1. Axel Summer, Head Global Financial Institutions & Sovereigns
Challenges in Correspondent Banking
Axel Summer, Head Global Financial Institutions & Sovereigns

2. Who we are, Geographic Footprint
RBI is a leading corporate and investment bank for Austria‘s Top 1,000 companies and for Western European commercial customers
A leading universal bank in Central and Eastern Europe (CEE) with one of the largest networks among Western banking groups – targeting corporate customers, SMEs, private individuals as well as financial institutions and sovereigns
Covering 15 markets (incl. Austria), thereof eight are EU members and Serbia and Albania have candidate status
Around 50,000 employees service approx million customers, through >2,000 business outlets
RBI is part of the Austrian Raiffeisen Banking Group, the country´s largest banking group, and acts as central institute of the regional Raiffeisenbanks

3. Thoughts about Correspondent Banking
How many correspondents do I need ?
More and more documents are
requested
AML, CDD, EDD, FIU, FCC, KYC, KYCC…
Numerous due-diligence requests and reports to FIU
Violation of communicated rules and policies
Size, organizational structure, business model, ownership, proficiency of personnel, market standing…
De-risking of
correspondent banks, what does it mean to me ?
How does it happen that banks exit
certain regions ?
Sanctions….
4/8/2019

4. What is Correspondent Banking ?
Correspondent Banking is an essential component of the global payment system, especially for cross-border transactions. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting, inter alia, international trade and financial inclusion. (BIS July 2016 / Committee on Payments and Market Infrastructure)
Correspondent Banking is the provision of a current or other liability account, and related services, to another financial institution, including affiliates, used for the execution of third party payments and trade finance, as well as its own cash clearing, liquidity management and short- term borrowing or investment needs in a particular currency. A Correspondent Bank is effectively acting as its Correspondent's agent or conduit, executing and/or processing payments or other transactions for the Correspondent's customers. These customers may be individuals, legal entities or even other financial institutions. A correspondent relationship is characterised by its on-going, repetitive nature and does not generally exist in the context of one-off transactions. (Definition accoring to Wolfsberg group)
Correspondent Banking is the provision of banking services by one bank as the correspondent to another bank as the respondent, including providing a current or other liability account and related services, such as cash management, international funds transfers, cheque clearing, payable-through accounts and foreign exchange services; The relationships between and among credit institutions and financial institutions including where similar services are provided by a correspondent institution to a respondent institution, and including relationships established for securities transactions or funds transfers; (4.EU Anti Money Laundering directive)
4/8/2019

5. Correspondent Banking
In the past, Correspondent Banking services were driven by the idea to enable the execution of a x-border transaction (usually a payment transaction) between two banks in the most direct way Has this changed ?
No, but in the last years the requirements to conduct a Correspondent Banking relation between two banks have increased significantly and changed the level playing field for all banks.
What makes life difficult in Correspondent Banking:
Compliance
Currencies ($, €, Y ….)
Regulators
Cost of Correspondent Banking
De - risking
4/8/2019

6. Compliance
UK at centre of secret $3bn Azerbaijani money laundering and lobbying scheme
Moldova discloses details of $22 billion money laundering case
4/8/2019

7. Compliance
Following the increased attention of regulators and authorities on the topic of Financial Crime and Money Laundering, banks have invested significant resources to improve their Compliance and KYC process
In the last 5 years all major Banks and Financial Institutions were hiring several thousand new people in Compliance and related functions to close gaps in their AML, KYC and Financial Crime Compliance processes and improve their understanding of transactions and customer behaviour
Several bn Euros were invested by banks into system upgrades or the complete re-building of the compliance infrastructure and transaction monitoring systems
Many organizational changes we have seen in banks over the last 5 years were driven either by compliance or following the detection of compliance failure
Compliance has become one of the main drivers for business and it impacts how a bank is conducting its business and how the footprint of an organization looks
Compliance is not a trend, it has come to stay …. like Risk Management did decades ago
4/8/2019

8. Currencies
USD, GBP, EUR, JPY etc…. currencies are more than ever defining the ability of banks to entertain Correspondent Banking relations
Different currencies -> different perceptions
EURO, GBP or JPY differ more to the USD than just in their value and global importance
In particular the perception of the US regulator towards its currency makes the difference if you conduct business in USD or in another currency
Therefore, it makes little difference if you are based in the US as a US bank, if you have operations there as subsidiaries or branches, or if you have dealings in USD through your correspondent bank – in one way or the other you operate in the wider sphere of the US authorities
Currencies are as well part of sanction regimes
An account relation that lasted for the last 30 years does not mean that it will last for the next 30
4/8/2019

9. Regulators
The attention of regulators towards x-border business and cash flows has significantly increased in Western Europe and the US. In the past is was mainly on consumer protection and domestic challenges in the banking system, but the scope widened towards financial crime and KYC processes.
Regulators have detected that AML, CDD and KYC processes and systems are not sufficiently developed to combat financial crime or money laundering activities.
Measures, taken by the regulators:
Regulators have increased the number of regulations to fight financial crime and have become more precise in defining their requirements
Regulators have increased their on-site inspections with banks to better understand their processes and measures
Fines have become „fashionable“ among regulators, and not only in US. BaFin (Germany) as well as the FCA (UK) have fined banks for deficiencies in their AML control frameworks
In particular if it comes to Correspondent Banking, the regulators of the correspondent banks
have an impact to the business
4/8/2019

10. Cost of Correspondent Banking
Following the investments banks have taken to beef up their compliance environment, the cost for entertaining a Correspondent Banking relation have gone up significantly and led to a review of correspondent relations in all banks.
Examples for minimum revenue hurdles in banks to entertain a customer relation:
Global players: > € ,-
Large European banks > € ,-
Mid-size banks &
regional banks: > € ,-
Elements of the cost calculations that need to be considered by entering into a Correspondent Banking relation:
Compliance and AML
Infrastructure (IT, System) and data management
Enhanced due-diligence , on-site investigations
Aggregator models are becoming more fashionable
Reputational damage and fines is what managers fear most today
The cost of a relation are the reflection of this fear
4/8/2019
Doc ID

11. Consequences -> de-risking
4/8/2019

12. De-risking
The significant increase of costs and the threat of being fined for conducting business that supports financial crime or is being misused by customers for money laundering activities was the trigger for many banks to review their correspondent banking portfolios
This review often leads to a de-risking (exit) of those correspondent bank relations who do not provide sufficient comfort in their AML and Compliance processes
The number of USD correspondent relations in the CEE/CIS region has dropped by 25 % in the last 6 years
Compared to other regions, CEE/CIS was the region most effected by the de-risking developments
Latvia being one of the most impacted countries, where US banks completely withdrew from the market in 2013 and others followed
The black listing of Bosnia by the FATF has significant impacts on its banking system and the ability of its banks to clear x-border business
The reputation of a country or a bank is of significant importance as the exit of major clearers often
triggers a chain reaction
4/8/2019

13. What to do now ?
Is this the end of Correspondent Banking as we know it ?
No, but certain points have to be addressed by banks and considered in their operational behavior if they entertain Correspondent Banking relations
What supports Correspondent Banking relations:
Compliance
Employees
IT – Infrastructure
Clear cut business model
Pro-active communication
4/8/2019

14. Potential questions to be asked …
What to do now ?
Compliance
What is the compliance understanding of my organisation ?
Is compliance part of the business chain or an isolated activity ?
Are my compliance training programmes adequate for my business and do my employees understand the compliance requirements of my correspondent banking partners ?
Do we communicate and explain our compliance processes and set-up to our correspondents ?
What is the non-financial risk tolerance of my organisation ?
Compliance is not (only) a function in the organization, it is the behaviour of an organization
Compliance activities are conducted on all levels of a bank
Compliance departments need to be sufficiently staffed and have a direct reporting line to the board of directors
Compliance activities need adequate IT infrastructure
Compliance and the Code of Conduct define the non-financial risk appetite of a bank
4/8/2019
Doc ID

15. Potential questions to be asked …
What to do now ?
Employees
Are my employees sufficiently trained for their business and do my employees understand the requirements of my Correspondent Banking partners ?
Employees are the key resource in any compliance and Correspondent Banking process
They are the 1st line of defence for any bank
What your own employees don`t understand can bring you in trouble with your correspondents
Correspondent Banking is people‘s business
IT / Infrastructure
Is my infrastructure (system and processes) ready to provide the necessary transparency about a customer and a transaction that I send to my correspondents ?
How is my customer on-boarding and reviewing process and can we be sure that a once declined or exited customers in branch A does not re-enter through branch or subsidiary B ?
Systems (internal process as much as IT) need to support an integrated approach towards customer data and business flows
AML systems, sanction databases etc… need to be up-dated daily
4/8/2019
Doc ID

16. Potential questions to be asked …
What to do now ?
Business model
Is my business model clear, transparent and how does it comply with the payments that I send to my correspondent ?
What does it mean to my business if I lose my main USD or EUR clearer ?
Banks need to be focused instead of just servicing any kind of customer
Payment streams need to fit to the business model a bank is communicating
Communication
Is my communication towards my correspondent banks pro-active or re-active ?
Pro-active communication to correspondent banks is key
Explain the business model, the compliance processes and the regulatory environment
Show your correspondent partners that your bank understands the business it is doing
….and all above that : …..KYC.…KYC….KYC….
4/8/2019
Doc ID