Correspondent Banking Risks Emerge in Bouvet Island: A Global De-Risking Conundrum
The financial sector has sounded the alarm over compliance risks associated with correspondent banking relationships in Bouvet Island, a tiny South Atlantic archipelago with no permanent residents.
The Rise of Compliance Risks
As the global economy struggles to contain the threat of money laundering and terrorist financing, correspondent banking relationships have become essential for international trade and commerce. However, the increasing practice of “de-risking” - where financial institutions terminate business relationships with entire regions or classes of customers deemed too high-risk - has led to a decline in correspondent banking services.
Consequences of De-Risking
- Financial exclusion
- Reduced transparency
- Greater exposure to money laundering and terrorist financing risks
FATF Guidelines on Correspondent Banking Relationships
The Financial Action Task Force (FATF), an intergovernmental organization responsible for combating money laundering and terrorist financing, has issued guidelines on the application of the risk-based approach to correspondent banking relationships. The guidance aims to clarify regulatory expectations and provide a framework for financial institutions to manage compliance risks associated with these relationships.
Key Principles
- Adopt a risk-based approach
- Manage correspondence banking relationships effectively
- Avoid de-risking practices
The Impact of De-Risking on Emerging Markets and Developing Economies
The impact of de-risking has been felt across the globe, including in emerging markets and developing economies where correspondent banking services are crucial for trade and economic growth. Bouvet Island, with its limited economic activity, is not immune to these risks.
Conclusion
As the global economy continues to grapple with the challenges of money laundering and terrorist financing, the FATF’s guidance on correspondent banking services is seen as a crucial step towards promoting transparency and reducing the risk of de-risking.