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IMF Releases Policy Paper Addressing Recent Trends and Considerations in Correspondent Banking Relationships
On April 21, the International Monetary Fund (the Fund) announced the release of its policy paper addressing recent trends in correspondent banking relationships (CBRs). According to the Fund, CBRs are facing pressure in some countries as cross-border flows are “concentrated through fewer CBRs or maintained through alternative arrangements.” Decisions made by global banks to terminate CBRs often result from a lack of confidence in the respondent bank’s ability to manage risk. Notably, recent changes in regulatory and enforcement requirements—addressing economic and trade sanctions, Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) guidelines, and tax transparency standards—have contributed to this problem. The Fund notes that these “financial fragilities” resulting from the terminations have the potential to increase financial services costs and negatively affect bank ratings—thus creating long-term effects on growth. The paper highlights the Fund’s plan to address withdrawal concerns and the resulting implications, including:
- establishing measures to enhance respondent banks’ capacity for risk management;
- strengthening and effectively implementing regulatory and supervisory frameworks, particularly with respect to AML/CFT;
- improving communication between correspondent and respondent banks;
- removing impediments to information sharing between correspondent and respondent banks; and
- understanding the “feasibility of temporary mechanisms, including public-backed vehicles, to provide payment clearing services” in the event all CBRs are withdrawn from a country.
The Fund also notes collaboration efforts with the Financial Stability Board, World Bank, G20, Financial Action Task Force, Arab Monetary Fund, and the Committee on Payments and Market Infrastructures, among others, to “ensure financial stability and promote financial inclusion.”
On December 19, the Financial Stability Board (FSB) announced the release of a progress report and 2017 workplan to assess and address the decline in correspondent banking. According to the FSB, a decline in the number of correspondent banking relationships is a source of concern for the international financial system because, among other reasons, “it may affect the ability to send and receive international payments, or drive some payment flows underground.” The FSB’s report discusses the FSB’s November 2015 four-point action plan to “assess and address” this concern and highlights actions taken by the FSB over the last five months, including:
- FSB efforts to collect both bank-level and aggregate country-level data on the number of correspondent banking relationships and aggregated transaction amounts by country and currency for approximately 300 banks in some 50 jurisdictions in order to understand in more detail the scale of withdrawal from correspondent banking, its causes and effects.
- The Financial Action Task Force (FATF’s) publication of guidance on correspondent banking, which clarifies that the FATF Recommendations do not require financial institutions to conduct customer due diligence on the customers of their respondent bank clients.
- The Basel Committee on Banking Supervision’s (BCBS’s) publication of a revised version of its guidance on correspondent banking.
- The hosting of a roundtable discussion amongst the FSB, International Monetary Fund, the World Bank, and officials from central banks, private banks and finance ministries around the world to discuss steps that need to be taken to address this issue.
The report also includes a discussion of deliverables for 2017, along with general time estimates as to when it expects to complete various tasks. Among other things, the FSB expects to publish the findings from its survey on correspondent banking in April of 2017, the BCBS expects to publish its revised guidance on correspondent banking in June, and FATF expects to release best practices on private sector information sharing and finalize its work on customer due diligence and financial inclusion in July.
On October 5, the OCC issued Bulletin 2016-32 to provide highly anticipated guidance regarding “de-risking” in foreign correspondent banking relationships. Last week, Comptroller Curry stated that the OCC intended to issue guidance that would reiterate the agency’s “risk management expectations for banks to establish and follow policies and procedures for regularly conducting risk evaluations of their foreign correspondent portfolios.” The guidance outlines “best practices” for banks to use when “conducting periodic reevaluations of the risks related to foreign correspondent accounts and making account retention or termination decisions.” As expected and as previously summarized in BuckleySandler’s Special Alert, these best practices include, but are not limited to, (i) establishing effective governance for overseeing how banks reevaluate risk and monitor recommendations for retaining or terminating foreign correspondent accounts; (ii) communicating regularly to senior management about decisions to retain or terminate foreign correspondent accounts, giving consideration to any adverse impact that closures may have on access to financial services for an entire group of customers or an entire region; (iii) establishing lines of communication with foreign correspondent customers in the context of determining whether to withdraw from a relationship; (iv) considering specific information these customers may provide that may mitigate risks they present; (v) when decisions are made to terminate accounts, providing sufficient time for customers to establish alternative banking relationships, unless any delay would create additional risk; and (vi) maintaining clear audit trails documenting the reasons and methods used for considering account closure.
On September 28, 2016 OCC Comptroller Thomas J. Curry announced during a speech at the Association of Certified Anti-Money Laundering Specialists (ACAMS) conference that the OCC is developing guidance around “de-risking” in foreign correspondent banking relationships. Following the joint fact sheet published by the federal banking agencies and the Department of Treasury, Comptroller Curry said that it will issue “guidance that reiterates our risk management expectations for banks to establish and follow policies and procedures for regularly conducting risk evaluations of their foreign correspondent portfolios.” The guidance will describe “best practices” that the OCC has observed that banks can use when “re-evaluating their risks and making decisions about retaining or terminating foreign correspondent accounts.”
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
On February 20, in remarks to the Florida International Bankers Association Anti-Money Laundering Conference, FinCEN Director Jennifer Shasky Calvery reviewed FinCEN’s key initiatives over the past year and outlined priorities going forward. She discussed FinCEN’s efforts with regard to virtual currency risks and stated that it is important for financial institutions that deal in virtual currency to put effective AML/CFT controls in place. She noted that it is also important for all stakeholders to keep virtual currency concerns in perspective given the relatively small size of the market. FinCEN is growing increasingly concerned with third party money launderers who layer transactions, create or use shell or shelf corporations, use political influence to facilitate financial activity, or engage in other schemes to infiltrate financial institutions and circumvent AML controls. FinCEN intends to pursue such actors regardless of where they are located. Director Shasky Calvery also reiterated concerns about securities firms that offer services similar to banks, and promised continued focus on threats posed by trade-based money laundering. With regard to its policy initiatives, FinCEN intends to engage stakeholders in a discussion of “balancing the policy motivations behind data privacy and secrecy laws in different jurisdictions with the need for an appropriate level of transparency to combat money laundering and terrorist financing.” The Director noted that this issue is particularly critical in the area of correspondent banking.
On October 18, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s judgment and held that subjecting a foreign bank to personal jurisdiction in New York was within the reach of New York’s long-arm statute and comported with due process protections provided under the U.S. Constitution. Licci v. Lebanese Canadian Bank SAL, No. 10-1306, 2013 WL 5700963 (2d Cir. Oct. 18, 2013). The complaint, brought by individuals who were harmed by rocket attacks in Israel carried out by the terrorist group Hezbollah, alleges that the foreign bank used its correspondent bank account in New York to wire millions of dollars to Hezbollah, knowing that the money would enable the group to carry out terrorist attacks. The New York Court of Appeals had accepted the Second Circuit’s certification question concerning the scope of New York’s long-arm statute and explained that a foreign bank’s use of a New York correspondent account to execute dozens of wire transfers is sufficiently purposeful conduct to constitute a “transaction of business” under the state’s long-arm statute. After resolving the question of personal jurisdiction under state law, the Second Circuit also held that subjecting the defendant bank to personal jurisdiction did not violate due process under the Constitution, finding that the alleged conduct—the deliberate and “repeated use of New York’s banking system” for the purpose of “repeated, intentional execution of U.S.‐dollar‐denominated wire transfers”—satisfied the minimum contacts test established by the Supreme Court in International Shoe. The court further noted that the bank should have foreseen that “it might be subject to the burden of a lawsuit” in that same forum for wrongs related to, and arising from, that use. The Second Circuit specifically noted that a foreign defendant’s “mere maintenance” of a correspondent account in the U.S. is not by itself sufficient to support the constitutional exercise of personal jurisdiction over the account-holder.
- Buckley Webcast: Fifth Circuit muddles CFPB’s plans to use in-house judges in enforcement proceedings
- Steven vonBerg to discuss “Regulatory plenary” at the Information Management Network’s Non-QM Forum
- Jeffrey P. Naimon to discuss “Understanding the ESG impact on compliance” at the ABA’s Regulatory Compliance Conference