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Correspondent Banking Services: New Regulations to Combat Money Laundering and Financing of Terrorism

The State Bank of Pakistan has introduced new regulations for correspondent banking services to prevent money laundering and financing of terrorism. The new rules aim to ensure that banks and financial institutions (DFIs) maintain a robust system to identify, report, and prevent suspicious transactions.

Assessing Suitability of Respondent Banks

Under the new regulations, banks and DFIs must assess the suitability of respondent banks by gathering adequate information about their business, including:

• Know-your-customer policy
• Management and ownership structure
• Major business activities
• AML/CFT regulations
• Geographical presence
• Money laundering prevention measures
• Purpose of the account or service

The assessment will also involve determining the reputation of the respondent bank and the quality of supervision over it. Banks and DFIs must also obtain approval from senior management before establishing new correspondent banking relationships.

Payable-Through Accounts

In cases where cross-border banking services involve payable-through accounts, the correspondent bank must ensure that the respondent bank has performed customer due diligence (CDD) measures on third parties having direct access to the account. The respondent bank must also be able to monitor its business relations with these third parties and provide customer identification information upon request.

Jurisdictions with Inadequate AML/CFT Standards

Banks and DFIs are required to pay special attention when establishing or continuing correspondent relationships with banks or financial institutions in jurisdictions identified by the Financial Action Task Force (FATF) as having inadequate AML/CFT standards.

Shell Banks

No bank or DFI shall enter into or continue correspondent banking relations with shell banks. Banks and DFIs must take appropriate measures to ensure that their respondent banks do not permit their accounts to be used by shell banks.

Wire Transfers/Fund Transfers

The new regulations require banks and DFIs to implement robust procedures for wire transfers and fund transfers. The ordering institution must:

• Identify and verify the originator
• Record adequate details of the wire transfer
• Include relevant information in the message or payment instruction accompanying the transfer

Beneficiary institutions must adopt risk-based internal policies and procedures to identify and handle incoming wire transfers that are not accompanied by complete originator information. Intermediary institutions must maintain all required originator information with the wire transfer.

Reporting of Transactions

Banks and DFIs must comply with the provisions of the Anti-Money Laundering Act, rules, and regulations issued by the State Bank of Pakistan. They must report suspicious transactions (STRs) and cash transaction reports (CTRs) as prescribed under the regulations.

The new regulations aim to strengthen the country’s AML/CFT regime and prevent the misuse of correspondent banking services for money laundering and financing of terrorism. Banks and DFIs must comply with these regulations to ensure their continued operations in the country.