Balancing Enforcement and Inclusion: U.S. Policies on Correspondent Banking Supervision and Enforcement
Foreign correspondent banking allows banks around the world to provide cross-border payment services to their customers through correspondent accounts created at other financial institutions for the purposes of third party payments, cash clearing, etc. Although correspondent banking remains a key component of the global financial system, and helps facilitate financial inclusion, bodies like the Federal Financial Institutions Examinations Council express concern that providing a gateway to the U.S. financial system through correspondent relationships could enable serious money-laundering, the financing of terrorism and give access to financial channels not otherwise available to sanctioned countries and persons. In recognition of this, and in light of the significant penalties levied in the last few years by the U.S. Department of Justice, New York Department of Financial Services, etc., banks have deployed, and continue to deploy, an aggressive de-risking process that ultimately involves terminating or restricting these correspondent relationships.
In June 2016, the International Monetary Fund (IMF) warned that terminating and/or suspending these correspondent accounts as a de-risking measure inflicts serious harm on island economies and emerging markets that depend on access to those transactional services. Prior to the IMF’s warning, the World Bank also published a paper discussing the increased termination or suspension of correspondent banking relationships by large international banks, especially in connection with the Caribbean, and the problems associated therewith. In the “Guidance on Correspondent Banking Services” issued by the FATF for October 2016, the FATF discusses other drivers of de-risking, such as confusion caused by Know-Your-Customer’s-Customer policies and increased compliance costs associated with conflicting regulatory requirements, etc.
Perhaps as a response to both wide-spread speculation about enforcement in the context of correspondent banking services, and the havoc wreaked in certain economies by wide scale termination, the U.S. Department of the Treasury (UST) and various federal banking agencies issued a Fact Sheet covering correspondent banking (the “Fact Sheet”). According to a related blog post from UST, the purpose of the Fact Sheet is to clarify supervisory and enforcement postures of the respective agencies. In both the Fact Sheet and the blog post, the emphasis was on what the current regime isn’t—one of zero tolerance. The key takeaways from the Fact Sheet are that correspondent banking is a key component of the global financial system and that U.S. financial institutions should create policies, processes, and procedures through a risk-based approach for foreign financial institution clients (FFIs) that are using the correspondent accounts.
Closely following on the heels of UST’s Fact Sheet was the “Risk Management Guidance on Periodic Risk Reevaluation of Foreign Correspondent Banking,” issued by the U.S. Office of the Comptroller of the Currency (OCC) on October 5, 2016, and the FATF Guidance for October 2016. A far stronger message to the banking community than the Fact Sheet, the OCC Guidance acknowledges the widespread closure of correspondent accounts—and the resulting barriers on access to financial services—as a result of banks determining that they are not able to mitigate the risks posed by correspondent accounts in today’s regulatory climate. The FATF Guidance similarly echoes FATF’s serious concerns that this sort of de-risking prompts the movement of financial transactions into less-regulated channels.
The various correspondent banking guidance issued by the OCC, FATF, and the UST and other federal agencies can be interpreted a number of ways. For instance, the OCC guidance (issued independent of other agencies) appears to assure banks that it cannot direct them to close their foreign correspondent accounts, while simultaneously providing specific details on how to make decisions to close accounts. Notwithstanding the foregoing, it generally appears that the U.S. government and the FATF have tried to assuage the fears of large banks with foreign correspondent accounts by highlighting risk reevaluation outcomes that do not simply result in wide-spread account terminations and the resulting wide-spread removal of foreign banks in emerging markets from the global financial system.
While fact sheets and other specific guidance issued by regulators are helpful because they provide valuable insight into a regulator’s mindset, an important part of the balance between inclusion and enforcement is the actual evaluation of whether a desired outcome has been achieved. If correspondent banking relationships continue to be terminated in 2017, the relevant U.S. regulators should have a meaningful way of determining whether their guidance have resulted in the desired outcome—if not, then the U.S. regulators should consider new forms of guidance.