Managing correspondent banking ML/TF risks: Recent regulatory developments on the risk-based approach model

This paper provides background and describes the current regulatory views of a sound risk-based approach as well as the specific risk factors, controls and other process tools that need to be accounted for when employing such an approach. Since 2010, regulations globally have focused on defining the risk-based approach as a strategy and have determined appropriate elements to consider while carrying it out. Gathering information from independent reliable sources; assessing relevant risk factors of their customers; taking tailored action based on the level of risk and documenting the rationale for such measures are some of the elements adopted by international laws, regulations and guidelines as representative of a risk-based approach. The fact that enforcement activities have increased, penalties are reaching higher levels and are more widely publicised, has inclined financial institutions to move towards de-risking or implementing inefficient know your customer’s customers (FYCC) programmes for all their correspondent banking relationships. These are not the only means to manage risk for correspondent banking relationships. Other efficient controls have been suggested by the Basel Guidelines, such as knowing the anti-money laundering (AML)/counter terrorist financing (CTF) policies of a customer, adapting their product offering, tailored monitoring to the risk of the respondent bank and where required, taking into account red flags resulting from external information and from self-developed customer intelligence. This paper shows how all measures, processes and assessment of risk factors, together with adequate de-risking and KYCC controls, contribute to a strong management of money laundering (ML) or terrorist financing (TF) risks in correspondent banking activities.