During my recent attendance at a multi-national Anti-Money Laundering conference, I couldn’t help but wonder why so little attention was devoted to compliance challenges that accompany cross-border wire transfers in the correspondent banking realm. There were plenty of sessions on banking for farming and agriculture businesses, retail banking, credit unions, and as well as fintech, crypto, and similar topics.
Conspicuously absent were two topics: Trade Finance and Foreign Correspondent Banking. One might argue that since these are primarily handled by large financial institutions, the interest may be limited. After all, a local community bank would probably process only a few cross-border wire transfers per month. It would also rarely finance an export deal worth millions of dollars. Yet, while not getting the desired coverage at the conference, the topics of correspondent banking and trade finance risks remain evermore relevant.
For now, let’s have a quick dive into one of them – cross-border wire transfers in a US financial institution on behalf of their foreign banking correspondent customers. Let’s leave trade finance for another article.
So, what is a foreign correspondent bank account? Simply put, it is an account of a foreign correspondent bank held by a US bank that acts as an intermediary between domestic and foreign banks, allowing the said foreign bank to send and receive its customers’ payments in US currency, thus allowing its customers access to USD-denominated global trade.
Ultimately, correspondent banks act as representatives of foreign banks in their transactional relationships with either another foreign bank (having a similar arrangement with another US bank) or a domestic financial institution. With this comes the responsibility of ensuring that respondent financial institutions involved in such payment have appropriate AML standards, as they would be the party to have further visibility into the identities of their customers, who, in the end, are ultimate originators or beneficiaries of the funds transacted.
Consequently, a correspondent bank has limited visibility of the ultimate originator and ultimate beneficiary. The wire instructions contain information limited to parties’ names, addresses, and purpose of payment. With limited information, the role of mitigating OFAC and AML-related risks rests with the correspondent bank’s transaction monitoring department. Clearly, Know Your Customer onboarding and refresher process for foreign banking customers is an integral part of any successful and comprehensive compliance framework. This, however, is an entirely different discussion.
Transaction monitoring is executed in two parts. Live payments are typically screened by a Sanction Team, concentrating on compliance with government-supplied sanctions lists (such as OFAC), matching names and addresses within payment instructions against names and addresses on the list. Whereas, post-factum, AML transaction monitoring detects questionable patterns indicative of possible money laundering and terror financing. While sanctions screening is black and white (true match-false match), AML monitoring is risk-based. Notably, US regulators focus on how well all elements of Compliance.
Programs are designed, thus ensuring that the bank appropriately mitigates relevant risks. Accordingly, correspondent banking cannot function without a well-rounded transaction monitoring framework, which includes adequately configured detection scenarios, quality control, and ongoing system testing and improvement.
Any successful transaction monitoring program should operate as part of the overall compliance framework, guided by the five pillars of AML Compliance – designation of a responsible compliance and reporting officer (MLRO), execution of periodic employee training, robust policies, procedures, and internal controls, independent monitoring and testing of existing program, and, finally, implementation of reliable due diligence protocols.
In post-factum transaction monitoring, it is an ongoing challenge to maintain effective risk mitigation operations due to limited information contained within the payment. This process is often aided by engaging respondent banks for additional information via a Request For Information (RFI) process. RFIs provide much needed additional data regarding beneficial ownership of ultimate payment parties.
Consequently, it is crucial for the success of the program to employ experienced staff with an aptitude for identifying patterns, who possess well-developed analytical skills, and the ability to craft succinct narratives.
Productive investigations trigger an obligation to file a comprehensive Suspicious Activity Report (SAR) with Financial Crime Enforcement Network (FinCEN). SARs filed by financial institutions are often utilized by law enforcement to aid in their investigations and to facilitate successful prosecutions of money laundering and terror financing. Periodically, these reports result in widely publicized criminal prosecutions of money launderers and terrorist financiers across the globe. There are also instances when reported information does not make it to the public eye but is, nevertheless, instrumental in law enforcement efforts.
Appropriately applied, together with access to historical transactional activity and prior investigations, transaction monitoring proves an effective tool for detecting, reporting and de-risking suspicious activity. It is an integral part of any correspondent banking compliance program.
