The Bad Actors are Taking the Correspondent Banking Route

By ThetaRay writer 4 years agoNo Comments
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Correspondent banking has always been considered a weak spot for banks in managing financial crime risks. More so, the most famous failures noted by large banks were around cross border payments and the financial crimes controls around them.

During the early 2000s, banks were found circumventing payments and hiding their originating banks to bypass sanctions regimes.  These days, most banks try to avoid violations of sanctions of any kind, but still do not have effective controls over their international payments systems.

Regulatory expectations and global standards, as published by the FATF for example, put focus on correspondent banking as a high risk area that should be addressed with strict controls, yet, it is the haven for money launderers and organized crime groups. The question remaining, why is this risk so hard to manage?

Opposed to other businesses, in which banks have full customer transparency including types of products and services they use, in correspondent banking, banks must rely on other bank’s controls and AML regime.

Not all banks apply the same standards, and for bad actors, it is enough to find the weakest link in the chain, enter their accounts there and place their dirty money in these accounts. The second phase is somehow more challenging for the criminals- opening the destination accounts and creating an illusion for the target bank to make it seem transactions of a certain volume of funds to these accounts are justified. Since KYC is not managed with activity monitoring and confidently isolated from global payments, the chances that the destination bank will notice something is off are slim to none.

An important player in this game is the intermediary banks, the SWIFT system is all but rationale and each identical payment may be transferred in different paths, meaning various banks may be involved either as an additional “station” or actual currency clearer for one of the banks involved. 

Sounds complicated? Do not underestimate the bad actors, for them, it is an ideal playing field as there are too many banks involved, most of them unaware of the entities behind payments and there is also a network of banks involved serving the organization to launder dirty money. 

All the while, bad actors know exactly how risks are managed, utilize the systems in place, and keep their activity undetected, unreported, and safe.

Join our upcoming webinar: Re-claiming Revenue Corridors in Correspondent Banking, September 9th, 2020 4:00pm CET. Register below!

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