Data Science and Artificial Intelligence Solutions Help Financial Institutions Curb De-Risking Practice

The ability to make and receive international payments via correspondent banking (CB) is vital to the global economy. Whether it is Texas-based manufacturer exporting parts to Brazilian customers or an engineer working in Europe sending money to his family in Asia, financial institutions (FIs) rely on CB relationships to move their customers’ money. 

By its simple definition, CB is an arrangement where a correspondent bank provides services to another bank (the respondent), often so the respondent can obtain access to overseas financial, trade, or other products. According to World Bank estimates, global remittances will increase to more than $636 billion in 2017. High remittance volume brings increased regulatory scrutiny, risk, and compliance costs that bite at FIs’ heels. The unfortunate result is that FIs often choose to de-risk foreign CB relationships rather than deal with the inherent risk and problems of maintaining CB accounts. Effective entity resolution and entity relationship investigation are integral to curbing the de-risking cycle. Data science and artificial intelligence (AI)-based tools are available today to help FIs effectively and efficiently maintain CB relationships.

The CB regulatory landscape changed in 2002 when the Financial Crimes Enforcement Network (FinCEN) enacted “Special Due Diligence for Correspondent Accounts and Private Banking” interim regulations under Section 312 of the US Patriot Act. The final rule was enacted in January 2006. FinCEN’s actions were in response to the September 11 terrorist attacks and mandated that FIs enact specific Know Your Customer (KYC)/Customer Due Diligence (CDD) and, in some cases, Enhanced Due Diligence (EDD) procedures, for their foreign CB relationships. In essence, some FIs saw the need for “Know Your Customers’ Customers (KYCC) policies and procedures due to costly CB KYC requirements that were difficult with little or no actual risk mitigation.

In 2016, the U.S. Department of Treasury’s Office of the Comptroller of the Currency (OCC) issued guidance to their regulated FIs regarding best practices for managing a CB relationship:

  • Establishing and maintaining an effective governance function to review the method for risk reevaluation and to monitor the appropriateness of recommendations regarding foreign correspondent account retention or termination;
  • Communicating foreign correspondent account termination decisions regularly to senior management;
  • Communicating with foreign financial institutions, considering specific mitigating information these institutions may provide, and providing sufficient time to establish alternative banking relationships before terminating accounts, unless doing so would be contrary to law or pose an additional risk to the bank, national security, or reveal law enforcement activity, and;
  • Ensuring a clear audit trail of the reasons and method used for account closure.

CB relationship management has become more challenging, costly, time consuming, and riskier; therefore, FIs have been increasingly turning to de-risking or exiting high-risk CB relationships. Some FIs no longer want to manage CB relationships linked to money service businesses (MSB) or CBs in high-risk jurisdictions in fear of regulatory scrutiny, investigation, and possible penalties. According to a November 2015 World Bank survey, 75 percent of major global banks stated that they had seen a decline in their CB relationships. The World Bank report further stated that the Caribbean noticed the most CB decline.

In the April 27, 2017 World Bank report titled, “Migration and Development Brief,” the global average cost of sending a $200 transfer was 7.45 percent in the first quarter of 2017, which is substantially higher that the 3 percent goal. The World Bank report places the cost at 9.8 percent in Sub-Saharan Africa. World Bank experts stated that a chief barrier to reducing remittance costs is “de-risking by international banks, when they close the bank accounts of money transfer operators, in order to cope with the high regulatory burden aimed at reducing money laundering and financial crime. This has posed a major challenge to the provision and cost of remittance services to certain regions.”

Effective CB relationship risk management boils down to having the effective tools to efficiently resolve entities banking through CBs. The ability to establish past transactional histories related to volumes and amounts, expected volumes and amounts, current and ongoing ultimate beneficial owner data, and any/all adverse media related to the entity is key to effective CB risk management and KYCC. Expanding the same data points to an entity’s related parties provides a holistic risk picture for the compliance team. CB and pseudo-customer investigation is time-consuming and costly, but an effective data science solution with AI enhancements offers a solution to this problem. Automated CB solutions are available today to provide all the required data points outlined above. Data science and AI are available, precise, and efficient tools to assist FIs in the de-risking quandary.

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