final Thoughts The major U.S. correspondent banks take their role as guardians of the U.S. financial system very seriously Be aware of the requirements of U.S. law, as well as the FATF and Wolfsberg principles, that U.S. correspondent banks are required or expected to apply By establishing communication and cooperation, you and your U.S. correspondent bank can help each other detect and
prevent financial crime Everything I have said about working with U.S. correspondent banks is true of working with correspondent banks in general 11 December 2018 Langley Compliance 17 Partners 11 December 2018 Langley Compliance 18 For Further Information Scott Nance [email protected] www.langleycompliance.com
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