Following the 2008 banking crisis and the more recent Libor rating scandal, as well as the increasing sophistication of international criminal syndicates, regulators have clamped down on international money transfers with a wide range of regulations. These regulations, according to PwC, often raise red flags, which turn out to be false positives, bringing with it considerable burden on the bank – as well as decreased appetite for correspondent banking. To reduce false positives and improve international money flows, the consultancy suggests a more nuanced engagement with compliance, involving closer relationships between compliance officers and relationship managers, as well as improved analytics models.
The 2008 financial crisis, and the high cost to tax payers to bail out banks that were ‘too big to fail’, led to wide spread condemnation of excessive risk taking in the financial industry, followed by a number of high profile investigations and arrests. The more recent Libor scandal has done little to relieve concerns. International criminal networks, terrorism, as well as money laundering also remain systematic issues for nations and the global economy, with their detection not always straightforward. In response to systematic failure within the industry, as well as criminal activity, regulators have implemented a wide range of measures to make sure the banks are sufficiently capitalised to meet various potential stresses, and that illegal activity is considerably more difficult to pull off.
The regulations have, however, also heaped more pressure on the correspondent banking network. According to PwC’s ‘Correspondence course: charting a future for US-dollar clearing and correspondent banking through analytics’ report, the regulations have come to impact the money transfer business, with poorer countries especially effected. Banks have been pulling their correspondent accounts and ending relationships as a result, with UK banks citing that they would need to close their operations if fines proposed by regulators to exposure to risky businesses are too much of a concern for the banks.
The research shows that the AML (anti-money laundering) and counter-terrorist financing rules, and their respective fines, place considerable risk barriers to banks seeking to engage in cross-border activity. Besides the risk of enforcement action and their penalties, there is also a push for increased scrutiny on the industry; leading to an ‘existential’ crisis, as hundreds of thousands of accounts have been closed since the introduction of AML reviews. The result, according to the consulting firm, is an undermining of the global financial system as the ability to transfer funds across borders for international trade is hampered.
The consultancy suggests a number of possible ways to retain the flow of trade while improving the oversight of correspondent accounts, which include an increased focus on data analytics, automated entity consolidation, alert risk scoring and new model-based approaches to transaction monitoring. These measures improve the ability to identify and manage risks and costs. Other changes could be to improve the coordination between compliance officers and front office relationship managers, allowing institutions to be more selective about their correspondent banking relationships.
Improving the collaboration between financial institutions may too improve the compliance process, by making correspondent banking more transparent, while improving the due diligence process. Examples of such a move include implementing the Swift’s KYC Registry, where all banks are active but are not engaging in competition. A focus on KYC might reduce the risks from false positives that follow from rules-based transaction monitoring, as it provides more context. Visualisation and other digital analytic tools may also reduce the number of false positives.
Other ways of reducing the compliance burden, according to the report, is a focus on factors related to underlying transactions that emanate from geographies deemed to be high risk. Models that provide a more nuanced way of dealing with potential violations, based on statistical models that increasingly escalate red flags based on context, allow investigations to prioritise and improve the efficiency of alerts. According to the reports, “Together these techniques can create a smaller pool of alerts to investigate while still providing sufficient coverage of the alerts that have the highest likelihood of being truly suspicious.”