Criminal Defense Lawyers

Managing Blocked Correspondent Banking Relationships

Correspondent banking relationships allow banks to access financial services in different jurisdictions and provide cross-border payment services to their customers[1]. However, these relationships can sometimes be abused by criminals looking to move illicit funds across borders. As a result, correspondent banks may decide to block or restrict certain client relationships that are deemed high risk, creating challenges for the affected banks.

There are a few key laws that have led to increased blocking of correspondent banking relationships:

• The USA PATRIOT Act of 2001 requires banks to conduct enhanced due diligence on correspondent accounts and private banking accounts of foreign banks[4]. This has led many banks to cut ties with higher risk foreign banks out of an abundance of caution.
• Section 313 of the PATRIOT Act specifically prohibits U.S. banks from maintaining correspondent accounts with foreign shell banks (banks with no physical presence), increasing the compliance burden[4].
• Section 319 of the PATRIOT Act requires banks to take reasonable steps to ensure their correspondent accounts are not being used indirectly to provide services to foreign shell banks[2].

If your bank has had a correspondent banking relationship blocked or restricted, here are some tips for managing the fallout:

1. Understand the rationale behind the block

The first step is to open a dialogue with the correspondent bank to understand their specific concerns. Are they blocking all activity with your bank, or just transactions with certain clients or jurisdictions? Getting clarity on the scope and context of the block is crucial.

In many cases, blocks relate to perceived anti-money laundering (AML) or counter-terrorist financing (CTF) risks. The correspondent may have concerns about weaknesses in your bank’s compliance program, or may simply be limiting exposure to higher risk regions. Understanding their viewpoint allows you to take targeted mitigation steps.

2. Review your bank’s AML/CTF policies and procedures

Conduct an objective review of your existing compliance framework – where are the potential gaps or weaknesses? Some areas to look at include:

• Client due diligence and enhanced due diligence procedures
• Processes for identifying suspicious activity and filing SARs
• Transaction monitoring and filtering systems
• Internal audits and independent testing
• Staff training programs
• Record keeping and documentation

Identifying areas in need of improvement will allow you to strengthen controls and address the correspondent’s concerns. Consider bringing in external experts to lend objectivity to the review.

3. Enhance your compliance program

With the results of your review in hand, move swiftly to implement necessary enhancements – this demonstrates your commitment to compliance. Some examples include:

• Updating CDD and EDD procedures to be more rigorous
• Lowering the threshold for flagging unusual activity
• Expanding transaction monitoring capabilities
• Conducting a “look-back” to re-check historical transactions
• Providing additional AML training to front-line staff

The more robust your compliance program, the higher your chances of re-establishing the blocked relationship or avoiding future blocks.

4. Increase communication with the correspondent

Maintain an open channel of communication with the correspondent bank throughout the process. Provide them with regular updates on the steps you are taking to enhance compliance controls. You can also offer to share policies and procedures, internal audits, and testing reports.

This transparency can re-build trust and demonstrate your commitment to addressing their concerns. Be responsive to any additional due diligence requests from their side.

5. Evaluate alternative arrangements

As a contingency, also assess if there are alternative arrangements that could meet your needs if the blocked relationship cannot be restored. For example:

• Routing transactions through intermediary correspondent banks
• Establishing new correspondent relationships in the affected jurisdictions
• Using payment hubs or gateways for cross-border payments
• Leveraging technology like blockchain and digital currencies

While not perfect substitutes, these alternatives can help fill the gap and reduce disruption to your customers.

6. Collaborate with industry peers

De-risking and blocked relationships are an industry-wide issue. Connect with peer banks that have faced similar challenges. Collective engagement with correspondents, regulators, and government agencies can help address the problem on a broader level.

Groups like the Wolfsberg Group, CPMI, and the World Bank are dedicated to finding solutions through published guidance, industry standards, and ongoing dialogue.

A unified industry voice emphasizing the negative impacts of wholesale de-risking on financial inclusion can be more influential than individual bank efforts.

7. Leverage technical assistance programs

International bodies like the IMF and World Bank offer technical assistance programs to help countries and banks strengthen AML/CFT controls. This can include:

• Conducting national risk assessments
• Reviewing regulatory frameworks
• Developing financial intelligence units
• Building capacity through training

Taking advantage of these resources can boost your capabilities and address some of the correspondent’s concerns about the operating environment.

8. Explore regulatory support

Domestic regulators often have tools to support impacted institutions. For example, the U.S. Federal Reserve has supervisory authority over correspondent banks and can provide guidance or assistance in re-establishing blocked relationships[1].

Specifically, the Fed can:

• Conduct examinations of correspondent banks to assess their compliance programs and risk management practices.
• Issue cease and desist orders or civil money penalties against correspondents that violate regulations or engage in unsafe practices.
• Provide clarification or interpretive guidance on regulations and expectations around correspondent banking.
• Encourage correspondents to maintain relationships through moral suasion.

Regulators on both sides can also collaborate to increase oversight, address compliance gaps, and mitigate risks[2]. For example:

• Entering into cooperative agreements to share information related to correspondent accounts.
• Conducting joint examinations of entities with cross-border operations.
• Coordinating efforts to strengthen AML/CFT controls and supervision.
• Providing technical training and capacity building to regulators.

If blocked relationships threaten financial stability or inclusion, regulators can work together to find a balanced solution. However, there are limits to their authority if banks make a prudent business decision to withdraw[1][2].

Potential regulatory responses

Some options regulators have to address systemic risks from loss of correspondent banking include:

• Providing guidance to encourage correspondent banks to limit wholesale blocking and consider a risk-based approach[3].
• Developing standards or principles for correspondent banks’ risk assessment processes[4].
• Requiring enhanced reporting and monitoring to detect emerging issues[5].
• Establishing resolution mechanisms or alternative arrangements if relationships are severed[6].

However, regulators must balance financial stability against other policy goals like protecting the integrity of the financial system[1]. They cannot compel private banks to maintain risky or unprofitable relationships without a clear systemic impact[2].

Banks themselves also need to make prudent risk-based decisions aligned with their business strategy and risk appetite. Ultimately, managing correspondent banking risks requires a collaborative approach between banks, regulators, and the industry.