/ White papers

Arachnys country audits offer an up to date, deep dive investigation into the data and regulatory landscapes of key markets worldwide.

The reports analyse sources such as corporate registries, news and litigation with the aim to educate you about the availability, quality and challenges associated with the data in each market. Some of the regions we have covered so far are Brazil, China, UAE and Nigeria.

/ Blog

De-risking Correspondent Banking: Risk of Financial Isolation


Given the evident financial crime and compliance risks inherent in some correspondent banking relationships the most rational solution for a financial institution might appear to be a de-risking program.

While this may initially appear to be most efficient and cautious approach to take in the short-term; when taking a medium to long-term view absolute de-risking of correspondent banking relationships may create new risks both to the financial institution and to the stability of the broader financial system.

It could also result in larger financial institutions missing out on the commercial opportunities that these relationships, when properly risk managed, represent.

The World Bank highlighted that “roughly half the banking authorities and slightly more local/regional banks indicated a decline in Correspondent Banking Relationships. For large international banks the figures are significantly higher at 75 percent.” Their analysis identified that de-risking by larger financial institutions was a significant cause of this decline and was resulting in a negative impact on the smaller financial institutions with whom those relationships were held, as well as the nations and populations who make use of those smaller financial institutions. The same report highlights that ‘The Caribbean seems to be the region most severely affected’, an issue on which the IMF issued an alert in November 2016. Warnings on this kind of financial isolation have also been issued for Latvia, following the Russian Laundromat revelations.

In these instances, the countries involved tightened their controls and found alternative foreign institutions willing to provide replacement correspondent services. However it is feasible that, if this process ran unchecked, a formerly stable state could experience isolation from the global financial system and instability in their broader economy over a short time period.

A report published by Oxfam illustrates how the removal of correspondent banking can have human rights and humanitarian impacts, particularly on developing countries. Lack of access to the global trade finance system hampers the development of the trade economy which would otherwise be a valuable source of foreign currency as a stabilizing and developing force in otherwise unstable locations.

The withdrawal of relationships can disrupt global remittance flows; that is the formal and an informal transfer of funds between social and family relations ships split across the developing and developed worlds, which can be damaging for countries such as Somalia, “where more than 40 percent of the population relies upon remittance inflows, which account for between 25 to 45 percent of the country’s total GDP”:

“to the extent that de-risking severs vulnerable populations’ access to financial services, it may also force the poor to choose alternate coping strategies that put human rights at risk. One such strategy is the shift to child labor to supplement household income and mitigate economic shocks.” Oxfam, 2015

PWC has also concluded that there is value to maintaining correspondent banking relationships, despite their inherent challenges. In the 2015 reportCharting a future for US-dollar clearing and correspondent banking through analytics’ PWC make the positive case that rather than abandoning correspondent banking, that they should instead use technology to mitigate the most challenging aspects of these relationships. By maintaining these relationships a large financial institutions can retain their position as the front line against transnational financial crime.

For financial institutions who want to retain this position and avoid driving illicit financial flows further underground, correspondent banking is the best approach. Furthermore, for those who take a longer term view and establish new correspondent banking relationships with these higher-risk countries and territories, there are real opportunities, not least because de-risking will has reduced the competition for those institutions (with sufficient control frameworks) who wish to invest in the opportunities inherent in developing markets.

  • Network diagrams of risky entities and records can ensure that high risk groups are understood, and frequency of monitoring can be tailored according to the risks by the correspondent bank.
  • Automated processes for identifying ultimate beneficial owners take the legwork out of identifying unknown risks, and captured data from emerging markets can increase the visibility.
  • The automated triggering of investigations, operations and due diligence for associated entities in a single source, alongside the autopopulation of entity data from third party sources, with the ability to differentiate between high-risk and low-risk jurisdictions, removes the manual work associated with data scarcity in emerging markets.

Suitably equipped with these powers, correspondent banks can once again upscale their business without fear of regulatory repercussion and reputational damage.