The risk of derisking - BAFT panellists discuss what the future holds

Opinion | 20 March 2017

The reasons and unintended consequences of derisking in correspondent banking were debated in BAFT's Europe Bank to Bank Forum. Will correspondent banking ever be the same again? The attendees from banks worldwide certainly didn't think so. What will regulators do now? Katharine Morton edits the highlights of the discussion

Where is the derisking debate globally?

Emile Van der Does de Willebois, global lead, financial market integrity and asset recovery at the World Bank: In the report1 that the World Bank produced on the withdrawal of correspondent banking services for the G20 in 2015, which confirmed stories that bank relationships were being exited (particularly in areas such as the Caribbean and offshore centres generally, but also larger jurisdictions), we didn't want to entitle it derisking, as we didn't want to second guess or impute a motive. It is not all about anti money-laundering (AML) risk. And the patterns and motives of what was going on were so differentiated that to call it all 'derisking' didn't seem to do it justice. The FCA produced a report in May 20162 also highlighting so called 'second guessing' by banks - with banks exiting relationships not because they think there is risk with a particular customer, but rather that their correspondent bank or a regulator may consider it a risk. Then there was an IMF staff discussion note - not mentioning the word derisking [for the same reason of not wanting to impute a motive]3.

And since then, in July 2016 the Committee on Payments and Market Infrastructures (CPMI) report4 based on Swift data confirmed that while the number of correspondent banking relationships was declining flows (volumes) through those relations were actually increasing, leading to a concentration. It's a more nuanced picture than some in the press portray.

Audience poll 1 - The recent withdrawal from correspondent banking relations is mainly due to:


Maurice Iskandar assistant general manager, International Banque Libano-Française: As a respondent bank on the receiving end of derisking we often have the feeling that international correspondent banks have gone a bit overboard. We cannot help but get the feeling that international correspondent banks have really blown things out of proportion with respect to AML and compliance, in response to increased pressures from US authorities and regulators.

What is the reason for fines? Was it due to respondent banks' actions? In my research and contacts with de-risked banks in MENA and with correspondent banks, it occurs to me that there have been very few instances where respondent banks have actually caused derisking banks to suffer from fines. In fact, out of the US$160bn5 in fines imposed on correspondent banks since 2009, only US$16.4bn - roughly 10% - were due to compliance reasons. There may have been a few bad clients/false information slipped by the respondent banks through the correspondent banking networks - it's been rare and didn't cause the big fines that have been imposed.

Why have correspondents blown this out of proportion? Maybe because they made mistakes - respondent banks did not cause the big fines but respondent banks are paying the price while bad actors are now underground. Some good actors have gone underground, financial exclusion has increased and whole countries have difficulty accessing markets for financing trade. These financial flows are now not followed, screened, monitored or controlled. Even financing of humanitarian aid flows has suffered. Has all this decreased risks or are we facing a redefinition of correspondent banking? Costs keep going up but revenues are not going up that much. We need more and clearer statements by regulators on what is legitimate correspondent banking.

What's the point of view of the large correspondent banks?

Audience poll 2 - Will correspondent banking ever be the same again?


Tracy Paradise, head of AML strategy & architecture, global AML, HSBC (and also executive secretary of the Wolfsberg Group, which is a leading industry group on global AML issues): Like most things, where you stand depends on where you sit. Nothing is black or white. From the perspective of a large correspondent bank, if you think about how we do business, derisking shouldn't be confused with de-marketing and sometimes it is.

Global financial institutions go in and out of business lines, countries and products for strategic or other reasons all the time. There are multiple reasons why any bank would choose to look at its portfolio of correspondent banks. Usually a review could be triggered by specific events such as news, FATF [Financial Action Task Force] mutual evaluation reports, financial reports, surveys that generate the need to look at a particular institution from a risk management perspective. Because of the preponderance of country risk in the risk assessment process, in some instances these trigger events may mean that a review of individual banks may be concentrated in one market.

My second point is around definition and regulatory responsibility. What can the industry do to make sure that regulators apply the same definitions and requirements? The standard setters that are the FATF6 and the Basel Committee on Banking Supervision (BCBS) have both issued guidance now. The FATF correspondent banking guidance that was issued in September 2016 goes further than before with respect to accepting a risk-based view of correspondent banking and accepting that not everything in correspondent banking is high risk. How a country then applies that guidance, which I would stress is not mandatory, and does not bear the same weight as regulation, is entirely up to them, which presents a challenge to the establishment of a completely harmonised playing field.

Emile Van der Does de Willebois: The audience polls show an overwhelming consensus that we are moving to a new model and that correspondent banking relations will continue to fall over the next year. Interestingly, a lot of the audience are still looking for more guidance from international standard setters. I wonder what more FATF and BCBS can do?

Audience poll 3 - This time next year, your institution’s number of correspondent banking relationships will have:

Maurice Iskandar: I agree with a lot of what the FATF have done but the problem is not what the regulators intend, but the unintended consequences, which have been huge. This has caused a lot of the issues we're facing. It would be good to have some clarity from correspondent banks on what your expectations are on the cost-benefit analysis on respondent banks and what are the costs of compliance? We hear varied figures from international banks. We are looking at firstly making sure we comply with the rules and regulations imposed on us, and on correspondents and secondly guessing what revenues we are providing to our correspondents in order to cover their compliance costs.

Where do you see solutions?

Tracy Paradise: Decisions about exiting relations are rarely done on one factor alone. I am surprised that 42% of the audience think that the standard setters BCBS and FATF have more work to do. While more guidance (which was the question asked) may be helpful, as I mentioned earlier, guidance is not binding and how individual jurisdictions implement the standards and regulatory frameworks is entirely up to each country. Industry groups need to work with BCBS, FATF and other stakeholders to clarify how banking works, ensuring knowledge transfer and offering a practical lens as to the impact of standards, guidance or regulations.

That 57% of [the audience] who thought that you would have fewer correspondent relationships in a year is shocking. The point here is not to cripple the business, impede or inhibit international trade, financial inclusion and financial flows. The point is to get to a place where the pendulum steadies and public policy objectives on financial inclusion do not conflict with appropriate risk management requirements.

For that to happen three things are needed. First is a clearer definition of what correspondent banking actually is. Right now the FATF definition of correspondent banking is essentially any business that one bank does with another, which is wide. The second is consistency of guidance, regulation and more/better coordination among all the actors involved in opining on correspondent banking.

The amount of time it takes, for example, to do multiple surveys on correspondent banking, derisking and inhibited flows and the associated data extraction is significant and it is not immediately apparent as to what is actually done with the information. As for utilities, the utility of a utility will only be proven and make a difference if regulators and supervisors clearly articulate that banks can rely on the information held in a utility as part of their risk assessment process. Without that element of endorsement, or even only non-objection, their utility will be limited.

Audience poll 4 - Which of the following will be most beneficial in addressing derisking?


Emile Van der Does de Willebois: We have a common cause here which is to drive the criminal out of the system but what we have developed is incredibly expensive and sometimes ineffective. Is there a suggestion that Fintech and common collaboration may hold some solution for the derisking problem?

Tracy Paradise: My last point is that we need to collaborate more, across the board and not just within the industry. We're all at different points, we live, breathe and deal with these issues day in, day out. There is a knowledge gap with respect to how to make this a more sustainable AML /CTF environment, but that takes time. We shouldn't lose sight of the fact that, as we are having all these discussions and dealing with these challenges, the only guys who are laughing are the perpetrators of the crimes and those who launder those proceeds. Collaboration between regulators and the industry is going to be far more critical going forward so that we can address these issues together. While Fintech can contribute, it is not a panacea for all the concerns we still have to resolve to make the AML/CTF framework more sustainable and effective.

Maurice Iskandar: International banks don't operate in a vacuum and we have to keep in mind shared values - they have to operate in a sustainable system.

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