FATF Gives Guidance on Correspondent Banking Services

2016 October: In response to concerns of global leaders, including the G20, about a need for further clarification of regulatory expectations, the FATF has approved a guidance on correspondent banking services. This guidance addresses the issue of de-risking and clarifies how money laundering and terrorist financing risks should be managed, customer-by-customer, in the context of correspondent banking relationships.

The FATF has recognised the important role that correspondent banking services have in the global economy and the reliance that entire sectors and regions place on them.

In recent times some financial institutions have decided to close their correspondent banking relationships with whole classes of customers or entire regions, in order to avoid, rather than mitigate, money laundering and terrorist financing risks. This is not however in line with the FATF’s stated risk-based approach. This “de-risking” can lead to financial exclusion, by depriving customers from access to the regulated financial sector for their financial transactions. The loss of correspondent banking relationships makes it harder to make cross-border payments, and can potentially damage the resilience and stability of the financial system.

An incorrect understanding and application of AML/CFT measures can increase the costs of doing business with correspondents, and cause unnecessary pressure on banks to end correspondent relationships.

Following its Plenary meeting in Paris last week, the FATF has made it clear to banks providing correspondent services that they are not required to carry out customer due diligence on each individual customer of their respondent institutions, and that any enhanced due diligence measures have to be commensurate to the degree of risks identified.

The FATF's new guidance, intended to deter banks from withdrawing financial services such as correspondent banking from whole classes of customers or entire regions as part of a 'de-risking' strategy, is a most helpful and welcome step for the financial services industry in the Cook Islands. As with all jurisdictions the industry in the Cook Islands is subject to the de-risking decisions made by banks internationally. The clear message given by the FATF will hopefully reduce and remove the pressure on such banks to de-risk and similarly reduce and remove the possibility that Cook Islands service providers and their clients may be the undeserved and unsuspecting victims of such unnecessary action.