On December 19, 2016, the Financial Stability Board (“FSB”) issued its end-of-2016 progress report regarding its action plan to assess and address the decline in correspondent banking. The report sets out a roadmap the FSB intends to follow in 2017 in response to the decline of correspondent banking, a critical part of the global payments system. In the next year, the FSB’s action plan consists of new data analyses exploring the dimensions and implications of the issue, clarifying regulatory expectations through new guidance from the FSB’s Financial Action Task Force (“FATF”) and other standard-setting bodies, enhancing domestic risk management frameworks in jurisdictions that are home to affected respondent banks, and strengthening tools for due diligence by correspondent banks.
Correspondent banking is the means through which domestic financial institutions service transactions for foreign financial institutions. A correspondent account may be used, for example, to process transactions domestically for the customers of a foreign financial institution (known as the “respondent” bank). As we explained in a previous post, it has been reported that financial institutions have become more reluctant to engage in foreign correspondent relationships because of concerns over escalated compliance risks with respect to money laundering and terrorist financing.
Faced with these risks, financial institutions may choose to close correspondent accounts, rather than risk regulatory violations. These choices can lead to the loss of critical financial services in some jurisdictions, especially in developing countries that do not have sophisticated anti-money laundering and anti-terrorist financing frameworks.
The FSB, an international body of regulators currently chaired by Mark Carney, Governor of the Bank of England, issued in 2015 a four-point plan to assess and address the decline in correspondent banking. The report included plans to:
- Further analyze and examine the problem;
- Clarify regulatory expectations;
- Build domestic capacity in jurisdictions that are home to the affected respondent banks; and
- Strengthen tools for correspondent bank due diligence.
Several steps have already been taken to implement this plan. Most significantly, the FATF issued guidance on correspondent banking in October 2016 that clarifies that financial institutions are not required to conduct customer due diligence on the customers of respondent bank clients.
The FSB’s latest progress report describes several deliverables it expects will be completed in 2017. Among others, these deliverables include:
- Data Collection and Analysis:
- The FSB will publish the findings from its survey on correspondent banking by April 2017.
- The World Bank will present findings from its country studies in 2017.
- Clarifying regulatory expectations:
- The Basel Committee on Banking Supervision will publish revised guidance on correspondent banking by June 2017.
- The FATF will finalize work on the definition of “correspondent banking” for purposes of its standards by June 2017.
- Domestic capacity-building:
- The FSB will publish suggested main elements of a communications strategy that jurisdictions may follow to build trust among foreign financial institutions by March 2017. The strategy will be designed to build trust by communicating the steps taken by a jurisdiction to improve its anti-money laundering and counter-terrorism financing framework and quality of supervision over financial institutions.
- Due Diligence Tools:
- International banking and payments associations will develop an action plan to improve and clarify guidance on what should be included in payment messages by June 2017.
These efforts by the FSB and other international regulators echo efforts by U.S. regulators to address reductions in correspondent banking relationships, such as October 2016 guidance from the Office of the Comptroller of the Currency and an August 2016 fact sheet from the U.S. Department of Treasury.