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Financial Crime Risks in Correspondent Banking: Leveraging Digital Transformation for Compliance
Date:May 21, 2024
Correspondent Banking (CB) is a key component of large international Financial Institutions’ (FI’s) service offerings. By providing cross-border facilities to a large network of other FI’s of many sizes, they create a system to virtually connect every account in the world. However, by having to execute transactions for beneficiaries they have not fully identified or have knowledge of, Correspondent Banks are exposed to increased financial crime (FinCrime) risks.
We have observed that Banks have backlogs on their Know your Customer ( KYC), Transaction Monitoring, Sanctions Screening and Suspicious Activity Reporting (SARs) related to CB activities. Thus, creating regulatory and operational risks.
In addition to the inherent complexity of the transactions involved, the Financial Crime Compliance coverage of CB is made particularly challenging by the uncertain geopolitical and economic environment, adding more layers of due diligence (Politically Exposed Person (PEP) screening), sanctions, with unprecedented programmes in scale and complexity from the US, UK and EU, and fraud monitoring.
In the first instalment, we explored the fundamental challenges and risks that correspondent banks face in the FinCrime landscape. As we delve deeper, this second part focuses on specific use cases to demonstrate how technological advancements can support and streamline compliance processes.
The integration of advanced technological solutions enhances the efficiency and accuracy of compliance processes but also enables the strategic reallocation of human efforts towards tasks that cannot be fully automated, such as in-person visits to correspondent bank customers and in-depth reviews of their AML frameworks, policies, procedures, and controls.
Leveraging these technologies, we see the following use cases as candidates for automation:
| Activity | Description |
| KYC / KYB | |
| Customer Due Diligence | Automated collection of basic data on respondent bank (i.e. jurisdictions, services provided, customer base, purpose of relationship), eliminating manual intervention. |
| Enhanced Due Diligence | Automated identification of PEP, UBO, Board of Directors and their network in the respondent bank’s environment, providing a more efficient control framework and eliminating complex manual intervention. |
| Adverse Media | Automated research of events related to the respondent bank presenting a FinCrime risk (i.e. investigation for money laundering, financial crime, terrorism financing). |
| Client Risk profile, on-going due diligence, perpetual KYC / KYB | Risk engine applying rating, performing continuous monitoring of client related data, assessing materiality of any changes, triggering new KYC process, update of risk rating etc. Enhancement of Control framework mitigating AML risks. |
| Sanctions and Name screening | |
| Sanctions list monitoring | Monitor major sanction lists (OFAC, EU, BoE etc.) and re-run screenings for respondent related names when monitoring alerts are detected. Automated control framework reducing the risk of backlogs. |
| Rules calibration | Define, review and update threshold and alert triggers based on internal risk appetite and external regulatory expectations. Automated tailoring of Screening rules based on investigation outcome, reducing false positives, and enhancing operational efficiency. |
| Alert Investigation | Review of positive hits in Respondent Bank environment. Automated filling of investigation report to facilitate analytical reviews. |
| Transaction Monitoring | |
| Real-time monitoring, pattern detection and scenario calibration | Continuous review of transactions generated by Respondent Bank, to monitor transaction flows and detect suspicious behaviour or deviation from expected usage of respondent accounts. Risk mitigation through proactive and adaptable pattern detection. Efficiency gains through reduction of false positives and backlogs. |
| Case Management and workflow | |
| Alert prioritization, enrichment, and assignment | Alerts trigger based on data collected (jurisdictions, product, client type etc.), prioritisation, risk rating and allocation of task to relevant team for investigation. |
| Auto-closing, QA / QC | Risk mitigation by automated review of pre-collected data and suggestion of escalation or closure of investigation. |
| Reporting and SARs | |
| Automated / pre-populated SARs | Pre-populate SAR upon request, with relevant data and rationale for submission, increased efficiency, and accuracy of SARs production. |
| Internal reports / KPIs / Dashboard | Produce internal reporting and tailored dashboard to support Senior Management decision making. Risk mitigation through better control framework and governance. |
Conducting digital transformation programmes in the FinCrime space is essential for Correspondent Banks to significantly enhance their ability to combat financial crimes, but it is subject to one major dependency: the quality and availability of data required to ensure the efficiency of these digital solutions. Having comprehensive Data Management Programme, and Tapping into the Core Banking Systems to source payments data is the best way to solve this problem.
In part 3 of this series, we will explore the role of ISO 20022 payment standards in supporting shaping Correspondent Banking practices.
Want to know more?
Do you have questions about Correspondent Banking regulatory requirements within your organisation, or could use some help reviewing existing FinCrime frameworks?