Since the 2008 financial crisis, international correspondent banks have had to face a number of challenges, like lower transaction volumes, shrinking profit margins, scepticism by regulators on money-laundering activities and incomprehensible risk parameters. A new report by the Financial Times on global banks cutting their corresponding banking operations and networks short and scraping off respondent banks and financial institutions from their clientle is a no-brainer for international banking watchdogs. Risk management is still dodgy, to say the least, in global banks. And the new measures won’t do much to help their purpose.
This retraction on the part of global correspondent banks is seen as a misdirected step by the financial intelligentsia who believe it will undo their efforts and insights into disrupting organised crime and cross-border money laundering activities. From the financial institutions’ point of view, the revocation of the networks will lead to new, unexplored challenges in financial crime and corresponding financial crime risk management. These will have expensive repercussions for correspondent banking in the event of compliance programmes not being customised to take on terrorist financing activities.
Why did correspondent banking succeed?
Previously, global correspondent banking business was based on trust and credibility. When the Euro was introduced as a currency back in 1999, few were aware of the problems some national as well as regional banks had to cope with. They weren’t able to process transactions that were Euro-denominated. C-suite level telephonic conversations kept trade systems running, with one bank reassuring the other about extending credit lines which gave the latter sufficient time to smoothen currency exchange glitches. Billions were guaranteed over the humble phone lines on the basis of years of correspondent banking relationships and trust.
The correspondent banking business relies heavily on how banks manage their institutional relationships with the various stakeholders clients, colleagues and competitors many times one and the same. During a crisis like war, economic upheaval or force majeure, under the able-guidance of banking leaders, correspondent banking networks at the regional level took charge and addressed financial blockages in single or multiple countries through inter-bank communication and due to their vested interests in advancing banking stability.
SWIFT key to financial intelligence
The Society for Worldwide Interbank Financial Telecommunication or SWIFT facilitates highly secure financial communication between banks and is the most trusted mode of messaging between respondent and correspondent banks. This financial information contained in international banking networks can greatly help financial intelligence concerns. Suspicious and misappropriated transaction reports from correspondent banks can throw a lot of light on the bank’s reach into other, under-developed or emerging markets, which is a goldmine for financial risk analysts.
With international financial institutions pulling out of their correspondent banking networks, their reach will definitely reduce. The anti-money laundering compliance teams at these banks will have to content themselves with less information for analysis and reporting any possible suspicious operations. As such, financial intelligence wings in international financial centres like New York, London, Toronto, Paris, Frankfurt and Sydney will receive less information on trends and suspicious banking activities in emerging markets in Latin America, Africa, the Middle East and Asia.
Financial risk management loses potency; needs corrective measures fast
Due to a rise in sophisticated, cross-border money laundering schemes, this stunting of financial intelligence quality as well as quantity will render financial risk management analysis incapable of piecing together illicit activity patterns. Here are a few steps both respondent and correspondent banks should take:
Major correspondent banks will have to be more stringent with their anti-money laundering compliances in order to compensate for diminished financial intelligence capabilities in emerging markets.
Both front- and back-end office staff need to be trained on the risks of terrorist-financing activities due to money-laundering and will, invariably be, the main line of defence against respondent banks and their highly-shielded anti-social elements.
Respondent banks will have to comply and implement preventative and risk-based anti-money laundering approaches formulated by the Financial Action Task Force (FATF). International financial risk management standards are expected of such banks. Financial crime analysis and typology reports need to feature in the compliance programme of respondent banks, irrespective of jurisdiction.
The need for training is perhaps even more in financial intelligence bodies and banking regulatory compliance and supervisory agencies to defend society against malpractices in respondent banks, as they have to be aware of all the complexities of global correspondent banking.
It is evident financial risk management is a critical function today’s budding managers need to acclimatise themselves with in order to sustain and grow in the highly volatile international trade and business environments.
