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Correspondent Banking relationships are essential in the global payment system and vital to international trade and the global economy as a whole, including for emerging markets and developing economies. Correspondent banking relationships are subject to anti-money laundering / counter-terrorist financing measures: the FATF Recommendations require financial institutions to identify and manage the risks associated with these business relationships and to apply specific due diligence measures when they are conducted on a cross-border basis. In recent years, financial institutions have increasingly decided to avoid, rather than to manage, possible money laundering or terrorist financing risks, by terminating business relationships with entire regions or classes of customers. This so-called ‘de-risking’ practice has negatively impacted correspondent banking. De-risking is not in line with the FATF Recommendations, and is a serious concern to the international community, including the FATF and the FATF-Style Regional Bodies. De-risking can result in financial exclusion, less transparency and greater exposure to money laundering and terrorist financing risks.
Since June 2015, the FATF has clarified the application of the risk-based approach to correspondent banking relationships. The financial sector welcomed this, but sought further clarification on regulatory expectations in terms of customer due diligence. This guidance explains the FATF’s requirements in the context of correspondent banking services. In particular, it clarifies that the FATF Recommendations do not require correspondent financial institutions to conduct customer due diligence on each individual customer of their respondent institutions’ customers. The guidance also highlights that not all correspondent banking relationships carry the same level of money laundering or terrorist financing risks, hence any enhanced due diligence measures have to be commensurate to the degree of risks identified.
The FATF developed this guidance with input from the private sector, and in collaboration with other interested international bodies, including the Financial Stability Board (FSB), which is coordinating a four-point action plan to assess the extent of de-risking problem and identify possible policy responses. This guidance addresses one of the points of this action plan: the clarification of regulatory expectations.