Compliance Risks Associated with Correspondent Banking in Macao: A Concern for Respondent Banks

The role of correspondent banking has become increasingly critical in Macao’s financial system, facilitating international finance and allowing banks to access global networks. However, recent scandals involving Danske Bank and other institutions have raised concerns about the compliance risks associated with correspondent banking.

Challenges in Correspondent Banking

Industry experts highlight several limitations in the current correspondent banking system:

• Lack of clarity on data gathering: There is a lack of clear guidelines on how to gather data based on correspondent risk appetite.
• Inadequate processes for holistic risk analysis: The current process for conducting holistic risk analysis is inadequate and often ineffective.
• Difficulty in automating transaction monitoring and client assessments: Respondent banks struggle with automating these tasks, leading to a high number of false positives.

Consequences of Limited Correspondent Banking

These limitations have contributed to the decline in correspondent banking relationships, leaving respondent banks vulnerable to being de-risked by their existing correspondent banks. As a result:

• Loss of access to global financial services: Respondent banks may lose access to vital global financial services.
• Increased risk exposure: Respondent banks become more exposed to compliance risks and potential losses.

Mitigating Compliance Risks

To mitigate these risks, Macao’s respondent banks must take proactive steps, including:

• Conducting thorough internal due diligence: Review ownership structures, business processes, relationships with foreign countries, and AML/CFT systems and controls.
• Investing in technology: Streamline and automate transaction monitoring, discard false positive results, and address suspicious transactions using AI and machine learning techniques.

Key Statistics

• 10% of suspicious transaction reports filed by financial services firms lead to further investigation by regulatory authorities (Europol).
• Annual venture capital investment for US-based AI startups saw a six-fold increase from 2000-2017.
• £238m of venture capital funding was poured into RegTech firms in the first quarter of 2017 alone.
• Estimated $12bn investment in RegTech ventures in 2021.

Conclusion

The compliance risks associated with correspondent banking in Macao raise concerns for respondent banks. To mitigate these risks, respondent banks must conduct thorough internal due diligence, invest in technology to streamline and automate transaction monitoring, and adapt to the increasing popularity of RegTech solutions. Failing to do so will hinder any service discussions and be a clear barrier to forming an agreement with correspondent partners.