It’s no secret that the recent push for more rigid financial crime regulatory oversight of financial institutions has resulted in a retreat from the correspondent banking space, and the de-risking of many markets and jurisdictions. This has had the unintended consequence of changing the correspondent banking landscape in a way that fails to holistically reduce financial crime risk and benefits neither the correspondents nor the respondent banks.
The increased costs of compliance have resulted in a concentration of financial crime risk in a shrinking group of correspondent institutions, and the exclusion of respondent banks this group deems too risky. This concentration has in turn led to an increasingly lopsided dynamic between correspondent and respondent banks. Overburdened by the increasingly vast networks they manage, correspondent banks have reacted by applying sweeping, and occasionally inflexible compliance procedures across their portfolios. However, despite their best effort, correspondent banks often lack the perspective to address the unique needs and circumstances of each individual respondent bank.
All too often in the financial crime risk management process, respondents banks come to the table only to be delivered a risk assessment of their own institution, unaware of the methodology by which they were assessed, and unaware of the information and data points utilised to reach conclusions. In such scenarios, respondents are left disempowered. They may lose the incentive to build controls specific to their institution, as any such processes would likely be overridden by those of their correspondent partners. Respondent banks are left unable to “own” their risk, and they simply conform to the standards of their correspondent banks, regardless of whether or not these practices are adequate and suitable for their institution. As a result, the correspondent banking network as a whole is less dynamic, less robust, and less capable of combating financial crime than it otherwise could be.
Correspondent banks are overburdened, and respondent banks are disempowered. To put it simply, nobody wins.
Empowering respondent banks
The reversal of this dynamic is crucial to the ongoing health of the global correspondent banking network. The culture of our financial system must empower respondent banks to control their narrative around financial crime risk. Instead of being presented with their financial crime risk exposure levels, respondent banks should be demonstrating an understanding of their risk exposure and plans for ongoing mitigation. Respondent banks have a clearer view on where their exposures lie, particularly on a day-to-day basis. Given the proper tools, respondent banks are more capable of navigating the particular intricacies of their institution and market, identifying risks and mitigating them directly. A larger correspondent bank may unintentionally overlook these areas of concern, regardless of the rigour of their risk management policies. In addition to the vast portfolios they must oversee, correspondent banks are not as close to the market as respondent institutions, and are likely unfamiliar with their unique risk profile.
When the onus is on the respondent banks to take charge of their own financial crime risk management, they will be left with no choice but to develop sustainable controls suited to their specific risk profile. The creation of a sustainable, hardy, and durable culture of effective risk management, requires a transition towards locally managed financial crime risk management programs and controls. Correspondent banks are capable of providing access to the global financial network, and clearly and explicitly delineating their specific risk appetite. Respondent banks must be empowered to manage their own internal risk exposure, held accountable for respecting their correspondent banks’ financial crime risk appetite, and gain market access on the merits of their risk profile.
The better respondent banks become at independently managing their risk, the safer the global financial network will be.
Building a common language
Of course, this shift in risk culture is predicated upon the acceptance of standardised definitions of financial crime risk, and levels of risk exposure; the creation of a common language, so to speak. This is where tools like the Elucidate FinCrime Index (“EFI”) come in. Through the use of lightweight, Platform as a Service (“PaaS”) solutions, individual respondents are able to carry out assessments of their risk profile in a holistic manner, taking into account all of the unique circumstances within which they operate.
Correspondent and respondent banks are able to interface directly within the EFI, identifying risk on mutually understood terms, and collaborating to ensure that any risks either party may face are dealt with quickly and effectively.
In turn, correspondent banks are able to continuously monitor the quantified finance crime risk exposure of their respondent portfolio, avoid exponentially increasing costs, and direct focus towards strategic financial crime risk management.