Barclays' closure of correspondent accounts was discussed in the House of Commons

Barclays’ closure of correspondent accounts triggered a heated debate in the House of Commons

De-risking, motivated by short-term risk-reward calculations, should not be allowed to kill off one of the cornerstones of the global financial system. Rather than abandon correspondent banking relationships, banks should be thinking about investing in and automating their risk controls, according to a new whitepaper by PwC.

The rise of tough new financial regulation in the years since the financial crisis has seen pressure mount on the correspondent banking network. The international money transfer business has been particularly affected, especially in poorer countries such as Somalia.  Many banks have pulled out, ending relationships and closing correspondent accounts. Barclays was at the centre of a Parliamentary debate over the issue in the UK House of Commons in 2013. The bank stated that it feared being fined by the regulator if it did not reduce what it perceived as exposure to risky businesses.

The report, Correspondence course: charting a future for US-dollar  clearing and correspondent banking through analytics, adds that financial institutions are facing ‘significant penalties’ for failure to comply with AML and counter-terrorist financing rules. Apart from enforcement action, one component of the regulatory push is an increased scrutiny on correspondent accounts. PwC suggests that the banking industry faces an ‘existential crisis’ for the financial services industry, since the closure of hundreds of thousands of accounts following AML reviews effectively undermines the global financial system by reducing its ability to transfer funds across border and support international trade.

Possible solutions highlighted by PwC include increased use of data analytics, including automated entity consolidation, alert risk scoring and new model-based approaches to transaction monitoring. These are identified as ways to better manage risks and costs. But beyond pure technology, there is also a need for greater coordination between front office relationship managers and compliance officers. Increased collaboration within organisations can help financial institutions to become more selective in terms of their correspondent banking relationships, says the report. This is critical to the risk-based approach that regulators advocate.

In addition, collaboration between financial institutions was highlighted as a means to make correspondent banking more viable, by making due diligence easier and streamlining compliance processes. Examples include Swift’s KYC Registry, which targets an area that is non-competitive but which all financial institutions need to carry out essentially the same tasks.

Caution is also advised. For example, rules-based transaction monitoring can produce a high level of false positives, so it may be better to adopt a system that incorporates more context provided by KYC or customer-level information. Visualisation tools can provide a clearer view of detection scenarios, allowing the number of false positives to be reduced.

Other factors that can be explored are factors related to underlying transactions such as structuring or related to a group of transactions such as flows to or from high risk geographies. Investigation outcomes can also be incorporated into model development, helping to create statistical models that can predict the possibility that an alert will be escalated. The point is to prioritise, improving the efficiency of alerts and investigation.

“Together these techniques can create a smaller pool of alerts to investigate while still providing sufficient coverage of the alerts that have the highest likelihood of being truly suspicious,” read the report.

@banking
techno