Financial exclusion is usually regarded as a problem confined to the most disadvantaged sections of society – poor people and struggling small businesses – who find it expensive or difficult to access banking and associated financial services.
But it has recently become a concern for smaller banks and money transmission businesses, some of whom are finding themselves frozen out of the correspondent banking network because global correspondent banks no longer want to do business with them.
This is serious, as correspondent banking remains the lifeline of commerce, facilitating and financing trade and cross-border financial flows.
There are two main reasons for this. First, many global banks are pulling out of smaller markets because they are no longer economically viable. Second, global banks today have to comply with much stricter laws and regulations to curb money laundering, terrorist financing and other financial crimes.
Many small banks and money transmission businesses are unable to meet or prove that they operate to acceptable standards, so the global banks deem them too risky and cease their relationships with them – a phenomenon widely known as de-risking.
Policymaking institutions like the International Monetary Fund (IMF), Financial Stability Board, Financial Action Task Force and the Basel Committee on Banking Supervision, as well as national regulators, governments and the global correspondent banks themselves, have recognised this as a form of financial exclusion that presents a serious threat to the integrity of the financial system.
In a Staff Discussion Note titled The withdrawal of correspondent banking relationships: A case for policy action, published in June 2016, the IMF describes what has been happening and makes some recommendations.
“In recent years, several countries have reported a reduction in correspondent banking relationships (CBRs) by global banks,” states the paper. It says that smaller emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europe and the Pacific, as well as countries under sanctions, are the worst affected.
“Individual banks may decide to withdraw CBRs based on a number of considerations,” it explains. “Generally, such decisions reflect banks’ cost-benefit analysis, shaped by the re-evaluation of business models in the new macroeconomic environment and changes in the regulatory and enforcement landscape, notably with respect to more rigorous prudential requirements, economic and trade sanctions, anti-money laundering and combating the financing of terrorism and tax transparency.”
The IMF says “coordinated efforts by the public and private sectors are called for to mitigate the risk of financial exclusion and the potential negative impact on financial stability”.
One recommendation is that national regulators should encourage the banks they regulate not to de-risk too hastily or indiscriminately. Another is that in countries facing severely reduced access to the correspondent banking network, governments should consider setting up “temporary mechanisms ranging from regional arrangements to public-backed vehicles to provide payment clearing services”.
An industry perspective
The exclusion of smaller banks from the correspondent banking network is a serious problem, because the smaller banks are most reliant on international correspondents for facilitating their cross-border flows. These flows underpin trade and commerce, which is chiefly responsible for the economic growth of the weaker sections of society.
There is not much any bank can do for correspondent banking clients that fall short of risk tolerance and are unwilling to improve their processes and systems. However, most of our clients recognise financial crime as a very serious risk to society and are therefore willing to work with us to raise their standards.
Standard Chartered helps its correspondent banking clients in a number of ways. As a part of “engagement visits”, Financial Crime Compliance experts visit the clients to share with them latest international regulatory developments, especially in relation to money laundering and other financial crimes, and share ideas on what a good compliance programme looks like.
A variation of the engagement visit is the “deep dive” where the bank will objectively assess how the client is doing on a number of different facets of financial crime compliance, such as policies, screening procedures, organisational structure, governance and training. The bank will advise its clients where they are deficient and agree on ways to improve.
Standard Chartered also organises in-country “Correspondent Banking Academies”, which are typically one- or two-day events held for clients and regulators in a country. Case studies are shared and best practices exchanged on customer due diligence and ways of identifying and preventing financial crime.
Finally, the bank also holds “Regional Correspondent Banking Academies”, which are similar to the above, but broader in scope and aimed at a more senior level of compliance staff.
Education is key to improving financial inclusion. If global banks simply refuse to deal with smaller banks, it not just excludes those smaller banks from the financial system, it also encourages a lack of transparency as financial flows will start finding alternate channels that potentially go completely under the radar.
It is far more beneficial for as many transactions as possible to remain mainstream, subject to tighter compliance controls.
Euromoney and Standard Chartered will be running a series of webinars on debt capital markets. The first one will be on ‘Investing China: CGB futures and the Bond Connect’ on May 15. Find out more
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