Correspondent monitoring: A safeguard against the worst-case scenario

Regulatory fines: Banks can be fined heavily for failing to comply with anti-money laundering (AML) regulations. In 2019, an Italian bank was fined more than US$1bn for sanctions violations.

Civil or criminal prosecution: Banks and their executives can face legal action, including civil and criminal charges, for facilitating money laundering or failing to implement adequate AML controls.

Restrictions on financial activity: Regulatory bodies may impose restrictions on the bank's operations, limiting its ability to conduct certain types of transactions or operate in specific jurisdictions.

Reputational damage: The bank's reputation can suffer significantly, leading to a loss of customer trust and confidence. This can result in a decline in business and a drop in share price if the bank is publicly listed.

Loss of future business: The bank may lose existing and potential business opportunities, because other financial institutions may be reluctant to engage with a bank known for poor compliance / operational risk management practices.

Operational impact: Losing access to correspondent banking services can severely impact a bank's ability to operate, especially in cross-border transactions. This can harm the bank's ability to serve its customers and maintain its operations in other jurisdictions.

Increased risk of financial crime: Without proper monitoring, banks are vulnerable to being used for money laundering and terrorist financing. Criminals can exploit the lack of due diligence to hide the origins of illicit funds, making it difficult for authorities to trace and prevent financial crime, and to counter terrorist financing.

Financial exclusion: De-risking, or the practice of avoiding business with high-risk regions or customer groups, can lead to financial exclusion. This can drive legitimate transactions underground, increasing the risk of money laundering and terrorist financing.

In summary…

The absence of proper and embedded correspondent monitoring can expose banks to significant financial, legal, and reputational risks, while also increasing the likelihood of facilitating financial crimes.

Countering the risks in correspondent banking involves more than just following Financial Action Taskforce (FATF) recommendations and compliance with the rules set out by regulatory authorities. It means putting correspondent monitoring at the heart of risk assessments and the overall risk management process.