Correspondent Banking (1) Mr X Citizen of Country A Country B Opens account for Acme Bank Country C Opens account for Acme Bank Country D Opens account for Acme Bank Country E Registers Acme Bank Use of correspondent bank accounts for money laundering – example The example derives from a real case. Mr X was a citizen of Country A. He registered a bank in Country B (‘Acme Bank’). Acme Bank was a shell bank, had no real physical presence, no staff and no remit ever to provide services to anyone other than Mr X; in fact its sole purpose was to act as a vehicle for Mr X’s money. Mr X deposited USD $25M of his money before moving on to Country C. In countries C, D and E Mr X went to various banking institutions and, acting as a representative for Acme Bank, established correspondent banking accounts in the Bank’s name. He then used the correspondent banking services of the host banks to transfer funds to Countries C, D and E from Acme Bank’s accounts in Country B. Using this network of correspondent banking accounts Mr X was able to move money across jurisdictions, from where it was used for the purchase of high value and highly tradable goods. Tx from Country B Tx from Country B Tx from Country B Deposits illegal funds USD $25 M Copyright Lessons Learned Ltd 2016 Copyright Lessons Learned Ltd 2007

Correspondent Banking (2) Key facts Purpose: banks can undertake international financial transactions in jurisdictions where they have no presence Relationship between two banks: ‘correspondent’ bank (service provider) and ‘respondent’ bank (customer) Types of service: transactions for both the bank and its customers; wide range of potential services Inherent risks: reliance on AML and due diligence procedures in respondent banks Money launderers’ perspective ‘Indirect’ relationship between originator of the transaction and the correspondent bank performing it Increased potential for concealment Use of ‘shell banks’ as vehicles for money laundering Key facts Correspondent banking relationships are effectively agreements for one bank to provide services for another in jurisdictions where the first bank does not have a physical presence. It is a customer-supplier relationship in which the ‘respondent’ bank is the customer and the ‘correspondent’ bank the one that provides the services. The relationship permits the respondent bank to move money via the correspondent bank’s own accounts and thus to offer its customers a range of services in countries where it does not normally operate. There are inherent risks in the relationship, because in many of these transactions the correspondent bank does not have direct contact with the customer entity and has to rely on the efficacy of the respondent bank’s customer identification and due diligence effort. Money launderers’ perspective Weak or inadequate customer identification and due diligence procedures on the part of the respondent bank, combined with the indirectness of the relationship between the customer entity and the correspondent bank, provide increased opportunities for concealment and this of course is attractive to money launderers. The fact that the money is transferred via the respondent bank’s accounts and not via their personally named accounts further enables this concealment. Money launderers might also seek to create their own ‘banks’ and use these to establish their own correspondent banking relationships. The banks registered by the money launderers are ‘shell banks’ that exist in name only. The deposits they hold are the criminal funds that the criminals are seeking to launder. These shell bank identities are then used to establish correspondent banking relationships with legitimate banks around the world. The relationship enables the money launderers to move their criminal funds from the shell banks’ accounts, via the legitimate banks’ own accounts, to new destinations in other countries and other banks. Copyright Lessons Learned Ltd 2016 Copyright Lessons Learned Ltd 2007

Correspondent Banking (3) Possible ‘red flags’ Respondent bank’s ownership structure cannot be verified Respondent bank has no real physical presence Respondent bank unable to provide background detail regarding entities for whom they have requested services Respondent bank unable to provide originator details for transfers for which they are an intermediate bank Respondent bank provides correspondent banking services for shell banks Respondent bank permits third parties access direct to its accounts for ‘payable through’ transactions Numerous requests for large volume wire transfers Unusually frequent and repetitive transactions Direction of transfer does not appear to fit with normal or expected business activity There are two specific problems to look out for: potential flaws or weaknesses in a respondent bank’s own AML standards and procedures use of shell bank structures to establish correspondent banking relationships for the sole purpose of laundering money. With regard to potential problems in the AML and due diligence carried out by the respondent bank, ‘red flag’ issues include: a lack of background knowledge about the bank’s customers absence of originator information for transfers passing through the bank slackness with regard to the entities to whom the bank provides its own correspondent banking services. With regard to the possible use of shell bank structures in relation to correspondent banking, ‘red flag’ issues include any problems in identifying the owners of the bank or its location, or in obtaining evidence of its normal operating activities. It is also possible that a legitimate bank may unknowingly use its own correspondent banking relationship to transfer via the correspondent bank’s accounts criminal funds that it has failed to identify. Tell-tale signs that a bank’s relationship with another bank might be being used in this way include: numerous requests for large volume wire transfers unusually frequent and repetitive transactions transfers whose destination do not confirm with the respondent bank’s normal business activities. Copyright Lessons Learned Ltd 2016 Copyright Lessons Learned Ltd 2007