Correspondent banking, whether traditional or digital, plays a vital role in the international financial system. However, it also involves significant risks – mainly because of the potential for correspondent banking services to be used for money laundering or financing illegal activities. Regulatory pressure and industry best practices are increasingly focused on enhancing the on-going monitoring of these relationships.  

Caroline McCreadie
Caroline McCreadie

Director, Cash | Global Network Management

cmccreadie@thomasmurray.com

Benefits of correspondent banking

  • Supports international trade and commerce, particularly for developing and emerging markets  
  • Facilitates easier cross-border trade and foreign exchange 
  • Allows for transfers into countries with currency controls 
  • Promotes financial inclusion 
  • Allows respondent banks to share risks with partners, reducing costs and improving risk management 

Risks of correspondent banking

  • Complexity of the network can obscure money laundering activity 
  • Lack of due diligence can lead to regulatory non-compliance 
  • A correspondent bank may fail to fulfil its obligations, default on credit, or experience operational failures, resulting in losses for the respondent bank and damaging its reputation 
  • Without continuous monitoring, can be difficult to identify weaknesses such as cyber security vulnerabilities and other operational deficiencies  

Who depends on cash correspondent monitoring? 

Effective correspondent banking oversight is crucial for:  

  • simplifying global trade and commerce; 
  • managing risks; and  
  • maintaining compliance with regulatory standards.  

It enables banks to provide secure and efficient cross-border payment services, supports economic growth and development, and maintains trust and confidence in the global financial system. By implementing robust oversight procedures, banks can mitigate risks, ensure integrity and transparency, and contribute to a stable and prosperous global economy. 

Financial institutions 

Banks and credit unions engage in numerous international correspondent relationships for wire transfers, foreign exchange transactions, and other financial activities. Monitoring these relationships helps them comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations through the tracking and reporting of suspicious activities. 

Investigative and law enforcement agencies 

Agencies such as the FBI, Europol, Interpol and domestic financial crime units rely on data from correspondent monitoring to investigate and prosecute financial crimes, including money laundering, fraud, sanctions avoidance, corruption, and terrorism financing. 

Compliance officers and departments 

Effective monitoring allows financial institutions to perform thorough due diligence on their correspondent banks. This involves gathering information about the bank’s ownership structure, business model, products and services, geographic location, and customer base.  

Additionally, the compliance teams in banks and other financial institutions use monitoring tools to detect and report unusual or suspicious transactions. These teams rely on CCM to ensure their organisations adhere to regulatory requirements and thereby avoid penalties. 

Auditors and audit firms 

Internal and external auditors use monitoring systems to review and assess the effectiveness of an institution’s AML/CTF controls. This helps in ensuring that the financial institution’s practices are robust and in line with regulatory expectations. 

Financial technology providers 

Fintech providers of compliance technology solutions use monitoring to develop and refine tools that help financial institutions detect suspicious activities. These solutions often include advanced analytics and artificial intelligence to improve the accuracy and efficiency of transaction monitoring. 

Regulatory bodies 

The Financial Action Task Force (FATF) is an intergovernmental policy-making body, not a law enforcement agency. Its regulatory approach is supported by around 200 countries. The Financial Crimes Enforcement Network (FinCEN) is a bureau within the US Department of the Treasury. 

Both set standards that require detailed oversight of correspondent banking activities to ensure compliance with AML/CTF laws. The regulatory approaches of the FATF and FinCEN tend to be closely followed by other national regulatory authorities around the world to reinforce and maintain the integrity of the financial system. 

Correspondent banks 

Banks that provide services to other banks, particularly for international transactions, need to fully understand and monitor their relationships to mitigate risk and ensure compliance. This is essential for maintaining their reputation and avoiding regulatory scrutiny. 

For more information on how Thomas Murray can help your organisation enhance its cash correspondent monitoring and ensure robust compliance, contact us. We’re ready to help you in safeguarding your operations and your communities. 

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