1. WORKING WITH U.S. CORRESPONDENT BANKS
Scott Nance
Langley Compliance/BSCN
Langley Compliance

2. Correspondent Banking
FATF defines correspondent banking as “the provision of banking services by one bank (the ‘correspondent bank’) to another bank (the ‘respondent bank’)”
Correspondent banking may include
Cash management
International payments
Foreign exchange
Payable-through accounts
Correspondent banking does not include
One-off transactions
The exchange of SWIFT keys
11 December 2018
Langley Compliance

3. How U.S. Correspondent Banks See the World
11 December 2018
Langley Compliance

4. U.S. Banks and Their Correspondents
U.S. banks offer their respondent banks
Access to the U.S. financial system
The ability to perform transactions in U.S. dollars
As a U.S. bank, providing correspondent banking services means your respondent banks could use your internal systems to
Launder money
Evade sanctions
Circumvent export controls
Hide corruption
Correspondent banking is a low-margin business
Due diligence on respondent banks can be very expensive and time-consuming
U.S. regulators have repeatedly fined U.S. banks for failure to apply appropriate due diligence and controls to their correspondent banking relationships
As a consequence, U.S. banks have been systematically “de-risking” by shedding some correspondent relationships and declining to establish others
The ongoing Danske Bank and Deutsche Bank situations are likely to make U.S. banks even more reluctant to offer correspondent banking services
11 December 2018
Langley Compliance

5. U.S. Requirements for Correspondent Banks
The USA PATRIOT Act imposes strict requirements on U.S. banks that offer correspondent banking services
U.S. banks cannot provide correspondent services, directly or indirectly, to foreign shell banks
The U.S. bank must maintain ownership information on its respondent banks (“certification” process)
U.S. banks must perform a risk assessment of the AML and sanctions risks presented by the potential respondent bank
The U.S. bank must determine whether the foreign bank requires enhanced due diligence (EDD)
The U.S. bank must apply a “risk-based” system to detect money laundering and sanctions violations
This must include monitoring of transactions (though not necessarily all transactions)
11 December 2018
Langley Compliance

6. Specific U.S. Requirements
“U.S. depository institutions that maintain correspondent accounts for foreign financial institutions (FFI) are required to establish appropriate, specific, and risk-based due diligence policies, procedures, and processes that are reasonably designed to assess and manage the risks inherent with these relationships.”
The U.S. bank must develop a risk profile of the potential customer
In particular, the U.S. bank must examine
The FFI’s business and markets
The type, purpose and anticipated activity on the account
The nature and duration of the relationship with the FFI
The supervisory regime of the jurisdiction in which the FFI is licensed
There are no specific CDD requirements regarding respondent banks
The U.S. bank must tailor its informational requirements to the specific situation
The U.S. bank must design and implement controls to manage the risks it has identified effectively, including
Periodic renewal of CDD
Monitoring transactions
11 December 2018
Langley Compliance

7. FATF Guidance
U.S. correspondent banks generally follow the FATF guidance on correspondent banking as well
The starting point for FATF’s guidance is that cross-border correspondent banking relationships are inherently higher risk than domestic correspondent customer relationships
FATF Recommendation 13 requires correspondent banks to
Gather sufficient information about a respondent institution to understand fully the nature of the respondent’s business
Assess the respondent institution’s AML/CFT controls;
Clearly understand the respective responsibilities of each institution
With respect to “payable-through accounts”, be satisfied that the respondent bank has conducted CDD on the customers having direct access to accounts of the correspondent bank
11 December 2018
Langley Compliance

8. Wolfsberg Guidance
The Wolfsberg Anti-Money Laundering Principles for Correspondent Banking require that correspondent banks apply risk-based due diligence to their respondent bank customers
The principles identify a number of risk factors, which are largely reflected in the Wolfsberg questionnaire
Potential customers who are subject to certain types of risks should be subject to EDD
PEP involvement
Downstream correspondents (“nesting” accounts)
Correspondent banks should monitor the activity of their respondent bank customers
This monitoring should be incorporated into the bank’s overall AML program
11 December 2018
Langley Compliance

9. Wolfsberg Questionnaire
Many U.S. correspondent banks will require potential respondent bank customers to fill out the Wolfsberg correspondent banking questionnaire
This questionnaire reflects the various risk factors identified in the correspondent banking principles
Ownership and ownership structure
Business lines and activities
Customer base
AML and sanctions risk assessment
AML, sanctions, and anti-bribery policies and procedures
AML, sanctions, and anti-bribery compliance systems
KYC, CDD, and EDD policies and procedures
Transaction monitoring and AML and sanctions reporting
Regulatory history, including any violations
Because of its length, some wonder how much attention banks actually pay to the Wolfsberg Questionnaire
11 December 2018
Langley Compliance

10. Bank Policies
Individual U.S. will have their own informational requirements
U.S. banks will also have their own policies and procedures for periodically reviewing respondent customers
At the least, you will need to issue your confirmation of ownership every three years
If the U.S. bank applies EDD, you may be subject to review on an annual basis
U.S. banks may also have their own policies regarding what transactions they will process
For example, banks may decline to perform any transactions involving Iran, even if they are permissible under U.S. law
Knowing these policies in advance can help prevent rejected or blocked transactions
Before entering into the correspondent relationship or undertaking transactions, you should confirm the bank’s policies
11 December 2018
Langley Compliance

11. Demonstrating Your Compliance System
In initiating and maintain the correspondent relationship, you should determine exactly what information the U.S. correspondent bank requires
The relationship will probably be initiated by the business rather than Compliance, but it is Compliance that will have much of the necessary information
Compliance should work closely with the business in providing the required information
In particular, Compliance should provide a full description of your AML and sanctions compliance systems
The description should provide enough detail regarding CDD and transaction monitoring, as well as sanctions policies and procedures, for the U.S. bank to see that you are mitigating your risks
If you have not benchmarked your system lately, this might be a good time to do so, especially with respect to international best practices
Your description should also address areas of concern that you know the U.S. bank is going to want to know more about
11 December 2018
Langley Compliance

12. Addressing Specific Issues
U.S. banks may be especially sensitive if you
Are located in certain geographic areas (including much of Eastern and Central Europe)
Focus on potentially risky business lines, such as high-worth non-resident customers or private banking
Do a lot of business in Russia, the Middle East, or much of Africa
Be aware of your country’s rating by Moneyval or FATF, and be prepared to show that your compliance system compensates for your country’s regulatory deficiencies
Explain the procedures you have implemented to ensure that you have mitigated these intrinsic risks (geography, business, customer base) to the greatest extent possible
If you have been cited by your regulator for AML or sanctions violations, be ready to show how you have corrected the situation
If you work with banks that have been having sanctions or AML problems, you should be prepared to answer questions about those relationships
11 December 2018
Langley Compliance

13. Working with Your U.S. Correspondents
Once the correspondent relationship has been established, you want to take steps to ensure open communication and cooperation between you and the U.S. bank
A good first step is to identify individuals in your U.S. correspondent bank’s compliance department and establish contact with them
This will allow you to respond quickly if transactions are rejected or frozen by requesting information from the U.S. bank’s Compliance Department about the reasons for their action
It will enable them to request information from you if they have problems with a transaction
Establishing lines of communication will also allow you to
Find out in advance whether the bank will process certain types of transactions
Inform the U.S. bank in advance of potentially problematic or complicated transactions
Once you establish a good relationship, you and the U.S. bank will be able to exchange information, benefitting you both
11 December 2018
Langley Compliance

14. Investigating a Rejected Transaction
The US correspondent bank rejected a transaction involving a Jordanian company, stating there was a connection with Syria
First we re-examined the transaction, to see if there was anything we might have missed
Our bank’s records showed the originator was a Jordanian company with Jordanian ownership, and no visible ties to Syria
When we (politely) asked our US correspondent why they had rejected the transaction, they stated that their office in the Jordan had discovered that the Jordanian company was in fact associated with a Syrian company, and they provided us with their evidence
We added the name of the Jordanian company to our filters, so that any future transactions with it would be rejected
11 December 2018
Langley Compliance

15. Clearing Transactions in Advance
There was some question as to whether a Latvian bank was owned 50% by an SDN
The Latvian bank said it no longer had any Russian ownership
Our Russian office confirmed the change of ownership as reflected in Russian records
OFAC had not made any official pronouncement
If the US correspondent bank believed there was still SDN ownership, it would block the transaction and freeze the funds, to the detriment of our customer
We contacted the U.S. correspondent, explained our basis for concluding that there was no SDN ownership, and asked whether it would process a transaction involving the Latvian bank
The US correspondent replied that it had reached the same conclusion, and would process the transaction
Clearing transactions in advance can be especially useful if the transaction involves a country such as Iran, but is authorized by a U.S. exemption or license
11 December 2018
Langley Compliance

16. Things Not to Do
If your U.S. correspondent rejects a transaction, do not
Argue with the U.S. correspondent bank
Resubmit the transaction without explanation
Ever, ever, ever delete or change information and then resubmit the transaction
But if you think you’re right, explain exactly what your reasoning is
Remember that, if a U.S. bank freezes funds, even by mistake, it cannot unfreeze them without a license from the U.S. authorities
If you are going to send the transaction to another U.S. correspondent bank, make sure in advance that they will accept it
Having a transaction rejected by multiple correspondent banks could give the wrong impression
It may be unwise to
Rely on risky correspondents, such as smaller community banks in the United States
Work through other foreign banks, such as Chinese banks, in an attempt to find a back door into the U.S. financial system
11 December 2018
Langley Compliance

17. Final Thoughts
The major U.S. correspondent banks take their role as guardians of the U.S. financial system very seriously
Be aware of the requirements of U.S. law, as well as the FATF and Wolfsberg principles, that U.S. correspondent banks are required or expected to apply
By establishing communication and cooperation, you and your U.S. correspondent bank can help each other detect and prevent financial crime
Everything I have said about working with U.S. correspondent banks is true of working with correspondent banks in general
11 December 2018
Langley Compliance

18. Partners
11 December 2018
Langley Compliance

19. For Further Information
Scott Nance
Martijn Feldbrugge
11 December 2018
Langley Compliance