Financial criminals depend on emerging technologies to perform illicit actions. They abuse correspondent banks which refers to the go-between for domestic and foreign payments. While correspondent banks have formal legal agreements, their vulnerability persists. Being active intermediaries and holding a legitimate status, these institutions are becoming a safe haven for money launderers.
Banks’ profitability has seen manifolds till 2022, with revenue growing by $345 billion globally. On the contrary, suspicious activities expose financial institutions to AML compliance risks. Due to a spike in illicit actions, regulatory bodies are increasing legal requirements for correspondent banks. These majorly include customer verification, risk assessment, background checks, and transaction monitoring. This article outlines reasons why AML solutions have become mandatory for correspondent banks.
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Correspondent Banks and the Increasing Risk of Money Laundering
Correspondent banks are the financial intermediaries that act as a liaison for cross-border payments. They work on behalf of centrally regulated institutions and are liable to stay put with global anti-money laundering requirements. Correspondent banks offer a wide range of services from treasury management, transactional settlements, cashing checks, and wire transfers to loan handling. While serving as active counterparts of financial institutions, they are the center of many illicit actions.
Criminals target correspondent banks to wash their dirty money by transferring it across countries in their offshore accounts. The increase in their vulnerability to digital onboarding of criminals and money laundering is because of the following factors:
Decentralized Financial Structure
For decades, financial institutions have been part of a centralized system which made them easier to supervise. However, in recent years, decentralized banking systems are increasingly making their way to the payment service provider landscape. Non-traditional financial entities offer savings, currency, and investment accounts which is increasing their popularity. Similarly, Decentralized Finance (DeFi) is becoming the new norm of online payments.
Considering all the development, anti-money laundering bodies are finding it hard to regulate correspondent banks. While providing convenience and ease of immediate funds transfer, tracking illicit financial activities has become challenging.
Insufficient Knowledge of the Customers
Know Your Customer (KYC) is an integral part of AML verification regulations. As they operate in another country, accurate verification of users often increases correspondent banks’ risk of non-compliance with anti-money laundering requirements. Correspondent banks are unaware of the respondent bank’s customers.
The Financial Action Task Force (FATF) made customer risk assessment an obligation for correspondent banks in 2015. Building threat profiles is a major outcome of efficient KYC verification. Therefore, insufficient knowledge of customers, their intentions, and risk profiles increase AML compliance risks for correspondent banks.
Shell Companies
Corporations with no significant assets or active business operations are known as shell companies. High-profile enterprises and individuals use them to avail tax benefits, hostile takeovers, and start-up efforts. Likewise, criminals also create counterfeit firms with hidden identities to conceal illicit funds. As a result, they disguise shady financial intentions while escaping AML monitoring. Adding to this are shell but legitimate-looking correspondent banks and offshore accounts that help criminals hide the proceeds of crimes.
AML Regulatory Compliance Challenges Faced by Correspondent Banks
Correspondent banks thrive on meeting AML compliance and preventing ending up on sanctions. However, high fraud risks, insufficient digital onboarding security controls, and other such reasons hinder their legal responsibility-fulfilling process. While they are making efforts to meet anti-money laundering requirements, the following challenges are likely to place barriers:
Varying Legal Requirements Across Different Countries
The distinction in regulations across jurisdictions holds correspondent banks back in meeting AML security standards. Money launderers seek out foreign transactions in countries with flexible regulations. This way, criminals escape legal scrutiny by transferring illicit funds through cross-border payments.
Incompatible Fraud Prevention Systems
Correspondent banks are decentralized entities and often lack advanced AML solutions to counter illicit actions. Later, they face insufficient risk profiling, due diligence, and activity monitoring.
Additional Operational Costs
Paying extra money for performing Customer Due Diligence (CDD) often leaves small correspondent banks with financial losses. In terms of foreign transactions, detecting suspicious activities becomes more challenging.
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Meeting Compliance Challenges with AML Screening Solutions
Correspondent banks can lower regulatory compliance risks by building effective fraud prevention countermeasures. AI-powered AML screening solutions help these financial institutions to build additional protection against criminal intentions. Furthermore, automated anti-money laundering services offer the following:
- CDD checks
- Risk assessment
- Cross-checking financial background
- Screening across global sanctions and watchlists
- Continuous activity monitoring for suspiciousness detection
- Real-time transaction tracking
Final Thoughts
Criminals are well aware of weaknesses in international anti-money laundering controls and use correspondent banking accounts for moving their illicit funds. Hence, establishing efficient AML systems has become a liability more than a requirement. With automated sanctions screening, suspicious activity tracking, risk assessment, and transaction monitoring, anti-money laundering solutions enable correspondent banks to meet compliance while streamlining time investment.
