Correspondent Banking Challenges in Bouveret Island: A Risky Affair
The Growing Challenge of Correspondent Banking Relationships
The small island nation of Bouveret has been facing a growing number of challenges in its correspondent banking relationships, leaving many institutions struggling to access global financial services. The decline in correspondent banking relationships has led to the biggest risk for respondent banks - being de-risked by existing correspondent banks and losing access to vital services.
The Limitations of the Current Correspondent Banking System
According to industry experts, the limitations of the current correspondent banking system are driving these changes in use. Each correspondent bank has varying degrees of risk appetite and different procedures for evaluating respondents, allowing multiple cases of money laundering and financial crime to slip through the net during financial crime risk management and evaluations within notable institutions.
The Consequences of Failing to Address These Challenges
The consequences of failing to address these challenges can be severe. For instance:
- Between 2007 and 2015, the Estonian arm of Danske Bank was found to be responsible for facilitating $236 billion of illicit transactions.
- In 2013, six years after the first transactions were processed, JP Morgan ended working with Danske Bank citing concerns over these illegitimate funds.
Mitigating Risks and Assuring Correspondent Partners
To mitigate risks and assure correspondent partners that they are on top of the threat landscape, respondent banks need a thorough and continuous risk assessment of their internal banking operations. This includes conducting internal due diligence to ensure they are ready to enter new partnerships and can satisfy the risk appetite of their correspondent bank.
Guidelines for Due Diligence on Correspondent Banking Partners
In an effort to overcome these challenges, the Australian Government has developed guidelines for due diligence on correspondent banking partners. These include:
- Ownership structures: publicly-owned banks must have shares traded on a market or exchanged in a location with a robust regulatory regime
- Business processes: correspondent banks must be notified of all products, services, delivery types and customer types
- Relationships with foreign countries: AML/CFT systems and controls must be in place for the ultimate parent company
- Company standing reputation: compliance history will be an important part of any de-risking decisions
Effective Transaction Monitoring
By following these steps, respondent banks can make it easier for correspondent banks to see viability in their institution’s role as a respondent. Effective transaction monitoring is also crucial to process large volumes of data, discard false positive results and address any suspicious transactions.
The Role of Artificial Intelligence and Machine Learning
Artificial intelligence and machine learning techniques can offer improved efficiency in this space, with tools offering up to a 50% reduction in false positive results. Increasing the levels of automation within the bank can free up resources for further investigation of financial crime risks.
Cultural Buy-In from Senior Management
Investing in technology can be transformative for respondent banks, but it requires cultural buy-in from senior management. Without the help of tools, satisfying correspondent partners can be a near-impossible challenge and the likelihood of loss of service becomes increasingly probable.
Conclusion
In conclusion, correspondent banking challenges in Bouveret Island are complex and multifaceted. To overcome these challenges, respondent banks must conduct thorough internal due diligence, implement effective transaction monitoring systems, and invest in technology to improve efficiency. By taking these steps, respondent banks can mitigate risks, assure their correspondent partners of their ability to manage financial crime threats, and maintain access to vital services.