The Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the Financial Action Task Force (FATF) and the Financial Stability Board (FSB) are calling for KYC utilities as a step towards addressing declining numbers of correspondent banks even as volumes and amounts of cross border payments increase.
As an industry initiative that will help to address the problem by helping with due diligence processes, the four authorities references the Correspondent Banking Due Diligence Questionnaire (CBDDQ) published by the Wolfsberg Group. The questionnaire aims to standardize the collection of information that correspondent banks ask from other banks when opening and maintaining these relationships, such as their ownership, the products and services they offer and their programmes for Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) as well as compliance with sanction regimes and Anti-Bribery and Corruption (ABC) programmes. The questionnaire is also part of a cooperative effort by the public and private sectors to recognize Know-Your-Customer (KYC) utilities as an effective and efficient tool to support due diligence processes.
A decline in the number of correspondent banking relationships has been a source of concern for the international community for some time. In affected jurisdictions, this decline may impact the ability to send and receive international payments, or drive some payment flows underground, with potential adverse consequences on international trade, growth, financial inclusion, as well as the stability and integrity of the financial system.
The CPMI identified in its report on Correspondent Banking that, according to data from SWIFT, the 7,000 banks that use the SWIFT network for correspondent banking have more than 1 million individual relationships. Each of these relationships must be opened and maintained, but there is no standardized format for the information required. The CPMI recommended (among other things) that this inefficiency could be reduced by respondent and correspondent banks using KYC utilities. A necessary condition for this would be for industry to define a standardised data set (including the format) that all utilities should collect and that all banks must be ready to provide.
The FATF has taken initiatives to make sure that the application of AML/CFT measures does not contribute to de-risking. In order to clarify regulatory expectations, the FATF published guidance on correspondent banking services, and risk-based approach guidance for money and value transfer services, which emphasize that financial institutions should identify, assess and understand their ML/TF risks, and mitigate them, on a case-by-case basis. FATF’s guidance on private sector information sharing also encourages greater collaboration and sharing of information within and among financial institutions.
The BCBS revised the annexe on correspondent banking of its guidelines on the sound management of risks related to money laundering and financing of terrorism in June 2017 to provide further clarification consistent with the FATF’s guidance on correspondent banking services. The relevant revised text notes that “an industry-wide questionnaire may be useful, provided it is used as a starting point for the risk assessment”.
The Financial Stability Board (FSB) published updated data on correspondent banking relationships using data provided by SWIFT. The report finds that the reduction in the total number of active correspondents, as measured by the number of banks that have sent or received messages, continued in the first half of 2017. While there may be some seasonality in the changes in the latest six months, the number of active correspondents in June 2017 is also lower than in June 2016.
There are regional variations in the figures. The twelve-month rates of change between June 2016 and June 2017 appear to confirm increases in the average number of active corridors per country (i.e. of direct relationships with other countries, measured by the flow of SWIFT messages) for North America and Eastern Europe and slower declines than in the year June 2015 to June 2016 in Africa and Oceania. On the other hand, the rate of decline between June 2016 and June 2017 increased in the Americas (excl. North America), Asia and Europe (excluding Eastern Europe) compared with the change from June 2015 to June 2016.
In line with previous analysis by the Committee on Payments and Market Infrastructures and the FSB Correspondent Banking Data Report of July 2017, data continues to show that, at the global level, the decline in the number of active correspondents has not resulted in a lower number of payment messages (volume) or a lower underlying value of the messages processed through SWIFT. The higher volume of messages could in part reflect a lengthening of payment chains, as discussed in the July 2017 report. A fuller analysis, including methodological enhancements, will be published by mid-2018, based on end-2017 data.