Strategies for Avoiding Being De-Risked

De-risking is defined by the Financial Action Task Force (FATF) as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage risk.”¹ This risk pertains directly to the potential for money laundering (ML), terrorist financing (TF) or the infringement of sanctions regulation.

With the risk of penalties to correspondent banks outweighing the return of these relationships, profitability and the perceived high-risk nature of countries in the Caribbean region are some of the key drivers of de-risking. De-risking has implications beyond the banking sector that can seriously impact the economies of the small island states who depend tremendously on imports—for them de-risking is also a trade issue. The Caribbean Financial Action Task Force (CFATF) notes on its website that:

“The most severe effect of de-risking in the Caribbean has been the termination of correspondent banking relationships which includes check clearing and settlement, cash management services, international wire transfers, trade finance and conducting foreign currency denominated capital or current account transactions. The financial institutions, agencies and other entities affected by de-risking include money transfer operators and other remittance companies, small and medium domestic banks, small and medium exporters, retail customers, international business companies, egaming/gambling.”²

The Caribbean region has been particularly affected, but de-risking is not a unique phenomenon to the region. De-risking has also impacted some African countries. Denis Kruger, head of Sub-Sahara Africa, SWIFT stated:

“Increasingly, however, banks around the world are reviewing and rationalizing their correspondent banking relationships. This trend, known as de-risking, is primarily being driven by concerns about anti-money laundering, counter-terrorist financing and the associated regulatory pressures; another contributory factor to this dynamic is the cost associated with maintaining multiple relationship.”³

The question is what can anti-money laundering (AML) officers and compliance professionals in high risk jurisdictions do to help reduce their organization’s risk profiles? How can they strengthen correspondent banking relationships (CBRs)? There are some practical steps that can be taken to position an organization and retain CBRs and acquire new ones:

1. Stay close to the correspondent bank and ensure that there is ongoing dialogue. This is a relationship that needs to be nurtured and there should be an ongoing dialogue on a quarterly basis to provide updates and changes to the following:

Business model
Target market
Client profile
Strategic priorities
Internal controls
Prevention of ML, counter-terrorist financing (CTF) and proliferation financing policies and procedure
Organizational structure
Risk profile of the firm

2. Perform periodical reviews of the terms of contract with the current correspondent banking relationship to ensure operations always stay within the terms of the agreement.

3. Share the institution’s AML and CTF training program with the correspondent bank.

4. Create the institution’s profile as a client of the correspondent bank. This involves addressing the following risk factors that the correspondent bank will likely consider:

What type of financial institution is being considered?
What is the location and the risk rating of the institution’s jurisdiction?
What is the institution’s customer base?
What is the institution’s ownership structure?
What transactional activity is expected to pass through the account?
What products and services will the institution request from the correspondent bank?

5. Discuss any audit or regulatory examination findings and any associated action plans. It is key to remain open and honest in sharing the risk management program.

6. Arrange face to face meetings at least twice a year to build relationships and keep the lines of communication open.

7. Advise the correspondent bank on any technology enhancements that the institution has undertaken that may assist with transaction monitoring or conducting client due diligence. They need to know the investment being made to reduce the institution’s risk profile.

8. Discuss risk ratings affecting the institution’s jurisdiction and any improvements made to reduce the risk profile.

9. Share any reports or updates from the bank’s regulators. Does the central bank or other supervisory agencies publish an AML/CTF report that highlights the achievements of the regulators as it relates to strengthening of the supervisory and regulatory regime for AML/CTF risks? Does the regulator issue a letter or certificate of compliance? If so, make sure that the correspondent bank receives a copy.

10. If the jurisdictional risk profile is high, it is important to keep up to date on any laws, regulations or guidance issued to reduce the risk profile of the country within which the institution operates. Most jurisdictions are subject to a mutual evaluation by the FATF or one of its regional styled bodies such as CFATF. Has the jurisdiction been evaluated by said bodies? What were the findings? There should be a review of the Mutual Evaluation Report followed by pronouncements made by the government on how to remediate deficiencies. Correspondent banks should be informed as improvements are made and re-ratings assigned, including ongoing updates on the regulatory environment.

11. It is important to be proactive if there is negative news that could affect the organization. A discussion with the correspondent bank to outline the steps that the institution is taking to mitigate any associated risk is recommended.

12. If there is an opportunity to consolidate the services that the institution is obtaining from the correspondent bank, proactively discuss this with them. Ultimately, it must be profitable for the correspondent bank to have the institution as a client.

Conclusion

Correspondent banking serves as the life blood for trade in the Caribbean region. These service driven economies depend on the inflow and outflow of currency to keep their economies going. It is truly a matter of economic growth and stability. In the absence of correspondent banking the risk of resorting to informal means for the flow of currency arguably increases the risk of financial crime due to the consequent reliance on cash to transact. The retention of correspondent banking relationships is critical to maintaining the integrity of financial systems with the Caribbean region.

Keeping the lines of communication open and the correspondent bank informed of any changes in operation on a regular basis is important to avoid unexpected surprises.

Tanya McCartney, CAMS, attorney-at-law and author, Bahamas Financial Services Board, Nassau, the Bahamas,
tanyamccartneyceo@gmail.com