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Addressing the unintended consequences of de-risking

Addressing the unintended consequences of de-risking

Financial Crime Compliance,
5 July 2016 | 3 min read

New paper provides insights into what banks can do to protect their correspondent connections

It’s no secret that many banks around the world are reassessing their correspondent banking relationships. The phenomenon, known as de-risking, has seen many large international banks responding to concerns about money laundering and terrorist financing – as well as cost and regulatory pressures – by withdrawing from certain relationships, products or even jurisdictions.

While such decisions may make business sense for the individual banks concerned, it is becoming increasingly clear that there are wider consequences for the industry as a whole. People still need to make payments – and if traditional banking channels are no longer available, transactions are likely to be forced into alternative channels, which may be less well regulated.

SWIFT spoke with a number of industry experts to understand the impact of de-risking on banks and their end customers, and ask what the industry can do to overcome these issues.

The resulting paper found that:

  • Banks around the world are reducing their correspondent banking relationships, focusing in particular on high-risk jurisdictions
  • De-risking is not necessarily just about minimising risk – the cost of maintaining relationships is a significant consideration
  • De-risking may result in difficulties which could affect a wide range of transactions, including remittances sent by individuals to their relatives at home, purchases of consumables, payments for medical care and education fees
  • Without access to traditional banking channels, people may seek alternative channels which are less well regulated and which may bring additional risks
  • By implementing the appropriate controls and providing information to correspondents and to the market in a more consistent and transparent way, banks may be able to reduce the likelihood that they will be de-risked
  • Data utilities such as The KYC Registry can be used to share information in an efficient and standardised way

SWIFT, through its financial crime compliance services offering, is working with the industry to offer community-inspired solutions that reduce the cost of compliance, increase transparency, particularly around correspondent risk, and enable banks in potentially at-risk regions to strengthen their compliance programmes and demonstrate their compliance to their counterparties.

Luc Meurant, head of SWIFT’s Compliance Services division, highlights a number of steps for banks to consider to try and avoid being on the receiving end of a de-risking exercise:

  • Put the right controls in place. Use compliance controls such as transaction screening – and make sure you can demonstrate them to your correspondent.
  • Be transparent. Large banks increasingly need to understand their correspondents’ clients (Know Your Customer’s Customers). Smaller banks should be transparent with their larger clearers about the clients, industries and geographies they serve.
  • Communicate proactively. Smaller banks should actively communicate what they are doing to increase their level of compliance.
  • Reduce your clearer’s due diligence cost. For a large bank, the due diligence costs for a high-risk counterparty can be as much as $50,000 per year. If this is higher than the fees earned from that counterparty, large banks may conclude the relationship does not make sense financially. Smaller banks should take any steps possible to reduce their due diligence costs on themselves – such as joining The KYC Registry.

De-risking will also be one of the compliance topics on the agenda at Sibos 2016, so make plans to join compliance and business practitioners from across the industry in Geneva.

Download new SWIFT paper on de-risking

Information paper - Addressing the unintended consequences of de-risking