Malaysia’s Correspondent Banking Industry Under Scrutiny for Compliance Risks

Correspondent banking relationships play a vital role in Malaysia’s global payment system, facilitating international trade and economic growth. However, these relationships come with a range of compliance risks associated with anti-money laundering (AML) and counter-terrorism financing (CTF).

The FATF’s Guidance on Correspondent Banking Services

Since June 2015, the Financial Action Task Force (FATF) has been actively addressing AML/CTF concerns in correspondent banking. The FATF’s guidance aims to clarify regulatory expectations for financial institutions, helping them identify and manage associated risks.

Key Takeaways

• The FATF’s guidance on correspondent banking services is a significant step in clarifying regulatory expectations for Malaysia’s financial institutions.
• Correspondent banking relationships come with AML/CTF risks that must be managed to support international trade and economic growth.
• The FATF has been actively addressing AML/CTF concerns in correspondent banking, particularly since June 2015.

De-Risking: A Criticized Practice

Some Malaysian banks have chosen to adopt a “de-risking” approach, terminating business relationships with entire regions or classes of customers deemed high-risk. This practice, while intended to mitigate AML/CTF risks, has been criticized by the FATF and regional bodies for resulting in financial exclusion and increased exposure to money laundering and terrorist financing.

Balancing Compliance Risks and International Trade

Malaysia’s banking sector is now under pressure to adopt a more nuanced approach to correspondent banking, striking a balance between managing compliance risks and facilitating international trade. As part of its efforts to address de-risking concerns, the government has been working closely with the private sector and international bodies such as the Financial Stability Board (FSB) to develop effective policy responses.

Effective Policy Responses

The country’s banks must now ensure they are adequately equipped to identify, assess, and mitigate AML/CTF risks associated with correspondent banking relationships, while continuing to support international trade and economic growth. The FATF’s guidance on correspondent banking services is seen as a significant step in clarifying regulatory expectations for Malaysia’s financial institutions.