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5 steps for conducting due diligence on your correspondent bank

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Introduction

You may have noticed the recent rise in cross-border payments, with payment volume and value increasing by 2% and 7% respectively. Whilst this has continued to rise, the capacity to cope with this as an industry has declined, as there has been a global reduction in the number correspondent banking relationships. Far from being a threat for respondent banks though, this trend represents an opportunity to win banking partners ahead of competitors. In order to stay competitive, correspondent relationships are important for your institution to serve its existing customers and attract new ones, and not risk being left behind.

Transparency in sharing customer transactions and profiles with prospective partners is one way to secure these, but you can also convey value by conducting thorough due diligence on your correspondent. When you demonstrate that you have researched the profile and business goals of your prospective correspondent partner, and that your institution can align with their goals, you will lay the foundation for a meaningful relationship that will drive your business forward and maximise revenue opportunities.

In this article, we walk through what correspondent banks are typically looking for in their respondent partners and how to conduct a thorough correspondent due diligence process in 5 easy steps. 

What are correspondent banks looking for?

Financial institutions evaluate potential partners on many factors, but most evaluate new correspondent relationships on three core elements:

  1. Profitability
  2. Expected costs
  3. Creditworthiness

Profitability is important in any new relationship, but you should also carefully evaluate the cost impact on your correspondent partner. Prior to bringing on any new partners, the correspondent bank will estimate the AML compliance costs any new partner will incur. For a respondent, it is important to understand the implications of regulatory market conditions in a particular jurisdiction. How can your institution demonstrate that it won't incur a lengthy and difficult onboarding process for your prospective partners? 

By tracking your bank's outsourced and incoming business activity and making sure that a sufficient amount of business is conducted through the correspondent bank's services, you can ensure an ongoing partnership. 

The due diligence process can be a costly and time consuming challenge for your organisation. If you aren’t fully prepared it can be a pitfall for your correspondent banking practices. Due diligence is a two-way process - it’s equally important for your organisation to conduct a rigorous assessment of your correspondent partner as it is for your organisation to efficiently provide information and navigate the correspondent’s process. The risk appetite from the correspondent bank may be lower due than your organisation given the significant risk of sanctions for non-compliance they face when onboarding a new customer.

Correspondent banking due diligence - 5 steps to follow

In the next section we run through how to conduct a thorough and efficient due diligence process of your correspondent bank to maximise your chances of securing the relationship.

Step 1: Conduct thorough due diligence on your correspondent

  • The correspondent bank will have ample documentation on its risk appetite for respondent partners to study.This information is often public, but additional documentation can be requested from your key contact.
  • Conduct an internal training process in line with the correspondent bank’s financial crime compliance training programmes and review any guidance material.

Step 2: Ensure efficient communication 

  • Nominate a point of contact within your organisation and arrange the same at your correspondent partner to create a streamlined, efficient approach to communications
  • Minimise the number of interactions with the partner institution to reduce wasted costs
  • Organise an extended on-site visit for the correspondent bank to review processes, systems and procedures
  • Provide case studies and examples of an effective compliance partnership with other banking partners to highlight how you have built effective relationships in the past to increase the confidence of the correspondent bank.

Step 3: Provide the right information to the correspondent bank

  • Ensure there is a central unit within your bank responsible for data collection and provision of data to align with the correspondent bank’s risk assessment and customer due diligence process
  • Create a standardised approach to documenting all the information you provide to all correspondent banking partners.
  • Complete the Wolfsberg ‘Correspondent Banking Due Diligence Questionnaire’ (CBDQQ), which was developed to create a global regulatory standard for correspondent banking practices.
  • Submit all your information and questionnaire results, correctly labelled and organised clearly in one package to your correspondent partner.

Step 4: Conduct an extensive self evaluation

  • Ensure that processes are in place to document high-risk customer types and fully disclose these to the correspondent
  • Similarly, high-risk traffic should be noted and disclosed ahead of any formalisation of the relationship
  • Accurately track and document any previous correspondent banking relationships that have ended and the reasons for these ending - correspondent banks value transparency. In particular, note any reasons such as de-risking, de-costing and de-marketing
  • Consider employing an independent audit form to conduct a rigorous internal audit on financial crime compliance if any high-risk identifiers have been noted, for example, customer types and jurisdictional risks.

Step 5: Align with the correspondent’s risk assessment 

  • Clearly identify which correspondent products your organisation will be utilising and note the reason for each. It’s important to consider the volume of product requests you make, as limited product requests are lower risk and are therefore more likely to be accepted
  • Carefully consider how you will use the correspondent’s account and services as different account activities represent different tiers of risk.

Summary

In conclusion, whilst proving your institution’s viability to a partner can be a lengthy and anxiety-driven process - it doesn’t have to be. By researching your correspondent thoroughly, you will be able to see if the fit is right for your organisation in the first place, and be in a better position to prove your organisation’s strength in supporting your correspondent’s business goals and objectives. Remember to:

  1. Research the profile of your correspondent thoroughly and match your strengths to their key objectives to increase the chances of winning a partnership
  2. Keep communication channels open to make the onboarding process smoother
  3. Gather and collect information quickly and be ready to provide this before being requested, to maximise chances of success

Building stronger relationships with your correspondent banking partner

To ensure you are able to keep up with your correspondent’s requests and needs, many institutions are turning to technology to speed up and automate the due diligence process. In our brand new guide, we cover managing your financial crime risk exposure, how to demonstrate your institution’s value in the relationship, and using data and tech to speed up KYC processes.

Download the guide

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Elucidate team
Elucidate team
https://www.linkedin.com/company/elucidate-gmbh/

Posts written by diverse members of the Elucidate team.

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