Wednesday 10 August 2016

5 Ways to Ease Correspondent Banking

Correspondent Banking enables banks to access financial services in different jurisdiction and provide cross border payment services which adds to international trade and financial inclusion. Correspondent Banking can be a risky business if compliance is not followed. To avoid huge penalties and repetitional damage, banks avoid dealing with clients with low volume or clients operating from risky areas. Different countries have different outlook over risky or war related products. Some examples, in a consortium with world's leading banks, India's State Bank of India has been shamed by local media for funding a company in US for manufacturing cluster bombs. 

HSBC Bank and Duetsche Bank's brand image were maligned by international media for enquiry in CFT (Combating the Financing of Terrorism) rules. Steven Vincent, a freelancing journalist has filed a multi million dollar lawsuit against HSBC, Credit Suisse, RBS, Barclays and Standard Chartered for Iran transactions. French Bank Credit Lyonnais has also been accused for providing services to Hamas affiliated group in France. Similarly, Bank of China has been accused of money laundering for Hamas and Palestinian Islamic Jihad in 2008. A CFT case comes with bad image for brands and a potential loss in share value.

India's Reserve Bank of India has fined 3 Indian Banks for flouting Anti-money laundering (AML) rules. The reason cited by RBI press release states ''weaknesses and failures in internal control mechanisms in respect to certain AML provisions such as monitoring of transactions, timely reporting to foreign investment units and assigning of Unique Customer Identification Code." Bank of Baroda, Punjab National Bank and HDFC Bank was fined for Rs 5 crores,  Rs 3 crores and Rs 2 crore respectively.

5 Ways to Ease Correspondent Banking Costs

Committee of Payments and Market Infrastructure, Bank of International Settlement has released a paper which guides central banks and correspondent banking participants on Model Correspondent Bank.

1. Use of KYC utilities

The use of Know Your Customer by respondent and correspondent bank which consists of up-to-date information and accurate information should be used in general to reduce the burden of compliance. The standardised format may be approved by ISO. Central Banks as an apex organisation play an important role in making changes which add to efficiency and reducing cost of due diligence.

2. Use of Legal Entity Identifier

In perspective to India, banks have been made mandatory by RBI to use Permanent Account Number (PAN) as valid legal proof for higher transactions. Aadhaar Enabled Bank Accounts (AEBA) have additional safety with valid fingerprints and eye scans. Several economists and regulatory bodies have lauded India's effort for OTP enabled banking from Re. 1 transactions. India has the most sophisticated payment network in the world ready for the Payments Banks and United Payment Interface. Use of sophisticated softwares like Finacle, SAP, Oracle is recommended.

3. Information sharing initiatives

The work conducted by various authorities related to AML and CFT is praiseworthy. The Financial Action Task Force and Basel Committee on Banking Supervision AML/CFT Experts Group are invited to further explore ways to tackle obstacles related to information sharing. Respondent and Correspondent Bank should use best market practices.

4. Payment Messages

It is recommended that banks decide individually which payment message method suits them individually. Payments messages in India do not contain data like passwords, profile passwords, birthdate. FATF and AMLEG are advised to create a model format for payment messages.

5. Use of the LEI as additional information in payment messages.

Correspondent banking services are an essential component of the global payment system, especially for cross-border transactions. There seems to be a variety of reasons for the general decline in correspondent banking relationships reported by many stakeholders. Often cited by correspondent banks as reasons for this decline are compliance with AML/CFT regulations, an increased perception of risk and some uncertainties on the potential impact of non-compliance. 

The measures recommended would alleviate costs. The exit of various banks from correspondent banking is of concern. The measures would help to decrease red flags related to due diligence and compliance.

- Chaitanya Kulkarni ( )
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