To enable an individual, or corporate or a financial institution to pay money from one jurisdiction to another, the transfer of funds has to go through several stages:
1st the customer (individual or company) must have a Bank Account
Bank located in England that does not have a physical presence in another Correspondent Banking is the provision of banking services by one Bank, wishing to pay the “Correspondent Bank”, to another bank, the “Respondent Bank”.
And like any provision of banking services, it must monitor from an AML/CFT/Financial Sanctions perspective. So far, so good. But how can you monitor transactions when you don’t see one or both ends of the money flow, when you don’t have insight into the source or destination of funds and when the transactions are not your customers’ transactions? How do you effectively monitor large financial flows when you are blind?
Downstream (or nested) correspondent banking refers to the use of a bank’s correspondent relationship by several underlying banks or financial institutions through their relationships with the correspondent bank’s direct customer. The underlying respondent banks or financial institutions conduct transactions and obtain access to other financial services without being direct customers of the correspondent bank.
Onboarding a Downstream Respondent Bank (Not an exclusive list):
- Understanding its full ownership structure up to the Parent
- Who controls the Respondent Bank relationship (the Respondent Bank or the Parent)?
- Who are its customers?
- Does the Respondent Bank operate Nested accounts?
- Where are the customers domiciled?
- Business sectors of its customers
- The expected activity of its customers
- Typical transaction size of its customers
- Conduct a Risk Assessment for that Bank
- Understanding the Legal, Regulatory and Industry Assessment of the Respondent Bank’s jurisdiction
- What AML / Financial Crime controls do the Bank have?
- Does the Respondent Bank fit in with the Correspondent Bank’s risk appetite?
Why is stage 1 crucial?
If you consider the importance of Financial Action Task Force (FATF) 40 Recommendations and the Wolfsberg Group, they are seeking the same objective to harmonise the standard of legal and regulatory across jurisdictions. To use the services of the Correspondent Bank, the Respondent Bank must operate to the same Legal, Regulatory and Industry standard of the Correspondent Bank. Adopting this approach will ensure that AML/ Financial Crime controls to mitigate the risk across jurisdictions.
If you consider from the Correspondent Banks perspective if the Respondent Bank’s controls are not to the same standard the Correspondent Bank is effectively performing your compliance functions for you.
After completing Stage 1, the Correspondent Bank can open up a LORO account for the Respondent Bank:
For the Respondent Bank to use the service of a Correspondent Bank, the Correspondent Bank must open up a “LORO” account for the Respondent Bank. To enable the Respondent Bank to transfer funds from where they have a physical presence to where they do not.
Now the real work begins for both the Correspondent Bank and Respondent Bank in ensuring that the LORO account is operating to the expected activity.
It is at this point that the importance of open communication between all parties is essential, continuous and reliable.
The Correspondent Bank must be in a position to evidence the controls that the Respondent Bank has in place, such as (Not an exhaustive list):
- Onsite visits (where permissible)
- Ongoing tracking process of results
- The request for information/documentation, e.g. Policies, Procedures and controls
- Transaction Monitoring MI to demonstrate that the controls in place at the Respondent are in line with the expectation of the Correspondent Bank
For further information please contact us for further information.
How we can help
At LS Consultancy, our consultants are industry experts that interpret the rules, regulations and spirit of the industry guidelines by assisting you “the client” in implementing a compliance programme that you can be confident is mitigating the risk of financial crime. What we can do:
- We analyse the relevant jurisdictions legislation, regulation and industry guidance to ensure that your controls adopt the highest standard possible
- Analyse and/ or Enhance your Business Wide Risk Assessment to ensure we consider money laundering and relevant predicate crimes
- Assessment of your Customer Onboarding and/ or Periodic KYC reviews rely on independent documentation and supported by credible information from your customer – as this is key to your compliance programme.
- Robust Transaction Monitoring and Screening whilst utilising your up-to-date KYC documentation/ information are fundamental.
- Greater emphasis on training – why not go through live examples with your RM’s, Operational Teams and Compliance – discuss the areas of concern and come up with compliant solutions.
- Ensuring your Compliance Monitoring Programme is conducted on a regular basis
- Engagement with senior management through relevant committees
For further information please contact us where our industry experts will be happy to answer your questions.
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