Correspondent Banking & AML/CFT : RBI, India
Correspondent
banking can expose financial institutions to significant risks, specifically
those of money laundering and terrorist financing. Criminals are able to
exploit the complexity and reach of correspondent banking relationships to
obscure the origins of illicit funds, making it challenging for authorities to
trace and prevent financial crime.
Many banks have been fined for processing prohibited payments. Back in
2019, UniCredit Group paid a hefty $1.3 billion fine for
processing prohibited transactions and in 2023, Swedbank Latvia was fined $3.4m for processing
transactions related to Crimea through US correspondent banks.
The complex transaction chains involved in correspondent banking business make
it much harder to trace illicit funds and a lack of transparency in
relationships hinders attempts to detect unlawful activities. Moreover,
jurisdictional variations in AML compliance standards, customer due diligence,
and financial crime regulations creates gaps that can be exploited to access
the global financial system illegally.
High transaction volumes make it easier for money launderers to blend illicit
funds with legitimate ones. Correspondent banking also provides criminals with
access to a vast network of financial institutions worldwide.
Correspondent banking is the provision of
banking services by one bank (the “correspondent bank”) to another bank (the
“respondent bank”). These services may include cash/funds management,
international wire transfers, drawing arrangements for demand drafts and mail
transfers, payable-through-accounts, cheques clearing etc. Banks should gather
sufficient information to understand fully the nature of the business of the
correspondent/respondent bank. Information on the other bank’s management,
major business activities, level of AML/CFT compliance, purpose of opening the
account, identity of any third party entities that will use the correspondent
banking services, and regulatory/supervisory framework in the
correspondent's/respondent’s country may be of special relevance. Similarly,
banks should try to ascertain from publicly available information whether the
other bank has been subject to any money laundering or terrorist financing
investigation or regulatory action. While it is desirable that such relationships
should be established only with the approval of the Board, in case the Boards
of some banks wish to delegate the power to an administrative authority, they
may delegate the power to a committee headed by the Chairman/CEO of the bank
while laying down clear parameters for approving such relationships. Proposals
approved by the Committee should invariably be put up to the Board at its next
meeting for post facto approval. The responsibilities of each bank with whom
correspondent banking relationship is established should be clearly documented.
In the case of payable-through-accounts, the correspondent bank should be
satisfied that the respondent bank has verified the identity of the customers
having direct access to the accounts and is undertaking ongoing 'due diligence'
on them. The correspondent bank should also ensure that the respondent bank is
able to provide the relevant customer identification data immediately on request
Correspondent
Banking: Correspondent banking is the provision of banking services by one bank
(the “correspondent bank”) to another bank (the “respondent bank”). Respondent
banks may be provided with a wide range of services, including cash management
(e.g., interest-bearing accounts in a variety of currencies), international
wire transfers, cheque clearing, payablethrough accounts and foreign exchange
services
Payable-through
accounts: The term payable-through accounts refers to correspondent accounts
that are used directly by third parties to transact business on their own
behalf.
Serial
Payment: Serial Payment refers to a direct sequential chain of payment where
the wire transfer and accompanying payment message travel together from the
ordering financial institution to the beneficiary financial institution
directly or through one or more intermediary financial institutions (e.g.,
correspondent banks).
Money Laundering Through Correspondent Banking
Money laundering through correspondent banking
refers to the illicit process of disguising the origins of illegally obtained
funds by utilizing the services and networks of correspondent banks. Criminals
exploit the complexity and global reach of correspondent banking relationships
to obscure the true source and ownership of illicit funds.
Here's a brief overview of how money laundering
can occur through correspondent banking:
- Layering: The process typically begins with layering, where
multiple transactions are conducted to obscure the trail of funds.
Criminals transfer money between accounts held at different correspondent
banks or make numerous cross-border transactions, making it difficult to
trace the original source of the funds.
- Smurfing: Money launderers may employ smurfing, also known as structuring,
to evade suspicion. They break down large amounts of illicit funds into
smaller, seemingly legitimate transactions, staying below the threshold
that triggers reporting requirements and arouses suspicion, even with the
presence of AML solutions for banks.
- Shell Companies: Criminals often establish Shell companies or use existing
ones to further obscure the origins of funds. Correspondent banks may
unwittingly facilitate transactions involving these entities, making it
challenging to trace the true beneficiaries and ultimate purpose of the
funds.
- Lack of Due
Diligence: Inadequate due diligence practices and underscoring
the importance of AML solutions for banks can contribute to money
laundering risks. Insufficient customer identification and verification,
weak monitoring of transactions, and inadequate risk assessment processes can
allow illicit funds to flow through the correspondent banking network
undetected.
- Jurisdictional
Differences: Money laundering through
correspondent banking can be facilitated by exploiting variations in
regulatory frameworks and enforcement across different jurisdictions.
Criminals may exploit weaker anti-money laundering (AML) controls in
certain countries to gain access to the international financial system
through correspondent banks located there.
To combat money laundering risks in correspondent
banking, regulatory authorities and financial institutions need to implement
robust AML measures, including enhanced due diligence, transaction monitoring
systems, information sharing, and compliance with international standards such
as the Financial Action Task Force (FATF) recommendations.
To better combat money laundering
risks in correspondent banking, regulatory authorities and financial
institutions need to implement robust anti-money laundering (AML) measures and
know your customer (KYC) due diligence. These processes include enhanced due
diligence, transaction monitoring, information sharing, and compliance with
international standards.
- Enhanced
due diligence – Correspondent
banks should conduct thorough due diligence on their customers,
including foreign respondent banks, to understand risk profiles
adequately before doing business and on an ongoing basis.
- Transaction
monitoring – Correspondent
banks should employ advanced transaction monitoring systems to detect
suspicious activities and transactions indicative of money laundering.
- Information
Sharing – Correspondent banks
should foster collaboration among financial institutions and regulatory
authorities to share information on potential risks and emerging money
laundering trends.
- Compliance
with international standards –
Correspondent banks should adhere to FATF recommendations and
international AML standards to ensure a unified global effort against
money laundering.
AML/CFT & RBI -Master Circular(MC) dated Feb 25, 2016 updated on Jan 04, 2024
The Reserve Bank of India (RBI) issued a KYC-AML-CFT policy in 2023-24 that covers guidelines issued up to January 04, 2024. The policy is based on recommendations from the Financial Action Task Force (FATF) and a paper from the Basel Committee on Banking Supervision on customer due diligence (CDD) for banks.
Correspondent Banks
Banks shall have a policy approved by their Boards, or by a
committee headed by the Chairman/CEO/MD to lay down parameters for
approving cross-border correspondent banking and other
similar relationships. In addition to performing normal CDD measures,
such relationships shall be subject to the following conditions:
a.
Banks shall gather sufficient information about a
respondent bank to understand fully the nature of the respondent bank’s
business and to determine from publicly available information the reputation of
the respondent bank and the quality of supervision, including whether it has
been subjected to a ML/TF investigation or regulatory action. Banks shall
assess the respondent bank’s AML/CFT controls.
b.
The information gathered in relation to the nature of
business of the respondent bank shall include information on management, major
business activities, purpose of opening the account, identity of any
third-party entities that will use the correspondent banking services,
regulatory/supervisory framework in the respondent bank’s home country among
other relevant information.
c.
Prior approval from senior management shall be obtained
for establishing new correspondent banking relationships. However, post
facto approval of the Board or the Committee empowered for this purpose
shall also be taken.
d.
Banks shall clearly document and understand the
respective AML/CFT responsibilities of institutions involved.
e.
In the case of payable-through-accounts, the
correspondent bank shall be satisfied that the respondent bank
has conducted CDD on the customers having direct access to the
accounts of the correspondent bank and is undertaking on-going 'due
diligence' on them.
f.
The correspondent bank shall ensure that the respondent
bank is able to provide the relevant CDD information immediately on
request.
g.
Correspondent relationship shall not be entered
into or continued with a shell bank.
h.
It shall be ensured that the respondent banks
do not permit their accounts to be used by shell banks.
i.
Banks shall be
cautious of correspondent banking relationships with
institutions located in jurisdictions which have strategic deficiencies or
have not made sufficient progress in implementation of FATF Recommendations.
j.
Banks shall ensure that respondent banks have KYC/AML
policies and procedures in place and apply enhanced 'due diligence' procedures
for transactions carried out through the correspondent accounts.
Wire Transfer
A. Information requirements for wire transfers for the
purpose of this Master Direction:
i. All cross-border wire transfers shall be accompanied by accurate,
complete, and meaningful originator and beneficiary information as mentioned
below:
a. name of the originator;
b. the originator account number where such an account is
used to process the transaction;
c. the originator’s address, or national identity number,
or customer identification number, or date and place of birth;
d. name of the beneficiary; and
e. the beneficiary account number where such an account
is used to process the transaction.
In the absence of an account, a unique transaction reference number
should be included which permits traceability of the transaction.
ii. In case of batch transfer, where several individual cross-border
wire transfers from a single originator are bundled in a batch file for
transmission to beneficiaries, they (i.e., individual transfers) are exempted
from the requirements of clause (i) above in respect of originator information,
provided that they include the originator’s account number or unique
transaction reference number, as mentioned above, and the batch file contains
required and accurate originator information, and full beneficiary information,
that is fully traceable within the beneficiary country.
iii. Domestic wire transfer, where the originator is an account holder
of the ordering RE, shall be accompanied by originator and beneficiary
information, as indicated for cross-border wire transfers in (i) and (ii)
above.
iv. Domestic
wire transfers of rupees fifty thousand and above, where the originator is not
an account holder of the ordering RE, shall also be accompanied by originator
and beneficiary information as indicated for cross-border wire transfers.
In case of domestic wire transfers below rupees fifty thousand where the
originator is not an account holder of the ordering RE and where the
information accompanying the wire transfer can be made available to the
beneficiary RE and appropriate authorities by other means, it is sufficient for
the ordering RE to include a unique transaction reference number, provided that
this number or identifier will permit the transaction to be traced back to the
originator or the beneficiary.
The ordering RE shall make the information available within three
working/business days of receiving the request from the intermediary RE,
beneficiary RE, or from appropriate competent authorities.
v. REs
shall ensure that all the information on the wire transfers shall be
immediately made available to appropriate law enforcement authorities,
prosecuting / competent authorities as well as FIU-IND on receiving such
requests with appropriate legal provisions.
vi. The wire transfer instructions are not intended to cover the
following types of payments:
a. Any transfer that flows from a transaction carried out
using a credit card / debit card / Prepaid Payment Instrument (PPI), including
through a token or any other similar reference string associated with the card
/ PPI, for the purchase of goods or services, so long as the credit or debit
card number or PPI id or reference number accompanies all transfers flowing
from the transaction. However, when a credit or debit card or PPI is used as a
payment system to effect a person-to-person wire transfer, the wire transfer
instructions shall apply to such transactions and the necessary information
should be included in the message.
b. Financial institution-to-financial institution
transfers and settlements, where both the originator person and the beneficiary
person are regulated financial institutions acting on their own behalf.
It is, however, clarified that nothing within these instructions will
impact the obligation of an RE to comply with applicable reporting requirements
under PML Act, 2002, and the Rules made thereunder, or any other statutory
requirement in force.
B. Responsibilities of ordering RE, intermediary RE
and beneficiary RE, effecting wire transfer, are as under:
i. Ordering RE:
a. The ordering RE shall ensure that all cross-border and
qualifying domestic wire transfers {viz., transactions as per clauses (iii) and
(iv) of paragraph ‘A’ above}, contain required and accurate originator
information and required beneficiary information, as indicated above.
b. Customer Identification shall be made if a customer,
who is not an account holder of the ordering RE,is intentionally structuring
domestic wire transfers below rupees fifty thousand to avoid reporting or
monitoring. In case of non-cooperation from the customer, efforts shall be made
to establish identity and if the same transaction is found to be suspicious,
STR may be filed with FIU-IND in accordance with the PML Rules.
c. Ordering RE shall not execute the wire transfer if it
is not able to comply with the requirements stipulated in this section.
ii. Intermediary RE:
a. RE processing an intermediary element of a chain of
wire transfers shall ensure that all originator and beneficiary information
accompanying a wire transfer is retained with the transfer.
b. Where technical limitations prevent the required
originator or beneficiary information accompanying a cross-border wire transfer
from remaining with a related domestic wire transfer, the intermediary RE shall
keep a record, for at least five years, of all the information received from
the ordering financial institution or another intermediary RE.
c. Intermediary RE shall take reasonable measures to
identify cross-border wire transfers that lack required originator information
or required beneficiary information. Such measures should be consistent with
straight-through processing.
d. Intermediary RE shall have effective risk-based
policies and procedures for determining: (a) when to execute, reject, or
suspend a wire transfer lacking required originator or required beneficiary
information; and (b) the appropriate follow-up action including seeking further
information and if the transaction is found to be suspicious, reporting to
FIU-IND in accordance with the PML Rules.
iii. Beneficiary RE:
a. Beneficiary RE shall take reasonable measures,
including post-event monitoring or real-time monitoring where feasible, to
identify cross-border wire transfers and qualifying domestic wire transfers
{viz., transactions as per clauses (iii) and (iv) of paragraph ‘A’ above}, that
lack required originator information or required beneficiary information.
b. Beneficiary RE shall have effective risk-based
policies and procedures for determining: (a) when to execute, reject, or
suspend a wire transfer lacking required originator or required beneficiary
information; and (b) the appropriate follow-up action follow-up action
including seeking further information and if the transaction is found to be
suspicious, reporting to FIU-IND in accordance with the PML Rules.
iv. Money
Transfer Service Scheme (MTSS) providers and other REs, are required
to comply with all of the relevant requirements of this Section, whether they
are providing services directly or through their agents. REs that
control both the ordering and the beneficiary side of a wire
transfer shall:
a. take into account all the information from both the
ordering and beneficiary sides in order to determine whether an STR has to be
filed; and
- file an STR with FIU, in accordance with the PML Rules,
if a transaction is found to be suspicious.
Correspondent relationship with a “Shell Bank”
Banks should refuse to enter into a correspondent relationship with a “shell bank” (i.e. a bank which is incorporated in a country where it has no physical presence and is unaffiliated to any regulated financial group). Shell banks are not permitted to operate in India. Banks should not enter into relationship with shell banks and before establishing correspondent relationship with any foreign institution, banks should take appropriate measures to satisfy themselves that the foreign respondent institution does not permit its accounts to be used by shell banks. Banks should be extremely cautious while continuing relationships with correspondent banks located in countries with poor KYC standards and countries identified as 'non-cooperative' in the fight against money laundering and terrorist financing. Banks should ensure that their respondent banks have anti money laundering policies and procedures in place and apply enhanced 'due diligence' procedures for transactions carried out through the correspondent accounts.
Correspondent Banking - Global Regulators
Society for Worldwide Interbank Financial Telecommunications (SWIFT)
The Society of Worldwide Interbank Financial
Telecommunications, or SWIFT, is
a cooperative society of financial institutions that have a standardized system
of communication. SWIFT provides services that allow businesses and individuals
to make cross-border payments within a fast, secure environment. SWIFT is used
on every continent, in more than 200 countries and territories connecting more
than 11,000 financial institutions.
SWIFT
itself is not a bank and does not hold transaction funds or process payments. Instead, SWIFT provides the language and the messaging
platform that banks and other financial institutions use to communicate
transaction details to each other.
FATF Guidelines
The FATF Recommendations require financial institutions to identify and manage the risks associated with these business relationships and to apply specific due diligence measures when they are conducted on a cross-border basis.
In recent years, financial institutions have increasingly
decided to avoid, rather than to manage, possible money laundering or terrorist
financing risks, by terminating business relationships with entire regions or
classes of customers. This so-called 'de-risking' practice has negatively
impacted correspondent banking. De-risking is not in line with the FATF
Recommendations, and is a serious concern to the international community,
including the FATF and the FATF-Style Regional Bodies. De-risking can result in
financial exclusion, less transparency and greater exposure to money laundering
and terrorist financing risks.
Since June 2015, the FATF has clarified the application of the
risk-based approach to correspondent banking relationships.
The Wolfsberg Group on AML/CFT for Correspondent Banking
The Wolfsberg Group consists of the following financial institutions: Banco Santander, Bank of America, Bank of TokyoMitsubishi-UFJ Ltd, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Société Générale, Standard Chartered and UBS
Financial Crime Risk Assessments are one element of the Financial Crime Compliance (FCC) toolkit available to Financial Institutions/Firms (FIs) which can be used to strengthen a FI's compliance framework. The assessments highlight key risk areas, how well those risks are managed and support a risk-based allocation of resource to the highest risk areas, as well as the establishment of strategic (more long term) and tactical (immediate workaround) action plans for managing the identified risks.
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