On-going Correspondent Banking Monitoring

Correspondent Banking is the provision of banking services by one bank, the “Correspondent Bank”, to another bank, the “Respondent Bank”.

And like any provision of banking services, it must be monitored from an AML/CFT/Financial Sanctions perspective. So far, so good. But how can you monitor transactions when you don’t clearly see one or both ends of the money flow, when you don’t have insight into the source or destination of funds and when the transactions are in fact not your customers’ transactions? How do you effectively monitor huge financial flows when you are blind?

Correspondent Banks open “LORO” accounts for the Respondent Banks. The latter use them as channels for their customers’ money flows so their money is transferred in jurisdictions where the Respondent Bank doesn’t have a physical presence or in a bank with whom the Respondent Bank doesn’t have a direct relation. In many cases, these LORO accounts are further “rented” for use for the Respondent Bank’s own Respondent Banks – the so-called “nested” correspondent relations. And thus, you can end up to a beautiful multiple-layers correspondent relation.

Correspondent accounts are in essence bank accounts and must be therefore subject to the same mandatory AML/CFT/Financial Sanctions monitoring.

Only that it is not actually the same. It is far more difficult and requires a different approach.

Why?

Because:

• You must understand your customer’s customers

  Your customer is the Respondent Bank and it is its account (the LORO account) that you must monitor. You don’t know its customers – the persons or companies on whose behalf the transactions are performed (their typical transactional profile, their economic activity, their source of funds, the purpose of the transactions, etc.).

• The information retained in the SWIFT message may sometimes be incomplete

  It may be incomplete regarding the ordering / beneficiary name or the details of the transactions – you may find yourself looking at a transaction and not knowing who the beneficiary is as the only information captured in the SWIFT message is actually the name of the beneficiary bank and not that of the beneficiary party. When the transaction details are also missing, the Sherlock Holmes story is complete.

• The information retained in the SWIFT message may sometimes be misleading

  It seems that the money comes from the UK, but in fact the ordering bank from the UK is just a bank in a nested correspondent relation and the original source of funds is an offshore jurisdiction.

• The individual amounts may be huge

  Very often you must “sail” between huge, legitimate individual amounts in order to spot the suspicious ones – in a situation with numerous 9-digits transactions, the line between suspicious and ordinary becomes very thin and dangerous.

• The number of the transactions may be huge

  It depends on how “popular” your Respondent Bank is and how many customers it has. The more transactions in a LORO account, the more difficult the on-going monitoring is.

So, how do you monitor your Respondent Banks?

• Monitoring starts before opening the LORO account

You must analyze the Respondent Bank very thoroughly before accepting it – what is its ownership structure and who finally owns it, what is its business model, what kind of customer does it have/target, what are its typical transactions, what jurisdictions are to be expected, what amounts, what is its AML/CFT/Financial Sanctions program? You analyze it, maybe you even visit it, you interview it, you make a risk assessment and you finally decide whether it fits your risk appetite or not.

• You lay down your conditions

Is it going to be a nested correspondent relation or not, what types of customers and transactions you forbid (eg. military, gambling, etc.), what is the framework for receiving answers to your enquiries, what is the term for the periodical review (annual/bi-annual/every 2 years, etc.

• On-going AML / CFT monitoring of the transactions performed in the LORO account

It is basically the same principle as in the case of your own retail/ corporate customers. However, you must have a dedicated IT system with dedicated scenarios and dedicated AML officers that analyze the alerts, request additional information from the Respondent Bank when needed, decide if the transactions are suspicious, report them to the local FIU and even impose mitigations measures when necessary – eg. forbidding the Respondent Bank to allow a certain “suspicious” customer to perform anymore transactions in your LORO account. Theoretically it is the same principle, but in practice the differences between an ordinary current account and a LORO account are very high and the entire AML/ CFT monitoring must be … “dedicated”.

• On-going Financial Sanctions monitoring of the LORO account

The LORO accounts may be opened with a different code than the ordinary current accounts. You must ensure that these accounts are technically set-up so they are subject to the real-time monitoring for financial sanctions.

• On-going monitoring of the Respondent Bank

You must be aware of fines imposed by its Regulator, negative news, changes in the shareholding structure, etc.

• Periodical review of the Respondent Bank

Based on its associated risk, every once in a while (quite often actually – every 6 / 12 / 18 / 24 months, on a risk-based approach) you re-assess you Respondent Bank. The process is quite similar to step 1, only that now you already have a picture of the Respondent Bank’s account activity so you can assess it better.

The suspicions usually follow the same tone: high-risk jurisdictions, un-justified large amounts, structuring, threshold monitoring, sudden and/or significant changes in transaction activity by value or volume, etc.

The principles are basically the same as in traditional monitoring. The framework is however different and this is where the difficulty lies in.

AML/CFT and Sanctions monitoring of accounts is a mandatory responsibility of each bank, no matter if we talk about traditional customer accounts or LORO accounts. And if recent money laundering scandals have taught us anything is that reliance on other banks simply because they are large, international and well-known banks, is a mistake.

So, if you know that you playing the role of a Correspondent Bank, start investigating how your bank is on-going monitoring its Respondent Banks. Remember! You need dedicated systems, dedicated alerts and dedicated AML training for your dedicated AML Officers.

So keep your eyes wide open and your LORO accounts under close monitoring!

And you should also start looking at your Money Transfer Business customers more closely, too. To be honest, they are just like your Respondent Banks and their accounts are in fact LORO accounts, but with smaller individual amounts. But this is another article.

By Andreea Tampu, ACAMS

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