However, banks, regulators, policymakers and law-enforcement agencies must now address the challenge of tackling money-laundering and the financing of terrorism.
One outcome is that some banks are choosing to de-risk their business by exiting correspondent banking in certain markets, with very real implications for the global economy.
With companies of all sizes now involved in global trade, the ability to make and receive international payments is essential. No bank has a global network that can facilitate cross-border payments and collections across all currencies, so correspondent banking fulfils a vital role.
However, there is growing evidence that increasingly stringent regulation, together with the cost and risk of compliance with these regulations, is resulting in some banks choosing to reduce their correspondent banking activities from specific client segments or entire markets.
This particularly applies to regions where banks believe the potential risks and costs of associated controls outweigh the strategic benefits of serving those markets. The Caribbean, East Asia-Pacific, Eastern Europe and Central Asia are the regions most affected.

Access problem: Banks are committed to the fight against financial crime and have invested heavily to reduce access to the banking system by its perpetrators. However, the complexity of compliance with diverse regulations across markets, uncertainty around interpretation and implementation, and risk of significant penalties in case of non-compliance is having unintended consequences.
Specifically, the impact of banks’ decisions to de-risk their business is that local and regional banks, and remittance providers, are finding it more difficult, if not impossible, to access international services. This, in turn, affects cross-border payments and collections and trade finance, endangering already fragile trade and posing a threat to financial inclusion.

IMF concerns: This issue is now being discussed at the top table of international finance. Christine Lagarde, managing director of the International Monetary Fund, has emphasised that regulators in developed and emerging countries have a role to play in halting the decline and helping banks to maintain their correspondent banking relationships.
She added that smaller countries needed to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, particularly in areas such as anti-money-laundering and anti-terrorism-finance compliance.

Positive steps: Despite challenges, the good news is that banks and key international bodies such as the Financial Stability Board (FSB) are united in their recognition and desire to maintain access to the international financial system for businesses and individuals in many of the world’s most vulnerable regions.
The FSB is working with the Basel Committee for Banking Supervision, the Committee on Payments and Market Infrastructures, the Financial Action Task Force, the IMF, the Legal Entity Identifier Regulatory Oversight Committee and the World Bank to address this issue.
Banks have a role to play by recognising the wider implications of their commercial and regulatory decisions to exit specific markets or activities. There are undoubtedly challenges. However, banks have an important role in collaborating to build consensus over controls such as “know your customer”.

How to support economic development: At Standard Chartered, we take our responsibility for managing financial crime risk very seriously. We have developed a strategy for correspondent banking called “de-risking through education”.
It focuses increasingly on how we partner with those clients who have the right intent but not yet the right tools or experience to build robust controls for financial crime risks. For example, we are actively promoting training and workshops for our clients through our “Correspondent Banking Academy”, as well as continuing to invest in due diligence and oversight.
The value of this approach is not simply to strengthen compliance, but also to build strong, open and pragmatic relationships with clients. We are also collaborating through industry bodies such as the Wolfsberg Group to engage in discussion as to what constitutes an appropriate level of transparency, how the regulators can support correspondent banking, and law enforcement derive benefit from financial intelligence.
These measures will help to make the financial system a hostile environment for criminals and terrorists, while supporting economic development that is important for the societies we serve.

DAVID HOWES, the author, is deputy head of financial crime compliance, Standard Chartered Bank.