The Decline in Access To Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions

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FINANCE, COMPETITIVENESS & INNOVATION INSIGHT | FINANCIAL STABILITY & INTEGRITY

The Decline in Access to Correspondent

Banking Services in Emerging Markets:
Trends, Impacts, and Solutions
Lessons Learned from Eight Country Case Studies
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TABLE OF CONTENTS
ABBREVIATIONS AND ACRONYMS III
ACKNOWLEDGMENTS V
EXECUTIVE SUMMARY VII
I. INTRODUCTION 1
II. METHODOLOGY AND SCOPE 3
III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES 5

3.1 The termination or restriction of CBRs in the banking sector 5
3.2 The termination or restriction of accounts in the remittances market 9
3.3 Impact on various types of customers, products, and services 11
3.4 The cross-border effects of derisking 14
3.5 Other potential implications of CBR terminations 15
IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES 17

4.1 The role of the public sector 17
4.2 The role of the private sector 21
4.3 The potential of Fintech to address the derisking problem 23
CONCLUSION 33
ENDNOTES 35
THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

I
BOXES
Box 1. The effect of CBR terminations on a banks’ ratings 8
Box 2. Improvements to AML/CFT regimes: the case of Somalia 18
Box 3. e-KYC: The case of India 23
Box 4. KYC utilities: The case of Mexico 25
Box 5. The case of Singapore 28
Box 6. Examples of alternatives solutions to correspondent banking 29
FIGURES
Figure 1. Causes to terminate or restrict CBRs in one of the surveyed countries 6
Figure 2. Summary of steps for regulating and supervising remittance markets 21
Figure 3. The database architecture 26
Figure 4. The KYC utility architecture 27
Figure 5. Current and alternative settlement flows 30
TABLES
Table 1. Summary of survey on account closures in one surveyed country 7
Table 2. Remittance operating account closures, 2010–2017, in one surveyed country 10
TABLE OF CONTENTS
II
ACRONYMS AND ABBREVIATIONS
AUD Australian dollar

AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism
BBA British Bankers Association
BdM Banco de Mexico
BIS Bank for International Settlements
CBR correspondent banking relationship
CBS Central Bank of Somalia
CDD customer due diligence
CFG Charity Finance Group
CNY Chinese yuan
CPMI Committee on Payments and Market Infrastructures
DFID Department for International Development
EAP East Asia and Pacific
EU European Union
EUR euro
FATF Financial Action Task Force
Fintech financial technology
FSB Financial Stability Board
GDP gross domestic product
IDB Inter-American Development Bank
IFC International Finance Corporation
IMF International Monetary Fund
ISO International Organization for Standardization
JPY Japanese yen
KYC know your customer
KYCC know your customer’s customer
KYCCC know your customer’s customers’ customer
LAC Latin America and the Caribbean
MAS Monetary Authority of Singapore
ML/FT money laundering/financing of terrorism

III
MTOs money transfer operators
NGO nongovernmental organizations
NPO nonprofit organizations
NZD New Zealand dollars
OECD Organisation for Economic Co-operation and Development
RBA risk-based approach
RMA relation management application
RSP remittance service provider
SA South Asia
SME small- and medium-scale enterprise
SSA Sub-Saharan Africa
SWIFT Society for Worldwide Interbank Financial Telecommunication
TDB Tonga Development Bank
UAE United Arab Emirates
USD United States dollar
WBG World Bank Group

IV
ACKNOWLEDGMENTS
T
his paper was written by Pierre-Laurent Chatain, Emile Van der Does de Willebois, Ines
Gonzalez del Mazo, Ricardo David Valencia, Ana Maria Aviles, Karol Karpinski, and
Sameer Goyal; Carlo Corazza, Priyani Malik, and Isaku Endo (all World Bank). Sue E.
Eckert and Don Abel (consultants) also contributed.
The authors are thankful to their counterparts We would like to thank the following colleagues for
in the countries listed here for their hospitality, discussions and suggestions: Ceyla Pazarbasioglu,
cooperation, and responses to the questionnaires Alfonso Garcia Mora, Aurora Ferrari, Yira Mascaro,
and follow-up discussions. The team wishes to Andy Jobst, Zafer Mustafaoglu, Cecile Thioro
extend its gratitude to the following: Niang, Emily Adeleke, Harish Natarajan, Jean
Pesme, Stuart Yikona, Cédric Mousset, Kuntay
• Bangladesh—Kamal Hossain (Joint Director, Celik, and Krishnamurti Damodaran (all World
Bangladesh Financial Intelligence Unit, Central Bank).
Bank of Bangladesh)
• Guatemala—Jose Alejandro Arévalo In addition to their suggestions, we would like
(Superintendent of Banks) and Silvia E. Villatoro to thank the following World Bank colleagues
Calderón (Assistant to the Superintendent, for their help in liaising with the authorities and
Superintendency of Banks [SIB]) country offices: Zafer Mustafaoglu and Leyla
Castillo (Guatemala); Niraj Verma and Priyani
• Mexico—Manuel M. A. Díaz (Director of
Malik (Bangladesh); Alejandro de la Campa,
Payment Systems, Banco de México)
Gunhild Berg, and Julie Dana (South Africa);
• Philippines—Nestor Espenilla (Governor, Cecile Thioro Niang, Galina Sotirova, and Bujana
Central Bank of the Philippines) Perolli (Jamaica); John Vivian, Tatafu Moeaki, and
• Samoa—Maiava A. Ainuu-Enari (Governor, Elizabeth Ika (Tonga); John Vivian and Antonia
Central Bank of Samoa) Wong (Samoa); and Jennifer Isern and Reinaluz
• South Africa—Daniel Mminele (Deputy Ona (Philippines).
Governor, South African Reserve Bank), Ismail
Momoniat (Head of Tax and Financial Sector The team also wants to extend its gratitude to the
Policy at the National Treasury), and Roy Korean government for its financial support through
Havemann and Keegan Edwards (the National the Seoul Center for Financial Sector Development.
Treasury)
• Tonga—Sione Ngongo Kioa (Governor, National This paper summarizes the main outcomes of
Reserve Bank of Tonga) eight country case studies carried out from April
to November 2017. Each visit led to the production
• Jamaica—Maurene Simms (Deputy Governor, of an aide-memoire for the authorities. Because
Financial Institutions Supervisory Division at of confidentiality restrictions, the country
Bank of Jamaica) and George Roper (Supervision cases did not lead to a specific publication, and
Evaluation Expert) therefore the results have been made anonymous
in the present report.

V
VI
EXECUTIVE SUMMARY
T
o move funds internationally, banks rely on correspondent banking relationships
(CBRs), roughly defined as the provision of banking services by one bank (the
correspondent) to another bank (the respondent). CBRs are essential to international
payments and provide an essential nexus between local economies and jurisdictions and the
international financial system. They underpin international trade, remittances, and humanitarian
financial flows among countries and are therefore particularly relevant to developing countries to
support economic growth and development.
Since the global financial crisis of 2008, global of the top management team for money laundering
banks have been reviewing their CBRs and and corruption offenses.
many have decided to terminate or limit their
correspondent banking services (also known as Overall, in the eight countries covered in this
derisking) to different regions, jurisdictions, or study, the macroeconomic impact of derisking
categories of clients. That process is still taking appears limited. In a few countries, the net loss
place, and all countries in this survey reported cases of CBRs has been marginal, and the impact has
of derisking. This response is true for both local remained contained. Banks have been able to
respondent banks and money transfer operators cope with the situation by dealing with fewer
(MTOs). But, as this study confirms, the effects correspondent banks or establishing new ones,
differ significantly from institution to institution but this process can be cumbersome. In addition,
and from country to country. In small islands in many cases the terms and conditions of newly
states, the impact of the decline in CBRs has been established CBRs were significantly more
acute. While those involved in the global debate unfavorable than under previous relationships,
tacitly assume that large banks have left regions or which confirms findings from the 2015 World Bank
countries altogether, our study shows that, in fact, survey on correspondent banking.1
the process is more selective. Global banks have
derisked certain banks, but they have also oriented While more robust vigilance of correspondent
and trained others in the same countries, suggesting banking channels is encouraged, maintaining CBRs
that their decisions to terminate a relationship comes at a cost to both correspondent and respondent
were not exclusively motivated by jurisdictional banks. Rising compliance costs associated with more
concerns. stringent Anti-Money Laundering and Combating
the Financing of Terrorism (AML/CFT) regulations
In some cases, derisking is justified. Although and international sanctions regimes makes the
the loss of critical financial services in a country provision of correspondent banking services a
is a cause for concern and may require authorities’ less financially attractive business proposition. All
intervention to protect the interest of those affected, bankers interviewed for this study acknowledged
there are instances when a global bank is justified in that correspondent accounts, including the new
terminating certain relationships. A case in point is ones, cost much more to maintain, thus requiring
the derisking of a prominent respondent bank by all larger transactions volume and fees to remain a
its foreign correspondents following the dismissal viable activity.

VII
The study shows that the effect of derisking has such as the use of personal bank accounts to channel
been felt at the microlevel, sometimes intensively. money or the use of commercial couriers to carry
On a few rare occasions, banks nearly lost their cash between sending and receiving countries. In
access to the international financial system. Impacts the long term, these alternatives are not sustainable
for banks include, among other things, (a) the loss of or desirable.
significant numbers of customers, mostly corporate
companies and exporters; (b) a significant drop in The direct effect of derisking on remittances,
remittance volumes; (c) the loss of highly profitable for the cost of making remittances and enabling
businesses, such as the supply of the United States inflows, is still unclear. While some countries in
dollar (USD) to certain countries; and (d) adverse which remittance companies have lost accounts
effects on banks’ ratings. experienced an increase of their average cost of
making remittances in the past year, others have
However, the effect on banks’ customers seen a decrease. Additionally, four of the eight
is currently limited for costs, despite a few visited countries have experienced a decrease in the
exceptions. The increase in costs generated volume of remittance inflows in the past five years,
by higher due diligence related to AML/CFT while the other four have shown a steady increase
regulations is rarely passed on to banks’ clients year after year. Therefore, the overall picture is
and is typically absorbed by the banks or money decidedly mixed, and further analysis is needed to
transfer operators (MTOs). There are cases, though, understand the different underlying factors (such
where clients have been affected significantly. In as geopolitical risks and oil prices) that may affect
one country, for example, a bank indicated that its costs and inflows. In this regard, the work currently
costs per transaction in switching CBRs had risen being undertaken by the Financial Stability Board
from USD 9 to USD 50–60. on remittances is very timely and opportune.
MTOs have been particularly affected by Derisking has also had cross-border spillover
derisking because of their cash-intensive effects, especially in the Southern African
business. In almost all surveyed countries, a Development Community. Pan-African banks
number of respondent banks received instructions have been under pressure from their correspondents
from their correspondent banks not to service to stop doing certain business (for example,
MTOs anymore, and financial services provided supplying foreign currencies) in neighboring
by MTOs are precisely the type of cross-border countries to maintain their CBRs. Consequently,
financial services intensively used in less financially USD clearing has been terminated or restricted in
developed countries. MTOs’ accounts were closed, several countries, which in turn further weakens
and this action has disrupted the operations of many local economies.
operators.
Even though the study did not find any
Foreign exchange traders, another cash- macroeconomic effects in any of the eight
intensive business, have also been significantly visited countries, the existence of significant
affected. In one country for example, at the end of microeffects and business distortions warrants
2014, 80 percent of foreign exchange traders had further attention. First, there is a trend toward a
foreign currency accounts with local banks; by concentration of correspondent banking services
2017, this number had dropped to 51 percent. with fewer institutions handling larger volumes,
leading to the buildup of counterparty risks. Second,
Although cash-intensive businesses have found the concentration of MTOs and remittances flows
alternatives, these expose MTOs to higher risks in a limited number of banks raises the prospect
and uncertainty. To remain in business, some of systemic risks in a few jurisdictions. Third, in
businesses have resorted to unconventional methods some cases, local respondent banks sought recourse
EXECUTIVE SUMMARY
VIII
with second tier and less reputable institutions after • Encouraging at-risk respondent banks to include
global banks terminated their CBRs. This shift the issue of derisking in their own contingency
warrants close scrutiny from domestic authorities. planning as part of the prudential requirements
Last but not least, there are concerns that derisking and supervisory practices
has resulted in the creation of new, informal • Establishing or maintaining open channels
channels through which money is now flowing. of communication between correspondent
Circumstantial evidence suggests that informality and respondent banks (A lack of awareness of
and greater use of cash and other unconventional country context is often a contributing factor
channels have resurged in a few places as a possible to derisking, and sharing mutual concerns is
consequence of derisking. If pervasive, they could valuable intelligence to the correspondent bank
undermine AML/CFT objectives by driving industry.)
financial transactions outside of regulated channels.
• Improving regulatory oversight of the obligations
of MTOs toward AML/CFT and generally
To address these situations, there are several
strengthening the AML/CFT regime by ensuring
avenues that can be explored at both the industry
that resources are allocated and used according
and country levels. This paper suggests a few
to risk
ideas intended to assist countries’ authorities and
market players in managing problems arising from • Liaising with industry and financial technology
the withdrawal of correspondent banking services. (Fintech) actors to discuss solutions to derisking.
To be clear, these ideas are relevant to the countries Properly regulated, Fintech has a great potential
included in the study, but not necessarily for other for lowering the cost of compliance, reducing
countries. These ideas include the following: the use of cash, and improving transaction
monitoring, which in turn can provide confidence
• Gathering data on CBR closures and on the to correspondent banks.
industries and types of activities affected by
derisking, at the country level

IX
ACKNOWLEDGMENTS
X
I. INTRODUCTION
T
he Wolfsberg group of banks, which developed the Wolfsberg Principles for Correspondent
Banking as recommended best practice for establishing and maintaining correspondent
accounts, defines correspondent banking as “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.”2
Correspondent banking is an essential component presented to the G20 Leaders in November 2015 to
of the global payments system, especially for cross- address the decline in correspondent banking stated
border transactions. Through correspondent banking that “the FSB would encourage the collection of
relationships, respondent banks can access financial relevant information by the World Bank and other
services in different jurisdictions and provide organisations on the scale of withdrawal, its causes
cross-border payment services to their customers, and effects.”5 Furthermore, during a subsequent
supporting, among other things, international stakeholder dialogue between relevant parties
trade and remittances and thus financial inclusion. organized by the World Bank and the Association
In addition, most of the payment solutions that of Certified Anti-Money Laundering Specialists,
do not involve a bank account at customer level it was recommended that “further work should be
(for example, remittances), rely on correspondent undertaken to identify and quantify the negative
banking for the actual transfer of funds. effects on the economies of smaller jurisdictions
(trade finance and remittance dependent
The termination of correspondent banking services individuals/families) to strengthen the case for
has the potential to reverse some of the progress public intervention/concern.”6
made in reducing remittance prices and fees,3 as
well as in the prices of other financial instruments The present paper aims to answer this call for
and services. Therefore, the World Bank Group more information to better understand the effects
(WBG), at the request of the G20 and with the of derisking at the local level, considering local
support of the Financial Stability Board (FSB) banks, MTOs, and the final customers receiving
and the Committee on Payments and Market remittances, using trade finance and benefiting
Infrastructures (CPMI), carried out two fact-finding from other services. In addition, the objective of
projects on derisking.4 The projects confirmed the this work is to inform policy decisions of national
trend that correspondent banking relationships had authorities and the international community,
been restricted or terminated, affecting especially including standard-setting bodies. In this sense, the
MTOs, small and medium domestic banks, and work includes a review of existing policy responses
small and medium exporters. and technical solutions, as well as WBG policy
recommendations.
In the conclusion of these surveys, the WBG noted
that, going forward, it would “seek to provide more The findings of these case studies complement the
insight into the further effects on financial inclusion efforts carried out since 2015 by other entities that
and economic activity resulting from the withdrawal confirm and explain the consequences of derisking.
of CBRs.” In the same vein, the FSB action plan In 2015 and 2016, the CPMI, the International

1
Monetary Fund (IMF), and the Commonwealth and highlights that the factors leading to global banks’
the Charity Finance Group (CFG) with the U.K. withdrawal of CBRs are multiple, interrelated,
Department for International Development (DFID) and vary case-by-case and that addressing the
and British Bankers Association (BBA) prepared withdrawal of CBRs will take time and require
individual country reports.7 These highlighted strengthened, coordinated, and collective action
the concentration of flows, the complex and on the part of public and private stakeholders.9 The
diverse reasons for derisking, the critical impact IFC carried out another survey focused on banks in
of derisking in some countries, the increase in emerging markets, which covered more than 300
the use of underground financial services, and the banking clients in 92 countries.10 The results of the
difficulties that charities were facing to send vital survey show that 72 percent of participant banks
funds to conflict and at-risk locations. are facing multiple external challenges that reduce
their ability to serve customers, mainly caused
More recently, in 2017, the FSB, the IMF, and by compliance costs and correspondent banking-
the International Finance Corporation (IFC) related difficulties. In addition, it highlights that
published further work on the matter. The FSB banks are reducing benefits to their customers (or
report contains evidence from an FSB survey of cutting customers), raising fees, and reducing credit
more than 300 banks in nearly 50 jurisdictions, limits.
plus data from the global payment messaging
system SWIFT (Society for Worldwide Interbank This paper offers further insights into the debate
Financial Telecommunication).8 It shows that the through the prism of eight emerging market
decline in the number of correspondent banking economies in East Asia and Pacific (EAP), Latin
relationships is continuing across all regions, America and the Caribbean (LAC), South Asia
but to a varying degree and more pronounced for (SA), and Sub-Saharan Africa (SSA).
USD and euro transactions. The latest IMF report
I. INTRODUCTION
2
II. METHODOLOGY AND SCOPE
T
he countries in this study were selected on the basis of several criteria, including (a)
concerns about the scale of derisking in a given country, as evidenced by public statements
or responses to surveys on derisking, and (b) the impact on remittances activities, including
on the cost of operations and the search and use of innovative technical solutions to address the
derisking problem. On that basis, seven emerging market economies were selected to analyze the
effects of derisking, and another jurisdiction was chosen for its approach to solving the derisking
problem. The survey covers countries from all the regions with the exception of Eastern Europe
and Central Asia and the Middle East and North Africa. The sample was not based on objective
criteria only but also on practical factors such as the countries’ interest in supporting this study or
their reluctance to share detailed information. Participating countries often cited confidentiality
concerns, and thus the authors decided not to mention any country in this study—with a few
exceptions.11
Each of the selected countries was visited by a team relationships. The data were supplemented by
of WBG experts who spoke with the authorities, qualitative information gathered through anecdotal
including ministries of finance and financial sector stories and testimonies during an onsite visit.
regulatory bodies; national and international banks;
MTOs, including some operating in the mobile In this work, the WBG considered many facets
payment space; and, where relevant, chambers of of derisking, including (a) increased costs,
commerce and financial inclusion committees. (b) limitations of business opportunities, (c)
Overall, the team spoke to multiple financial concentration of risks, (d) resurgence of informality,
institutions that constituted a representative sample and (e) thoroughness of AML/CFT practices and
of the banking sector and met with the most relevant risk management processes.
MTOs in each jurisdiction.
The report is more than only a reflection of the eight
Before the visit, the WBG sent questionnaires to country visits. Field work was supplemented by
collect both qualitative and quantitative data that conference calls with third countries that were not
would inform the discussions. The questionnaires surveyed but whose authorities expressed interest
sought data on the following: (a) the number in sharing their experience of derisking. In addition,
of CBRs terminated or restricted and those still roundtables and forums organized during the 2017
operational for each bank, (b) the types of clients WBG and IMF Annual Meeting in Washington, DC,
requiring correspondent banking channels and on were an opportunity to collect further information
those whose funds the correspondent did not wish on the effects of derisking in emerging markets.
to deal with, (c) the degree of concentration of MTO
activities in a number of local respondent banks, To be clear, the effects of derisking are diverse and
(d) the degree of dependence of the respondents on measured in different ways by different countries.
foreign correspondent banks, and (e) the reasons That is partly because derisking is a new area of
for closing accounts or ending correspondent inquiry and no internationally agreed standards and

3
metrics have been developed yet. The proposed conclusions that follow are not necessarily valid
fact gathering put forward by the IMF may, over globally; they apply only to the countries discussed.
time, establish such metrics, comparable country Of course, they may be useful to other countries in
by country.12 For the time being, the effects are similar situations—but the aim is not to provide a
measured in different ways, and therefore it is global picture of the state of derisking, but a picture
noted that there is significant heterogeneity in at the local level.
the derisking effects analyzed in this paper. The
II. METHODOLOGY AND SCOPE

4
III. MAIN OUTCOMES OF THE

COUNTRY CASE STUDIES
3.1 The termination or restriction of CBRs in the banking sector
General trends in the banking sector
A
ll countries in this survey reported cases of CBR terminations. In all countries surveyed,
banks’ CBRs were terminated or restricted. In one country, 9 of an initial 42 correspondents
cut off or reduced their services to 10 domestic respondent banks. According to the
supervisory authorities in another country, between December 2015 and January 2017, 35 CBRs
were closed, but 10 new CBRs were established during the same period creating a net loss of 25
CBRs. In this country, the bulk of terminations and restrictions in CBRs occurred in 2016. In
another country, close to 60 percent of all banks had CBRs terminated between 2013 and 2015. In
another country, even though the banking industry did not express any concern about derisking, all
banks had at least one CBR terminated.
Some banks have been more affected than others more derisked than private commercial banks and
by CBR terminations, while other banks’ CBR foreign commercial banks.
networks have actually grown. Interviews with
bankers suggest that the scale and frequency of However, all banks have been able to maintain,
CBR terminations have not been the same among restore, or establish new CBRs. In several
all banks in one country or among countries. In one countries, the withdrawal of CBRs led to a
jurisdiction, some banks lost many more CBRs than net reduction in CBRs but remained relatively
others: one bank lost 10 CBRs and was unable to contained overall, as banks could find alternative
open more than one new relationship, while another arrangements. In one country, for example, about
bank lost 25 correspondent banking accounts 158 nostro and MTO-related accounts were
but reopened 27 new accounts with different terminated over the past four years, but many
correspondent banks. In another country, a bank of the affected banks were able to establish new
claimed the loss of one account, but in a short time relationships with other financial institutions. A
it was able to reopen a new relationship with almost total of 52 new relationships were established by
no disruption to customer service. On the other end those banks in that country. Further, one of the most
of the spectrum, a global bank derisked a bank in prominent banks in a jurisdiction saw its CBRs cut
the same country with which it had a relationship off several times since 2012, but it was always able
of more than 30 years. The bank that was derisked to offset the closing of accounts by opening new
now depends on only one global correspondent CBRs over the same period. In conclusion, except
bank for its cross-border transactions. Also, there for one bank that will be discussed subsequently,
are cases where banks did not lose any CBRs and no case was reported where an institution was left
even managed to increase the number of CBRs. without any CBRs at all. The majority of banks are
In one of those countries, banks have remained still enjoying multiple correspondent bank accounts
basically untouched by derisking.13 Further, in one in several currencies with several counterparts—
country, state-owned commercial banks have been from countries belonging to the Organisation

5
for Economic Co-operation and Development AML/CFT compliance issues were identified as
(OECD) and from non-OECD countries—and the key reasons.16 In several instances, global banks
have maintained multiple relation management severed their relationships because of the absence
applications (RMAs).14 Banks keep opening new of activity with their respondents.17 Many banks
relationships. also mentioned overall risk appetite of the foreign
institutions, changes to regulatory requirements in
A lack of profitability and concerns about foreign jurisdictions and concerns about money
AML/CFT compliance by respondents—or by laundering risks as causes for decline (figure 1).18
the jurisdiction they are in—remain the key
drivers of CBR closures. There are many causes Banks with large international operations are
of derisking. The WBG’s 2015 global survey driving CBR terminations. Global banks, mainly
identified two groups of drivers of the decline in from the OECD (for example, the United States and
foreign CBRs.15 One category of causes is more the European Union [EU], but also from Canada
business related and explains the decision to and Australia), have been the main banks closing
terminate a foreign CBR in purely economic terms. CBRs. In 2015 in one country, 10 accounts were
The second category of causes is more regulatory terminated by U.S. banks (from a total of 37), and all
and risk related and explains the decision on (a) of those were in USD. Moreover, United Kingdom
the basis of the money laundering and financing and Canadian banks terminated 14 percent and 17
of terrorism (ML/FT) risk level of the counterpart percent of nostro accounts, respectively, in this
being unmanageable and (b) concerns about country; another prominent U.K. bank terminated
international and regional sanctions. The analysis all its CBRs altogether. The same pattern was
of the responses to the questionnaires used in observed in another country in the sample.
this survey and the subsequent onsite interviews
confirm this. Even though respondent banks However, in only a few cases did these banks
complained about the absence of transparency from withdraw all CBRs from a jurisdiction,
their correspondents, the lack of profitability and suggesting that concerns about countries were not
Figure 1. Causes to terminate or restrict CBRs in one of the surveyed

countries
92
47
40
20 6 6
13
Profitability/low Overall risk Inability of Changes to ML/TF risks Bank’s Sovereign credit
volume appetite of respondent to supervisory high-risk risk rating of
CB understake requirements in customer bases bank
CDD CB’s jurisdictions
Source: Central Bank data 2016 (number of respondents to the Central Bank survey).
Note: CB = central bank; CBR = correspondent banking relationship; CDD = customer due diligence;
ML/TF = money laundering/financing of terrorism.
III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

6
the reasons for withdrawing. Some OECD banks as recently having established new relationships.
exited entire regions because of strategic decisions, Table 1 summarizes account closures in one of the
but many continued operations with selected countries surveyed, as of October 2017.
local players. In addition, in certain Caribbean
countries (a region particularly affected by the
withdrawal of CBRs), some of these banks with
Direct effects of closing and restrictions
large international operations are back in business.
of CBRs on banks
According to respondent banks, indications are At the microlevel, only a few banks have been hit
that these international banks and other operators severely by CBR terminations. Several cases were
are exploring business opportunities again. One reported of banks being affected by the loss of their
U.S. and two Canadian banks were all mentioned relationships. Across all countries surveyed, banks
Table 1. Summary of survey on account closures in one surveyed country

Type of account closed
Countries of banks Total accounts Foreign banks
No. Remco and
providing CBRs Nostro Bank sub closed involved
tie ups
1 Australia 1 51 52 6
2 United Kingdom 5 5 10 20 7
3 Hong Kong SAR, China 5 12 1 18 9
4 Canada 4 2 11 17 8
5 United States 2 8 4 14 5
6 New Zealand 1 10 11 6
7 Italy 2 7 9 7
8 Singapore 1 2 1 4 3
9 Papua New Guinea 3 3 4
10 France 1 1 2 2
11 Spain 2 2 2
12 Germany 1 1 2
13 Saipan 1 1 1
14 Cyprus 1 1 1
15 Brunei 1 1 1
16 Austria 1 1 1
17 Ireland 1 1 1
Total 20 33 105 158
Total countries/jurisdictions that withdrew CBR: 17

Total foreign banks involved 51
Total accounts closed 158
Source: Industry Association Data.
Note: Bank sub= bank subsidiary; CBR = correspondent banking relationship; Remco = remittance company.

7
tended to be given very short notice—between 30 beneficiary of a payment. Correspondent banks are
and 60 days at best.19 On a few occasions, banks also paying increased attention to their respondents’
came close to losing access to the international customer due diligence (CDD), demanding periodic
financial system. One bank contacted 42 potential updates. In addition, it is a common practice for
correspondents in the United States, Canada, and correspondents to visit the sites to ensure that their
Europe, and only one agreed to establish a CBR after respondents are complying with their AML/CFT
a tedious six-month process. In the same country, a obligations.22 Respondent banks also complained
prominent bank lost all its CBRs for four months about their correspondents asking questions about
before it found a replacement; the bank lost its ability their customers’ customers (know your customer’s
to meet some of its obligations and to provide credit customer, or KYCC) or, as observed in one case,
card services in foreign currencies, and it suffered about their customers’ customers’ customers
damage to its reputation. A few banks that lost their (KYCCC). It is important to stress that KYCC
CBRs also tried to find alternative solutions locally and KYCCC go beyond the Financial Action Task
by approaching their domestic competitors to use Force (FATF) standards.23
their own CBRs, but mostly without success. Banks
that suffered the most usually claimed (a) the loss of Even banks that did not lose any CBRs mentioned
significant numbers of customers, such as corporate the challenges involved in maintaining their
companies and exporters; (b) a drop in volumes of relationships and the need to respond to multiple
remittances (in one case, as much as 30 percent); and ongoing queries from their correspondents.
(c) the loss of highly profitable business20; and (d) a The same holds true for the other side; according to
negative effect on their ratings (see box 1). a prominent correspondent bank, CBRs used to be
handled only by a few people. Now, they have entire
The cost of establishing and maintaining teams for this. Rising compliance costs associated
new partnerships has increased for many with more stringent AML/CFT regulations and
institutions. If opening new accounts has not been international sanctions regimes make correspondent
especially challenging—with some exceptions banking services less financially attractive, which,
described previously—banks acknowledged that along with heightened reputation costs, leads
correspondent accounts (including new ones) correspondent banks to cancel services.24
cost more to open and to maintain. The typical
questionnaire to establish a new CBR (or to monitor Restrictions also have been imposed on new
an existing CBR) is about 90 pages. Increasingly, correspondent banking relationships. In addition
correspondents are requiring more detailed to higher CDD costs and heightened scrutiny,
information on banks’ customers and operations, many banks have also claimed pressures from their
with special attention to the initiator and the ultimate correspondents to limit their exposure to certain
Box 1. The effect of the termination of CBRs on a bank’s ratings

In one jurisdiction, a prominent bank that had issued a bond of approximately USD 150 million found itself losing
multiple corresponding banking relationships (CBRs) and facing market concerns about the bank’s capacity to
pay the quarterly coupon to investors. As a result, the bank’s ratings were downgraded by two internationally
reputable rating agencies three levels (to Caa1 from B3).21 In its statement, one of the agencies indicated that
the bank’s ratings could be downgraded further if the bank did not manage to obtain new, stable, and reasonably
priced correspondent banking lines in a timely manner. The bank considered this downgrading to be the biggest
long-term impact of derisking. This rating slide alone could make it even more difficult for the bank to find
alternative CBRs.

8
categories of customers (for example, remittance to data gathered by the World Bank and in light of
companies, MTOs, and nonprofit organizations) the current country case studies, MTOs and other
to certain lines of business and to certain countries remittance companies are the most exposed to the
outside of the correspondent’s appetite for risk. derisking phenomenon.28
In one country, for example, this pressure from
correspondents on their respondents to reduce The flow of funds from migrant workers back
relationships with MTOs and foreign exchange to their families in their home country is an
traders led to a trickle-down effect. At the end of important source of income in many developing
2014, 80 percent of this country’s foreign exchange economies. The recipients often depend on
traders had foreign currency accounts with local remittances to cover daily living expenses, to
banks; by 2017, this number had dropped to 51 provide a cushion against emergencies or, in some
percent. An MTO reported that 50 percent of its cases, to fund small investments. Remittances are
subagents lost their local bank accounts completely. among the largest source of external resources
In other countries, banks also claimed that their in developing countries, and for some they are
new CBRs were subjected to restrictions (for equivalent to as much as one-third of gross domestic
example, caps being placed on certain transactions) product (GDP). Moreover, the flow of remittances
or limitations (for example, prohibiting nesting and seems to be significantly more stable than other
downstream clearing, checks and drafts clearing, forms of external finance.
and online gambling). Further, correspondent banks
sometimes ask their new respondents to pay higher MTOs and remittance service providers (RSPs)
due diligence fees, to execute a minimum volume have been particularly affected by derisking
of transactions per month, and to make significant because their business is cash intensive. Banks
deposits upfront as a precondition for opening a are often reluctant to accept business from those
new CBR account. who are not customers or depositors. Walk-in clients
who are not depositors of the bank and who bring
cash for a remittance transaction will most likely
3.2 The termination or restriction be turned away. Interviews with banks suggest that
of accounts in the remittances some of their concerns with MTOs and remittance
market companies are about (a) risks to the banks’
reputations, (b) the banks’ fear of scrutiny and large
Officially recorded remittances to developing
penalties from local regulators, (c) the banks’ lack
countries are expected to reach USD 450 billion
of confidence in the RSP’s AML/CFT procedures,
in 2017, up from USD 429 billion in 2016 and
and (d) the banks’ reassessment of the risk–reward
recovering after two consecutive years of
tradeoffs of providing accounts to MTOs.
decline.25 Global remittances, which include flows
to high-income countries, are projected to grow
As a result, global financial institutions have
by 3.9 percent to USD 596 billion. According
instituted risk mitigation measures by severing
to the World Bank, currently the global average
ties with MTOs. In almost all visited countries,
cost for sending remittances is 7.32 percent while
MTOs’ bank accounts were closed, leaving many of
the International MTO Index is at 8.20 percent.26
them unable to make deposits and international wire
Banks remain the most expensive type of service
transfers. Because of the restrictions put on CBRs
provider, with an average cost of 11.0 percent.
by global banks, fewer local banks are willing to
Derisking practices by global financial institutions
provide banking services to MTOs. In one country,
threaten to cut off access to the global financial
for example, four of the five MTOs interviewed
system for remittance companies and local banks
affirmed that at least one of their agents had bank
in certain regions, putting them at risk of losing
accounts closed or restricted for international money
access to the global financial system.27 According
transfers. In a second country, three of eight MTOs

9
operating in the country are struggling to remain these entities and those dependent on them,
viable as all had their business bank accounts closed. such as nonprofit organizations. In one country,
In a third jurisdiction, remittance accounts had for example, one MTO that operates globally and
been closing before 2010, but that has accelerated processes inbound remittances from the United
between 2012 to 2016 with 17, 24, 37, 27, and 20 States described a situation in which a local
accounts closed, respectively, over the five years. respondent bank froze its six accounts for three
Closings continue (see table 2). In a fourth country, days. The respondent bank ultimately closed all
one bank closed 42 of 56 foreign exchange trader of the accounts in June 2016 without notice, at
accounts so that the bank could keep its CBRs with the instructions of its correspondent bank, which
global banks. Another institution made the decision decided to stop doing business with MTOs. These
to stop banking MTOs’ subagents altogether for the accounts were used not only for transactional
same reason. operations but also for paying staff salaries and
checks. It took three days for the MTO to recover
The effects of the closures and restrictions of its USD 50 million in assets and much longer for
correspondent banking services to MTOs have beneficiaries to collect their funds. Of particular
caused stressful and disruptive situations for note is another country where banks and MTOs still
Table 2. Remittance operating account closures, 2010–2017, in one

surveyed country
Remittance account closure trend- 2010 to 2017
No. Countries 2010 2011 2012 2013 2014 2015 2016 2017
1 Australia 5 5 13 12 8 8
2 United Kingdom 1 6 2 7 2 1
3 Canada 2 2 5 2 3 2
4 Hong Kong SAR, China 2 2 4 3 3 2
5 United States 2 2 6 2
6 New Zealand 2 1 3 4
7 Italy 2 5 1 1
8 Singapore 2 2 1
9 Papua New Guinea 3
10 France 1 1
11 Spain
12 Germany 1 1
13 Saipan 1
14 Cyprus
15 Brunei 1
16 Austria 1
17 Ireland
Total 2 9 17 24 37 27 20 12
Source: Industry data from one surveyed country.
Note: Some of the accounts reported closed occurred before 2010, or no date reported.

10
have access to accounts in targeted markets but have 3.3 Impact on various types of
been forced to switch from larger (international) customers, products, and services
banks to smaller local, community, and thrift banks.
This substitution of global banks by second-tier
Effects on bank’s retail customers
entities warrants close attention (see discussion
under section 3.5). The impact of derisking on banks’ customers
has been acute in several instances. Interviews
Higher operation and other related costs led suggest that, globally, the increase in costs of banks
some of the MTOs to resort to unconventional generated by the higher compliance costs related
methods. Derisking poses many challenges to to AML/CFT regulations and that, currently, the
MTOs. On one side of the transaction, the closing requirements of international correspondent banks
of bank accounts threatens their ability to secure are not being passed on to clients. In most cases, it
funds in the host (sending) country; on the other is absorbed by the banks. However, cost increases
side, a (potential) lack of liquidity in the home can be significant. In one country, a bank indicated
country undermines the MTOs’ capacity to make that its costs per transaction in switching CBRs had
payments to beneficiaries. Most MTOs interviewed risen from USD 9 per transaction, to USD 50 to 60.
continue to operate despite this threat with financial In another country, a building society lost its CBR
support from other businesses or private funding with a U.K. bank but was able to reopen a new CBR
by their owners. Such practices, albeit temporary with a U.S. bank. Yet this shift entailed an increase
in nature, undermines accountability, transparency, in cost for clients—predominantly pensioners of the
and ultimately viability. In another instance, an country that used to work in the United Kingdom.
MTO in Australia lost access to its bank account and Those clients now have to transfer their pension
had to find an alternative arrangement to transfer payments to their home country via wire transfers,
remittances. As an interim solution, the MTO is which entails a cost of USD 40 per transaction, an
using a cash logistics company to collect cash from amount that is not insignificant for these customers.
the MTO’s outlet locations and to deposit cash in In a third jurisdiction, the cost of studying abroad
the cash logistics company’s account from where it is becoming increasingly expensive for the students
is then wired to the MTO’s correspondent account. and families of that country. Because of derisking,
This operation has increased the cost of remittance local banks lost their nostros accounts in Australian
services by 33 percent (from AUD 6 to AUD 8 and Canadian dollars. Consequently, tuitions fees
per remittance transaction). In another country, and living expenses can only be remitted through
remittances continue to be serviced through well- intermediary third currencies (most often USD);
known providers, but some of the smaller operators that results in a dramatic increase in transfer costs
that no longer have bank accounts in the sending (an extra charge of USD 60 for cross-currency
countries are using alternative practices to remain transactions, in addition to the flat fee applied by
in business. These practices include, for example, the bank for each transaction).
the use of personal bank accounts to channel money
or the use of commercial couriers to carry cash
between the sending and receiving countries. None Effects on trade finance
of these alternatives are sustainable. The impact of derisking on trade finance is
getting increased attention at the global level.
In conclusion, the effects of closing or restricting In a recent publication, the IFC stated: “because
MTOs’ accounts go beyond the impacts they bank-to-bank relationships represent a key element
have on MTOs’ operations or cost structure. It in cross-border transactions, declines in CBRs
also affects remittances clients, their agents, and the put trade finance at risk. This has the potential to
entire industry. Banks are competitors to MTOs— hurt trade in both rich and poor countries.”29 The
and competition is distorted when banks close International Chamber of Commerce also noted
MTO accounts.

11
that because of AML and KYC, 62 percent of average cost of remittances is still unclear. While
participants in a recent survey have declined trade some countries have experienced a rise of their
finance transactions, and three-quarters of the banks average cost of remittances in the past year, others
said that small- and medium-scale enterprises have seen a decrease in the cost. For example, the
(SMEs) were the most adversely affected customer cost of sending money to one country through its
group. The industry has also raised concerns about most important corridor increased 2 percentage
the effect of CBR terminations on trade finance, points over the past year, from 8.1 percent to 10.1
driven by the high costs of KYC compliance.30 percent. Similarly, in another case, the cost of
Globally, correspondent banks processing trade sending remittances to the country increased from
finance transactions are reducing the number of 4.0 percent to 4.8 percent between Q2 2016 and Q2
active RMA keys to reduce KYC costs.31 As in cash 2017. Another jurisdiction also reported an increase
clearing, this reduction could affect banks and their in the cost of remittances for the same period.
clients in some regions, specifically in emerging However, both countries saw a decrease between
countries and for SMEs. the Q3 2016 and Q3 2017. In other jurisdictions,
a different scenario unfolded, despite severe
The experience of the eight surveyed countries derisking. In one country, for example, the cost of
does not indicate a direct effect of derisking on sending inbound remittances decreased in its most
trade finance, and further analysis is needed. important corridor, from 5.3 percent in Q3 2016 to
Activities that consume capital or leverage are 4.3 percent Q3 of 2017. The same downward trend
more prone to be reconsidered by global banks; occurred in another country.
such activities include trade finance (which requires
cash upfront), long-term funding in USD, large The impact of derisking on remittance inflows
derivative uncollateralized trades, and provision also varies from one country to another. The
of liquidity withdrawals. Derisking has resulted volume of migrant remittances inflows into the
in disruptions to established businesses because of visited countries also merits analysis. In four
increased cost in operations and diminished quality surveyed jurisdictions, the volume of remittances
of services provided to exporters and importers. But into the country decreased in the past five years,
in none of the eight countries was this considered a in one country as much as 79 percent from 2012
significant problem, and only one country indicated to 2016 and in another by 32 percent. However,
some concern. In that country, more than 90 percent in a third country, where some European banks
of trade is settled in USD.32 There, a few banks explicitly asked local banks not to use their
claimed that the closure of CBRs—even in small correspondent banking services for activities
proportion of cases—has adversely affected their related to remittances, remittance inflows are still
business, particularly on trade finance. One bank increasing. Most recent data in this country indicate
claimed a loss of 10 percent of its trade services, an upward trend in remittances. CPMI also reported
and another lost between 10 to 15 percent of its in July 2016 for this third country a marginal loss
trade finance business. of CBRs (−2 percent) and an increase in value (16.2
percent) and in volume (48.4 percent) over the
period of 2012–2015. In a fourth country, the effect
Effects on remittances’ recipients
of derisking on remittances seems to be negligible.
The direct impact of CBR terminations on the Remittances to this country increased to USD 2,292
cost of remittances is unclear, because the price million in 2016 from USD 2,226 million in 2015
development of remittances in different countries and have continuously grown over the past 15 years
is decidedly mixed. Even though many MTOs in (from USD 968 million in 2001).
the visited countries have provided insights into the
increase of the operation costs of their remittance It is therefore difficult to draw definitive conclusions
services, the direct effect of derisking on the on the effect of derisking on remittances because

12
other factors might be in play. Most literature on automatically being considered high risk. During
remittances finds that the drivers for the cost of the past several years, there have been an increasing
remittances depend on, among other things, (a) number of reports of humanitarian assistance and
the type of corridor, (b) the number of migrants other vital services being stymied by an inability
living in the sending country, (c) the competition to transfer funds internationally. Several reports
in number of MTOs and banks, (d) regulation and released in 2017 indicate significant problems for
government policies, and (e) the size of the country. many different kinds of NPOs in all parts of the
Remittances are a volume business, and for small globe providing essential services, often in conflict
states in particular, volumes are by definition small. zones and inaccessible regions.35 A random sample
That means that the level of competition among survey (focused exclusively on American NPOs)
MTOs can be quite low, and one or two companies found that two-thirds of U.S. NPOs working
might have control of the market and the cost. In internationally experience banking difficulties.36
one surveyed country for example, the market The most frequent problems include wire transfers
for remittances is not very efficient and the price delays (37 percent), excessive documentation
of sending and receiving remittances continues requests (26 percent), and increased fees (33
to be high (between 10 and 11 percent).33 Money percent).
transfers through banks are expensive and most
people prefer to rely on MTOs. As the smaller As a result, NPOs have adopted coping strategies
MTOs are being squeezed from the market because that are contrary to AML/CFT objectives. All
of bank account closings, some funds are deflected these difficulties combined have led charities
to the larger MTOs that generally price higher than to adopt strategies to move funds through less
the smaller operators. However, in some cases the transparent, traceable, and safe channels, with 42
cost for sending remittances is much lower in small percent resorting to carrying cash. These coping
states.34 mechanisms not only put NPOs at risk, but also
can undermine AML/CFT objectives by driving
financial transactions outside of regulated channels.
Effects on nonprofit organizations and
charities Derisking challenges are affecting all types and
In the country studies, access for nonprofit sizes of NPOs, including putting pressure on the
organizations (NPOs) and charities to finance operations of larger, well-known, international
did not come up as a significant issue. In one humanitarian organizations. NPOs operating
country, a respondent bank was instructed by internationally use currency dealers to disburse funds
its correspondent to stop doing business with in local currency to provide goods for humanitarian
nongovernment organizations. In a second country, purposes and to pay employees or contractors.
domestic respondent banks indicated they do not These currency dealers have accounts in local
consider NPOs and humanitarian organizations to banks, but often are considered MTOs in the eyes
be high risk, but have noticed their correspondents of correspondent banks and have had their accounts
do. Other than that, this topic was not raised. closed. In addition, some local banks with whom
NPOs work have lost their CBRs in some countries.
However, other studies have shown that in This situation puts international organizations and
certain jurisdictions, including those that are NPOs at risk of delays when emergency aid needs
developing, NPOs are having problems opening to be delivered quickly. Moreover, it increases NPO
bank accounts and, in particular, moving funds costs by having to deliver aid in OECD currencies at
internationally. Pervasive views of charitable higher rates (around 3 percentage points difference)
customers as being particularly vulnerable in cases where local banks are unable to process the
to terrorist financing have resulted in NPOs transactions.

13
3.4 The cross-border effects of withdrawal by EU banks presents them with a
derisking business opportunity.
There have also been cross-border effects of CBR Angola was found to be particularly affected by
terminations, especially in certain countries in CBR terminations. This report did not include
Sub-Saharan Africa (SSA). Banks headquartered Angola as one of the surveyed countries, however,
in one country, but with a strong presence in the the WBG team had a video conference with
entire SSA region (39 subsidiaries in total), have not Angolan authorities and local banks to discuss
themselves been derisked in their own jurisdiction the regional perspective. In Angola, six Angolan
but are derisking their relations in other countries banks were previously routing foreign currency
in the region. These structural features explain, to transactions via a bank in another country, and
a certain extent, why the effect of derisking can these services were terminated. Fifteen Angolan
easily spread throughout the region and can have banks were also previously receiving their USD
unintended cross-border spillover implications. notes from the same institution and this service
was ceased in December 2015, at the request of the
Only a few CBRs in this visited country have been notes supplier, a US bank. At present, USD notes
terminated or restricted, yet several countries in are available through so-called down streaming
the Southern African Development Community and nested relationships between subsidiaries of
region have been seriously affected. U.S. and Angolan banks in third countries (in the EU and
European banks have not terminated relationships Africa) and in others (Asia). CBRs denominated in
with the respondent banks in this country, but USD are still vital to the Angolan banking system,
relationships between the respondent banks and given Angola’s dependence on international trade
their affiliates in other parts of Africa have been but actually it has been turned to euro.37
terminated or restricted, either as a business
decision or under pressure from correspondents. Angola is taking action to mitigate the
In effect, foreign correspondent banks (mostly in consequences of CBR terminations. The cost of
the EU) have withdrawn from certain geographies doing business has also risen because the country
and from certain client categories in Africa given has lost some relationships with international
their limited risk appetite, the increased cost of banks, which has in turn further weakened the
maintaining relationships, and the low volumes. In nation’s financial system as it struggles with
several instances, respondent banks were pressured lower oil prices and high nonperforming loans.
to stop doing business in neighboring countries Because of the USD shortage, the import of food
if they wanted to maintain their CBRs with their is particularly challenging given that 90 percent
Western partners. The cross-border spillover effects is imported. Almost every sector of the economy,
of derisking in the region has now become a concern including medicine supply, has been affected by
at the regional level. derisking. Also, the problem of dollar supply has
affected small entrepreneurs who do business with
Local banks think that local risks are not always the Brazil, China, South Africa, and United Arab
well understood. The respondent banks consider Emirates. The fact that certain operations now have
that decisions about terminating relationships to be denominated in euros increases the cost to the
are often made on the basis of a (high-income) user. According to the authorities, inflation has also
understanding of risk (for example, high-value increased as a result. Angolan authorities and banks
cash transactions equal high risk) without a fuller are trying to address the compliance concerns of
understanding of the market or the entity, making U.S. regulators to normalize USD correspondent
jurisdiction risk all-decisive. At the same time, banking relationships, and some progress has been
some of the respondent banks recognize that the made.38 However, on the basis of feedback from
industry participants, rating agencies do not expect

14
USD correspondent bank services to return to commercial relationships with 35 foreign exchange
normal soon. traders. When processing remittance transactions,
the foreign exchange traders credit funds to this
Angolan banks are not the only African banks fourth country’s bank’s USD nostro account that
facing challenges meeting USD obligations is held with a global U.K. bank. The latter is the
following loss of correspondent bank only correspondent of the domestic institution
relationships. Review of recent literature39 shows that accepts funds originating from MTOs.
a noticeable decline in CBRs in the region, and Consequently, that makes the remittance business
the effect is a significant concern in dollarized in this country vulnerable to any changes in this
countries. Domestic banks have less access to U.K. bank’s policies.
external financing, face payment delays, and are
subject to additional transaction costs and liquidity The withdrawal of CBRs is leading to structural
constraints. International banks perceive certain changes in banking. Recent developments in the
African jurisdictions to be higher risk, as well as banking sector are noteworthy in a few visited
posing specific institutional risks, and view the countries. In one country, a global U.K. bank has
compliance costs as outweighing the relatively low left the country altogether, while other OECD banks
profits. Strengthening the regulatory framework, have reduced their relationships with domestic
including the AML/CFT regimes, and strengthening banks. Most of the banks that have been derisked
enforcement will be important to maintain existing have established new relationships not only with
CBRs. global banks but also with nonsystemic and non-
OECD banks, including from India, Pakistan,
Saudi Arabia, and United Arab Emirates (UAE).
3.5 Other potential implications of In several instances, new alternative CBRs have
CBR terminations been set up with the UAE only.41 The limited pool
The concentration of MTOs and remittance of correspondents that has agreed to partner with
flows within a limited number of banks raises the domestic banks increases systemic risks in that
prospect of systemic risks in a few countries. The country.
withdrawal of banking services to MTOs has led to
a concentration of MTOs’ accounts and remittance Further, the replacement of CBRs by second-
flows in a limited number of banks. In one of the tier banks also raises concerns about integrity
countries, all three major remittance operators that warrant authorities’ attention. In several
are now operating with the same domestic bank. instances, correspondent banking services are
Smaller MTOs are also likely to be holding accounts now being offered by regional banks instead of by
with this bank as there are only two significant global banks. As discussed previously in this report,
commercial banks in the country. Because the where global banks have terminated correspondent
leading bank no longer accepts MTOs, all the banking services, local banks and MTOs have
accounts are effectively pushed to the other bank. found ways to maintain their operations in order
A systemic risk is created by this concentration of to survive. However, in some cases top-tier banks
MTO accounts in one single institution.40 Similarly, have been replaced by second- or third-tier banks,
in a third country, about 91 percent of remittances a situation that has been observed in surveyed
are processed by a handful of banks. As a result, a countries in several regions including EAP, LAC,
more severe derisking of those banks—particularly and SSA. Authorities must closely scrutinize the
of the one bank which processes more than 49 internal procedures of banks that have recently
percent of country’s remittances—could have started to provide correspondent banking services to
significant consequences on the local economy. ensure they are aligned with local and international
Another manifestation of concentration risks standards. In some cases, banks whose CBRs were
appears in a fourth country where a bank maintains severed by global banks opened a new relationship

15
with a bank that was recently ordered out of the These trends represent a significant challenge for
United States for failing to comply with AML/CFT the authorities as they could undermine AML/
laws and regulations.42 CFT objectives by making millions of financial
transactions untraceable.
Informality has resurged in one place as a possible
unintended result of derisking. The termination In some cases, derisking has not in itself created
of CBRs for MTOs may be driving some customers a problem but has exacerbated an already
to alternative banking solutions especially among existing problem. The prime example is the use
countries’ expatriates. With the loss of familiar of cash, notably U.S. dollars, in certain countries
MTOs because of derisking, customers have two or regions. The case of one country is particularly
choices: (a) to use a new provider, with higher compelling. In 2014, one global U.K. bank that
compliance requirements and potentially higher provided cash shipment services in this country
costs, or (b) to use an illegal supplier with no left the entire region, leaving only one U.S. bank
compliance requirements and a lower cost. Given offering this service. The U.S. bank has prohibited
those options, authorities in one surveyed country its respondents in this country and the entire region
said many customers were moving to unregulated from accepting cash deposits originating from
channels. In effect, derisking has affected clients’ foreign exchange traders and MTOs. Furthermore,
ability to access regulated MTOs in some areas the same bank has also put limits on the volume
and has increased the cost of MTOs’ services. of USD-denominated cash to be deposited by its
Therefore, some MTOs are losing customers who respondents. As a result, in an economy where
are now resorting to informal channels, especially tourism accounts for 30 percent of GDP, the limits
hawalas, an informal money-transfer system in on depositing cash in USD create piles of cash that
which an expatriate transfers an amount of money to cannot be deposited. Therefore the risk increases.
an agent wherever they are based, and an equivalent Operators are either keeping the cash in their vaults
payment is made in local currency in the receiving or moving the money around using couriers, thus
country.43 Hawala channels are cheaper, faster, and exposing staff members to assaults and to robbery.
handle at least as much in remittances as banks, Some are also selling their USD surplus at a
without foreign currency ever crossing the border. discount to informal traders.

16
IV. POSSIBLE SOLUTIONS AND

GOOD PRACTICES
4.1 The role of the public sector
T
he following recommendations are based on the country studies only. They are examples
of measures considered or taken in those countries that may be relevant to other countries.
They do not cover all the negative effects resulting from derisking because the country
studies did not show some of those effects (for instance, access to trade finance or the inability of
charities to access funds).
Ongoing surveillance mechanisms and such as remittances but also to provide assistance
contingency planning should domestic banks experience more severe
termination of restrictions in CBRs or should MTOs
National authorities are encouraged to gather be derisked. In that regard, several stakeholders
data on CBR closings and on nostro-vostro claimed that there should have been more help
accounts in banks. Derisking is still happening, or guidance from regulatory authorities earlier.
and authorities are encouraged to consistently Supervisory authorities should develop a strategy
collect data on the state of their CBR relationships to keep track of banks actively looking to secure
and to establish permanent monitoring for forward- new, stable, and reasonably priced correspondent
looking risk assessment. Several of the surveyed banking lines, and those authorities should also be
countries have started monitoring trends in CBRs, ready to provide emergency support.
and some intend to do so through their banking
supervisor’s off-site monitoring department. One
of the countries visited was creating a standard Dialogue between respondents and
form that would be submitted by banks quarterly correspondents
on the number of CBRs maintained. This reporting
Authorities should encourage an ongoing dialogue
could encompass not only banks but also MTOs.
between respondents and correspondents. This
To that end, the IMF has conceived an innovative
essential step ensures correspondent relationships
framework that can be readily used by central
are maintained. Derisking is a complex phenomenon
banks and supervisory authorities to collect data
that requires communication between all those who
and effectively monitor the developments of CBRs
directly or indirectly play a role in correspondent
in their jurisdictions.44
banking. A lack of awareness and understanding of
country context and risk is often a contributing factor
Public authorities should design a contingency
to a bank’s decision to withdraw its services. For
plan to address any severe deterioration in
that reason, countries should make extra efforts to
CBRs. In all visited countries, there was no real
establish an ongoing dialogue with the international
plan to manage and mitigate the effects of derisking.
banks that operate in their jurisdiction. Familiarity
National authorities should design contingency
with each other’s practices and developing personal
planning to prevent, mitigate, and manage real
business relationships are essential preconditions
crises when they emerge and define remedial
for respondents and correspondents to ensuring
measures ex ante. This plan should be designed
relationships are maintained. The purpose is
not only to prevent a systemic crisis in key sectors

17
twofold: on the one hand, such dialogue will inform regime by the respondent bank’s jurisdiction is a
the international banks of ongoing initiatives by crucial element of any strategy to try to maintain
country authorities or in their institutions, and on the the confidence of the correspondent banks (see
other hand, the dialogue will help respondent banks box 2). Equally important, such improvements
to understand the expectations of the correspondent should be well communicated. Whereas this paper
banks and learn their practices. is not the place for an extensive discussion of all
the structural elements of an AML/CFT regime, a
country should be able to show the strength, clarity,
Improvements to AML/CFT regimes in a
and detail of its AML/CFT laws and regulations. A
risk-based approach
country should also be able to show the rigorous
According to all studies conducted so far (by enforcement by supervisory and law enforcement
the IMF, FSB, CPMI, and the WBG), concerns authorities of those laws and regulations and the
about a respondent bank’s AML/CFT regime application of those laws by financial institutions.
are among the primary reasons for terminating In one country, the central bank ran a “road show”
CBRs. Thus, the improvement of the AML/CFT in the United States aimed at reassuring U.S.
Box 2. Improvements to AML/CFT regimes: The case of Somalia

To mitigate the risks associated with the loss of CBRs, authorities can consider a range of actions that seek to
foster higher standards of transparency and compliance with international financial standards from banks
and MTOs. Drafting AML/CFT regulations tailored to a specific sector such as MTOs can greatly improve the
formalization, transparency, and compliance of actors who operate in sectors vital to the economy such as
remittances: in that regard, consider the case of Somalia.
The population of Somalia is heavily dependent upon remittances from abroad. Each year, the Somali
diaspora remits approximately USD 1.3-1.5 billion to relatives and friends in Somalia. In May 2013, a U.K.
bank said it intended to close the bank accounts of the Somali remittance company Dahabshiil and approximately
100 other money transfer companies in Somalia. This action followed a corporate decision to derisk from certain
business lines with perceived higher risks of ML/FT. As remittances are estimated to account for 24 to 45 percent of
Somalia’s GDP, the threatened withdrawal of the U.K. bank and other banks providing correspondent banking to
Somalia raised significant concerns.
In response, the Federal Government of Somalia with the technical assistance of the World Bank and other
international partners is undertaking a policy and institutional reforms program. The Supporting Remit-
tances Flows to Somalia Project, backed by funding from the United Kingdom, includes measures to improve the
formalization, transparency, and compliance of the remittance providers in Somalia. The project supports the
efforts of the Central Bank of Somalia (CBS) to begin formal supervision of the Somali MTOs with the assistance
of a “trusted agent” (an external firm procured by the World Bank) to work alongside the CBS for four years to
establish onsite and off-site supervision of MTOs. In March 2016, the World Bank selected the Norwegian firm
Abyrint as the trusted agent.
To strengthen the regulatory framework for the MTO sector, the World Bank worked with the CBS to draft
MTO regulations. The regulations focus on two key areas: (a) regulations for operation purposes, including
provisions for, among others, customer due diligence, recordkeeping, ongoing monitoring, reporting, internal
controls, consumer protection and risk management, which would apply to all registered and licensed MTOs
operating in Somalia, and (b) regulations for customer registration, which would apply to customers (individu-
als and businesses) of all MTOs to ensure everyone a fair and equal chance at succeeding. The trusted agent
will work with the CBS to ensure that the MTOs and their agents comply with the regulations and meet the
requirements on an ongoing basis.
IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES

18
supervisors that the country’s AML/CFT regulatory deal with the risks—devoting more resources to
framework was robust and had been improved, for the higher risks. Only then can it credibly claim to
example, by establishing a national identification have both identified and mitigated its risks and, in
system set to roll out in 2018. The project aims to the process, become a more attractive place for a
establish a reliable identification system for citizens correspondent bank.
and other nationals that are residents in the country,
with a unique national identification number as The World Bank Group has designed a specific tool
the primary identifier of a resident. For financial to assist countries undertake such a national risk
institutions, it will make the identification and assessment, which is being or has been used in more
verification process seamless. Such an identification than 80 jurisdictions. In some instances, countries
system will also contribute to increased confidence have sought to generate significant publicity for
in the KYC/CDD process and, in turn, provide their risk assessment to publicly show what the
comfort to foreign correspondents. country is doing, how it is seeking to increase
effectiveness, and how it is addressing any negative
At the same time, a country needs to be open impression of its AML/CFT system.
about its vulnerabilities and risks: a country
needs to show that it is adopting a risk-based
approach to AML/CFT and allocating its ISO-like certification for respondent
resources accordingly. Country context is one of banks
the determining factors for a correspondent bank Respondent banks could be subject to an
in assessing the risk level of the respondent. If a independent and transparent evaluation to be
country shows it is doing well on that front and made by a reputable audit firm to determine
is adopting a risk-based approach to supervision the existence and effectiveness of their AML/
of AML/CFT, that effort will positively affect the CFT internal system. As already discussed, the
risk rating of the respondent and thus increase the lack of trust by global banks in countries’ ability
willingness of the correspondent to establish a to meet AML/CFT international standards is one of
CBR. the causes for derisking. In particular, local banks
are not always subject to a thorough oversight by
For a country to be able to adopt a risk-based domestic supervisors. A more intrusive AML/
approach to AML/CFT, it will first need to CFT surveillance may provide comfort. An ISO-
undertake a detailed assessment of its system. To like certification process could also add credibility
adopt such an approach requires an evaluation of and demonstrate that respondent banks’ AML/CFT
the weaknesses of all private and public institutions systems meet international standards.45
responsible for developing, applying, or enforcing
AML/CFT legislation. Those institutions range This solution increases the level of trust of
from policy-setting bodies to reporting entities such correspondent banks. In one surveyed country,
as banks and the so-called designated nonfinancial the central bank considered that the positive audit
businesses and professions and from the financial undertaken by a reputable third consulting company
intelligence unit to the law enforcement, was a factor that helped reestablish CBRs with the
prosecutorial, and judiciary bodies. Furthermore, the audited financial institution. Thus, the positive audit
approach requires an understanding of the threats to counteracted the adverse impact of derisking. Such
which a jurisdiction is exposed. Such an assessment a certification process could be used for the MTO
should examine which crimes generate significant industry. In that regard, Australian MTOs have
profits and where those profits are being laundered, created an association, the Australian Remittance
in what sectors, and where they are finally invested. and Currency Providers Association, which is now
Having undertaken such an assessment, the country trying to carry out compliance activities and has
then needs to devise a plan that sets out how it will started a certification process that goes beyond its

19
national requirements. Such a move aims to (a) In any case, regulating and supervising MTOs
reassure banks about the reliability of the industry or having a separate regulation for remittances
and (b) ensure alignment among MTOs in their could create a safe and sound remittance market
discussions with banks and the government. and prove beneficial in reducing some of the costs
of complying with legal requirements. In addition,
it could change the perception of the industry. The
Improving regulatory oversight of MTOs World Bank’s 2014 book Making Remittances Work
Improving regulatory oversight of MTOs should provides a tip sheet with a step-by-step framework
be at the forefront of any derisking strategy. The for national regulators and supervisors to implement
concern of the quality of regulation and supervision an effective regulatory and supervisory regime
of the remittance industry is among the primary for RSPs.47 Such a regime should at least feature
reasons for derisking. A first step to improving the following: (a) a better understanding of the
regulatory oversight and supervision of MTOs is to remittance market by supervisors; (b) entry controls,
ensure the effective implementation of international risk-based supervision, and adequate cooperation
standards. The World Bank’s Committee on between supervisors, including between AML/CFT
Payment and Settlement Systems General supervisors, payment systems overseers, and the
Principles for International Remittance Services banks’ supervisor; (c) proportionate and deterrent
set out principles covering five key areas: (a) sanctions in the case of noncompliance or illegal
transparency and consumer protection, (b) payment provision of services; and (d) guidance provided
system infrastructure, (c) the legal and regulatory by regulators and supervisors on what is expected
environment, (d) market structure and competition, from MTOs in AML/CFT compliance and what
and (e) governance and risk management.46 The is expected from banks when providing banking
principles, which require a combined effort by services to MTOs. Figure 2 shows the steps for
both MTOs and public authorities if they are to regulating and supervising remittance markets.
be implemented effectively, are designed to assist
countries that want to improve the market for Also, a core objective of supervising and
remittance services. regulating remittances is preventing money
laundering and terrorist financing. MTOs have
The complexity and variety of MTOs business been derisked because of the combination of cash-
models have evolved extensively over the past few intensive businesses and perceived poor AML/CFT
years and, consequently, so have their supervision internal procedures. As a result, it could be beneficial
regimes. More and more countries have adopted to subject MTOs to AML/CFT requirements, which
single licensing regimes for all categories of may include (a) licensing or registration,48 (b)
payment service providers. For instance, in the EU, CDD, (c) record keeping, (d) the ability to trace
traditional money remitters are licensed under the transactions, (e) reports of suspicious activities,
payment institutions regime, and many countries and (f) internal control systems as set out by FATF.
have copied this regime (for example, Brazil, Also, an industry code of conduct with independent
Jordan, Morocco, Tunisia, and so forth). Money certification could help, if AML/CFT regulators can
remitters that offer e-money accounts are regulated support this process and banks can get some degree
as e-money-issuers in the EU and similarly in other of comfort from the regulators about the implications
countries. Therefore, legal regimes and associated of certification. Issuing domestic guidance, closely
AML/CFT requirements vary, depending on the following specific FATF recommendations such
business model, and supervisory arrangements as the “Guidance on Correspondent Banking
also vary accordingly. In an increasing number Services” would also help, as it may contribute to
of countries, payment systems overseers are also clarifying regulatory expectations for MTOs.49 In
licensing MTOs or supervising MTOs, sometimes addition, focused training, in particular, for smaller
in cooperation with AML/CFT supervisors. MTOs could assist in improving their capacity to
implement the guidance.

20
Figure 2. Summary of steps for regulating and supervising remittance
markets
1 2
Study/analyze the Study/analyze the current
circumstances legal/regulatory framework on
surrounding the remittances in the country, and the
remittance market. approach by other countries.
3
Determine the approach
to regulation and
supervision.
Get feedback
from players in the
4 remittance market.
Design new or amend
existing legal and
regulatory framework. Get feedback from
relevant government
agencies.
6 5
Identify and formalize License/register the
informal remittance providers of
providers. remittances.
7
Ongoing supervision
Risk
level Onsite
examinations
Off-site monitoring
(oversight)
4.2 The role of the private sector started to factor in CBR termination as a reason for
downgrading financial institution ratings. Therefore,
possible derisking should prompt a bank’s senior
Contingency planning
managers to remain vigilant to relationships with
Senior management of banks whose CBRs their correspondents and to include the “derisking
have been terminated should include derisking risk” in their risk management and recovery plans.
in banks’ contingency plan. The loss of CBRs CBRs should be monitored at all times and any
can have a negative effect not only on a bank’s withdrawal should be reported immediately to
customers but also on the bank itself, as previously management. Banks should also offer guidance
discussed. Moreover, rating agencies have also in their contingency plan on how the businesses

21
should carry on if sudden and massive derisking bank indicated that their chief compliance officer’s
occurs, and banks should develop a strategy to extensive experience in a large U.S. bank was
establish new CBRs. instrumental to its maintaining a strong relationship
with that bank. It allowed the respondent bank to
adopt a risk-based framework very similar in design
The importance of reaching out to the to the U.S. bank’s risk framework, and the personal
correspondent banks and the role of relationship helped ensure a degree of trust.
professional associations
Respondents should also promptly react and be
Implementing a risk-based approach as a
persistent whenever they face a termination of
prerequisite for refusing or terminating a
their CBRs. In one country, a respondent bank’s
CBR
practice showed the value of taking immediate
action after being notified by the global bank Banks should follow a risk-based approach
of its intention to terminate the relationship. It to terminating a CBR and always be able to
immediately insisted on a person-to-person meeting objectively explain why the relationship is being
with senior management of its correspondent bank terminated. Terminating a CBR is a business
at its U.K. headquarters; the respondent succeeded decision that can have serious implications for
in extending the original notice of 30 days to 1 respondents. Many institutions complained about
year. They agreed on an action plan. While the losing their accounts at short notice without
ultimate reasons for the correspondent bank’s getting any explanation from their correspondents.
decision to extend the period cannot be verified, the Going forward, an explicit provision on the notice
respondents mentioned that they would consider period for termination should be included in the
taking the case to court, pointing out the low risk contractual arrangement between respondent
of its customer base (predominantly pensioners and correspondent. As emphasised by the FATF,
receiving state pensions from U.K. government). “the wholesale cutting loose of entire classes of
Prompt action and the threat of publicity may have customer, without taking into account, seriously
played a role in that decision, too. Another financial and comprehensively, their level of risk or risk
entity experiencing the same problem followed a mitigation measures for individual customers
similar approach. within a particular sector is not in line with FATF
standards.”50
Bank and MTO associations can and should
play a more active role by reaching out to global The case of MTOs is particularly relevant; even
banks. In one country, different industry associations though considered high risk, MTOs have very
(of bank remittance officers and of correspondent rarely resulted in banks having to pay significant
banks) organize regular events with foreign fines. In a recent report by the Australian Financial
participation to show their advances in complying Intelligence Unit on remittance corridors between
with AML/CFT obligations and the improvements Australia and Pacific Island countries, there is a
in the country’s regulatory framework. These forums clear and explicit statement that the corridor does
also serve as a good platform for the officers to not pose an ML/TF risk, contrary to what is often
discuss their interactions with foreign banks. Sharing said. In the EU, a risk-based approach is becoming
mutual concerns and knowing how the industry is a legal obligation to deny access to banks’ payment
dealing with challenges is valuable intelligence to accounts services. Such an obligation forces banks
the correspondent bank industry. In one country, to perform a risk-based analysis of each one of
an association was established uniting all those its clients and prevents them from closing the
dealing with correspondent banking services in one accounts without sufficient justification.51 This
association. This way of building relationships may legal obligation will not prevent derisking from
deserve consideration in other jurisdictions. One happening but it should make it much more difficult

22
to derisk as it will require duly motivated reasons to • Creating alternative plans to the existing
be evaluated by national supervisors. Implementing correspondent banking framework
this approach will require a process to evaluate the
reasons of the banks and the answers of the MTOs. The first group comprises e-KYC and
transaction monitoring measures.53 These allow
for automation of activities that were previously
4.3 The potential of Fintech to done manually by compliance staff, such as
address the derisking problem examination of documents, triaging of suspicious
Financial technologies have a great potential for transactions, or cross-checking customer profiles
lowering the cost of compliance, reducing the with other databases such as sanctions lists, ID
use of cash, increasing monitoring, and boosting databases (see box 3), or credit information bureaus.
confidence of correspondent banks in national One of the most promising areas where technology
systems. Currently, the financial sector is undergoing can add value is leveraging machine learning and
a major transformation brought about by the rapid other big data algorithms in transaction monitoring
development and spread of new technologies. The and due diligence procedures. Traditionally,
confluence of finance and technology is referred transaction monitoring involves screening
to as Fintech, typically describing companies or customers’ operations on the basis of a set of
innovations that employ new technologies such as defined rules, such as compliance with international
distributed ledger technologies.52 While Fintech is sanctions lists or not exceeding preapproved
still evolving, it remains very promising as it offers transactions threshold. Solutions that are based on
many applications, including solutions to derisking. machine learning, however, can generate suspicious
Those solutions can be broadly divided into three activity reports by automatically detecting patterns
areas or groups: correlating with suspected fraud that could be
difficult to produce for a human operator. This
• Simplifying and automating existing procedures way, machine learning can (a) free up compliance
departments’ staff time and allow staff to focus on
• Leveraging previously unavailable economies of more thorough investigation of more complicated
scale cases and (b) enable financial institutions to flag
Box 3. e-KYC: The case of India

India has come a long way in lowering the costs for KYC using electronic means. India is not included among the
countries surveyed for this report, however, it provides a useful example. It uses the Aadhar system for identify-
ing customers as the basis for its KYC efforts. Aadhar is a unique 12-digit identification number issued by the
Indian government to every citizen. The idea behind Aadhar is to have a single, unique identification number
on a document, the Aadhar card, that captures all details, including demographic and biometric information, of
every individual resident in India. The Aadhar card does not replace existing ID documents, but it can be used
to serve as the basis for compliance with KYC norms by financial institutions and other businesses that maintain
customer profiles.
A resident Indian can apply for the Aadhar number and card by submitting the existing proof of identity (passport,
driving license, and so forth) and proof of address (phone, power bill, bank statements, and so forth) and by
undergoing biometric profiling (fingerprints and iris scan) at any Aadhar center.
For correspondent banks, the knowledge that its respondents use a biometric ID system and have access to
reliable and up-to-date information on their customers gives them a degree of comfort regarding KYC by their
respondents and thus, all other things being equal, makes this relationship more attractive.

23
and triage activities that would otherwise remain supply mechanisms, but the essence of it is that
undetected. However, the effectiveness of big data banks do not have to gather KYC information on a
in transaction monitoring and due diligence, to particular customer themselves. Instead, they have
a great extent, depends on certain preconditions. recourse to a utility, typically a database, that has
First, leveraging technology solutions would certain information available on that customer. This
require a coordinated action between financial information is particularly relevant in the context
institutions and central banks or other regulators.54 of correspondent banking.55 However, regulatory
Second, the staff must have the capacity to backing will be necessary to foster wider adoption.
understand and use the results from the algorithms In particular, financial institutions must be certain
effectively. This capacity is considered a major that they will not be penalized for accepting trusted
challenge. Technological solutions are often viewed KYC profiles from the database and that other
as black boxes, with bank employees lacking in parties maintain similarly rigorous due diligence
understanding of the underlying algorithms and in standards.56 (See box 4 on KYC utilities). Further,
the ability to tailor them to local needs and contexts. privacy laws may also prohibit sharing, storing, or
mining basic information in KYC utilities, such
The second group includes automating as other correspondent relationships and details of
compliance measures that allow for new geographical areas served.57
economies of scale, created by sharing information
across different financial institutions through Other cases of KYC utilities are being developed
KYC utilities. The term KYC utility is used to in other jurisdictions or by international bodies as
cover an extensive array of different information- discussed in box 5.

24
Box 4. KYC utilities: The case of Mexico
KYC utilities vary in the extent of the information they provide, with some having barely more than a name
and an address, whereas others have more extensive information, sometimes even including the finan-
cial behavior of the client. In addition, the utilities vary according to how they are put together—by an indepen-
dent third party, by government, or by financial institution—and to how the integrity of the stored data is secured.
Mexican authorities are developing two databases that will be combined: a database for cross-border
transactions and a KYC utility. The database for cross-border transactions records all domestic wire transfers
in foreign currency, as well as cross-border wire transfers originating in Mexico, irrespective of their size. Every
financial transaction that crosses the border has to be reported. For each transaction, banks report basic informa-
tion about the ordering customer, the recipient bank, the beneficiary of the transfer, the amount sent, the currency
sent, and more. It is noteworthy that the database does not capture inbound operations that originate abroad at
this point. Inbound transactions will be captured in late 2018.
The goal of the database for cross-border transactions is to enable banks to assess the risk of their cus-
tomers in a more holistic way. Banks only have a partial view on the financial profile of their customers. They
have information on the transactions which they conduct on behalf of their clients but not on those transactions
conducted by other entities. Through the database, each bank can see the forest—not only the trees.
The output can be queried at any time by the banks, and will comprise information on a customer’s
transactions from the previous year, which will be updated daily. Although no other information needs to
be gathered by the banks, the database will foster the quality of ML/FT risk management by providing additional
information on transactions that are not accessible otherwise. In addition, the database provides detailed infor-
mation on cross-border transactions and domestic wire transfers in foreign currency. The system also defines for
each client a specific code (ranging from 1 to 5) corresponding to the client’s level of activity, which should lead
the bank to conduct extra due diligence and seek more information on the client.
Accuracy and consistency of data are of paramount importance. For the database to accurately summarize
the transactional activity of a sender in the financial system and to gain trust among banks as a reliable source of
information, reported data must be high quality. Therefore, Banco de Mexico (BdM) established a comprehensive
framework to encourage banks to report consistent and authentic data combined with measures to rectify already
reported data and to avoid recurrences.
The database, although not yet operational, has a wide scope, is resource intensive, and relies on a
proper information technology infrastructure. Whereas the usefulness of a database with these dimensions
is clear, however, this database may not be an option for low-capacity countries. The database design and
implementation have been resource intensive.58 Furthermore, there are some preconditions to be met, including
a reliable and widely distributed information technology infrastructure, sufficient capacity to maintain the system
(BdM developed an in-house algorithm to monitor inconsistencies and errors), and strong security systems to
protect against cyber threats.

25
Figure 3. The database architecture
Clients
Centralized databases
Send Instruct
The transactional
required cross-border
database categorizes
information transactions
Transactional clients based in their
database transactional level and
Send daily reports with data generates other inputs
to uniquely identify the for the KYC database
sender.
Send or update KYC Validation

required information database processes
Provide aggregate
statistics about their Includes client identification, operational
Mexican clients’ operation category, and other KYC information
banks
Authorities have access to the

databases’ contents
National authorities
The Mexican authorities are also developing a KYC utility that complements the transactional database.
BdM and the Mexican Ministry of Finance are developing a KYC database of all clients and users that initiate or
receive domestic wire transfers in foreign currency, as well as cross-border wire transfers. This database will have
different information and documentation requirements according to each client’s aggregate level of operation.
The KYC database will keep an updated and complete file on each client. It will allow banks and authorities
to query a subset of the information that is suitable to their needs, within the scope of their legal powers. To obtain
client or user information, banks will need to require authorization from their client. Also, to ensure high-quality
information, the database’s operator will verify consistency and authenticity of the information. The KYC utility is
still at the design phase. In January 2018, a first regulation was to be issued that would set the legal foundations
of the utility to get the database up and running by the end of 2018.
In due course, the two databases will be interlinked. This will bring several major benefits:
 Clients in the KYC database will be categorized according to their aggregate level of operation.
 For each category, there will be a minimum amount of KYC information and documentation that banks will be
required to have and to report to the KYC database.
 For clients with a higher level of operation, a larger amount of information and documentation will be registered.
 Thus, banks will have sufficient information to better perform risk management. In that regard, the integration
between the two databases will permit the banks to go even further in the risk analysis, as it will allow banks
to map the related parties. This ability should, in turn, improve their correspondent banks’ confidence in their
KYC processes.
Source: Banco de México
IV. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

26
Figure 4. The KYC utility architecture
Clients National authorities
Have access to the

database’s contents.
Send
required
information.
Send or update
required information. KYC
database
Can query KYC

information.
Mexican
banks
• Performs validation procedures.

• Determines sufficiency of information for
each client according to their category.
Source: Banco de México

27
Box 5. The case of Singapore
Singapore (not included among the countries surveyed for this report) also has developed a KYC utility as a way
to enhance customers’ onboarding. According to the Monetary Authority of Singapore (MAS), KYC is one of the
most complex processes in the financial industry because it is costly, laborious, redundant, and still not fully ef-
fective in detecting tax evasion or money laundering.59 The government has taken the first step with MyInfo—a
single platform containing personal data submitted to and verified by the government. MAS and the Government
Technology Agency of Singapore have conducted a pilot program with several banks to enable customers to open
a bank account online using MyInfo. Application timings were shortened by as much as 80 percent in the pilot.
Going forward, MAS is working closely with local and foreign banks to explore a banking KYC shared-services
utility that will streamline KYC. This streamlining means centralizing processes such as (a) leveraging on MyInfo
for customer identification and verification, (b) collecting and validating KYC documents, and (c) screening against
sanctions and blacklists. The banking KYC utility expected to be in place in 2018 will (a) harmonize and enhance
KYC checks across the industry and (b) improve the quality of risk management while reducing cost and time
taken.
The SWIFT KYC registry
As indicated by SWIFT, more than 1.3 million bilateral correspondent relationships exist across the industry. This
amount of data creates a massive administrative burden for banks each time a relationship is added or information
needs updating. Yet it has never been more important to ensure that due diligence on banks’ correspondents and
their downstream relationships is thorough, timely, and accurate.
In December 2014, SWIFT launched a KYC registry that meets the need for an efficient, shared platform for man-
aging and exchanging standardized KYC data.60 SWIFT has worked with the world’s largest correspondent banks
to define a set of data and documentation that addresses KYC requirements across multiple jurisdictions. Limited
to SWIFT-connected supervised institutions when the registry was started, in December 2017 SWIFT opened ac-
cess to all supervised financial institutions, regardless of whether they are connected to SWIFT.
According to SWIFT, the KYC registry is a “secure, global utility which nearly 4,000 correspondent banks and
funds players use to contribute, share and consume a comprehensive set of KYC data and documents. The
Registry helps financial institutions streamline the exchange of know your customer information to support KYC
compliance. Member institutions share their data in response to access requests from their counterparties who
‘consume’ the data as part of their KYC processes. Each institution retains ownership of its Registry data, and full
control over which counterparties can access it.”61
Thomson Reuters’s central registry for bank client data
In 2014, Thomson Reuters launched Accelus Org ID, a central KYC platform to help leading banks and invest-
ment managers make informed KYC and onboarding decisions while creating a more sustainable and compliant
regulatory environment for themselves and their clients. The registry acts as a central clearing house for banks,
corporations, asset managers, hedge funds, and others to check identity documentation for their counterparties.
The proposed solution brings several benefits to the users, such as reducing onboarding time and cost as well as
enhancing regulatory compliance.62 In particular, the platform provides a comprehensive risk-based KYC policy
that has been stress tested with regulators and more than 100 financial institutions globally, as well as informa-
tion on ultimate beneficial owners. As indicated by Thomson Reuters, the registry is the only service to provide
integrated ongoing screening and monitoring to detect changes in bank’s customers’ KYC profiles.

28
The third group of Fintech approaches to the currency at will. It is not clear whether markets
derisking issue consists of attempts to redefine most affected by derisking are likely to sustain
the existing correspondent banking architecture, the required number of exchanges. Moreover, the
often by using “cryptocurrencies” as “bridge high volatility of cryptocurrency exchange rates
assets.” In this framework, financial institutions introduces additional market risks that would need
maintain liquidity only in local currency and to be managed. Finally, cryptocurrency exchanges
the bridge asset, with cross-border settlements are increasingly facing the same AML/CFT
occurring in that bridge asset. A number of different requirements as traditional financial institutions.
bridge assets have been proposed, from bitcoin and In some cases, those requirements are even more
ether to product-specific cryptocurrencies such as stringent considering that in many jurisdictions
XRP (promoted by Ripple) or Lumens (promoted cryptocurrencies are associated with illicit financial
by Stellar). Such efforts need to be treated, however, flows. As a result, their long-term suitability as
with caution. The viability of using cryptocurrencies alternatives to the traditional correspondent banking
to facilitate cross-border transfer will depend on the model has not yet been proven.
availability to convert cryptocurrencies and local
Box 6. Examples of alternative solutions to correspondent banking
Ripple. The model focuses on commercial cross-border and interbank payments combined with cross-currency
funds settlement. Ripple allows for a move away from establishing upfront correspondent banking relationships
toward a more dynamic approach. This approach identifies a path for the flow of funds from a sender in a par-
ticular currency to a receiver in a particular currency, through a series of participating institutions that offer ser-
vices for that currency. This method can lead to better discovery of prices for foreign exchange transactions and
to expanding access to such services for smaller remittances companies. Ripple’s own cryptocurrency, XRP, is
actively traded on several cryptocurrency exchanges. Ripple also operates its own exchange, structured as a
network described previously, in which the top currencies actively exchanged are CNY, USD, JPY, and EUR. In
addition, other cryptocurrencies like bitcoin and ether are also actively exchanged.
Abra. This model offers instant peer-to-peer money transfers with no transaction fees through Abra’s network,
combining cryptocurrency with physical bank tellers. Because of the existence of tellers, bank accounts are not
required to conduct a cross-border payment; only the recipient’s phone number is required. As of 2017, Abra is
available globally and supports more than 50 currencies in addition to bitcoin.
Note: See World Bank, “Distributed Ledger Technology (DLT) and Blockchain,” Fintech Note 1, World Bank, Finance & Markets Global Practice,
Washington, DC, 2017, http://documents.worldbank.org/curated/en/177911513714062215/pdf/122140-WP-PUBLIC-Distributed-Ledger-Tech-
nology-and-Blockchain-Fintech-Notes.pdf.

29
Another substitute to correspondent banking— multilateral collaboration and involvement from
not Fintech based—is creating a direct link a variety of industry players from both countries
between the central banks payments systems including regulators, payments system operators,
themselves.63 The current method of executing a and RSPs, just to name a few. However, because
cross-border transaction through correspondent of the potential benefits and the current state of
banking is shown in figure 4 in red arrows. Where derisking in the world, this alternative may be
Bank A settlement flows reach Country B through worth evaluating again.
its CBR, it enters the national payment system to
reach the end customer. The green arrows depict The proposed Fintech solutions discussed have
the process using a direct link between the national not been tried and tested so far and thus are
payment systems and therefore circumventing still in the concept phase. It is not clear if each
Bank A’s correspondent bank. As addressed in the solution would always comply with AML/CFT
General Principles of International Remittances, standards and allow for full transparency from
this solution comes with several barriers including payment senders to recipients. Also, to the extent
standardization of message formats, exchange rate that some of the solutions allow for the direct
agreements, and proper settlement arrangements.64 access to information across borders, it may be
Addressing these issues is difficult and may necessary to make amendments to laws (notably
be costly. Additionally, integration of cross- on data privacy). All technology is vulnerable to
jurisdiction systems may require a high degree of exploitation by bad actors and therefore requires
adequate cyber-risk safeguards.
Figure 5. Current and alternative settlement flows

Country A Country B
(currency A) (currency B)
Central bank Central bank
National payment National payment

system system
Bank A Bank B1 Bank B2
Customer Customer
Note: red arrows = settlement flows for current method of making cross-border payments via correspondent banking relationship;
green arrows = settlement flows for the payment system’s direct link alternative.

30
The development of other innovative NZD 10,000 (~USD 7,300) per year. Transactions
products and alternative options to are monitored in real time with an automated AML/
correspondent banking CFT reporting system. NZD are paid into the New
Zealand bank account in the name of the Tonga
Other cases of innovation do not rely on Development Bank (TDB) held at KiwiBank.
correspondent banking such as digital These funds cumulate in the New Zealand account
remittance products. As discussed previously, and are used to settle Tongan import payments. In
closures of MTOs have caused (a) reduction in Tonga, the importers of these goods and services
competition for domestic remittance markets, (b) pay Pa’Anga to TDB which, in turn, provides the
greater vulnerability of countries to disruptions required Pa’Anga to the remittance beneficiaries.
in the flow of much needed remittances, and (c) The funds can either be withdrawn from a bank
movement of local remittances into informal account in Tonga or paid as cash through a TDB
channels. The development of digital products representation point on production of a unique
provides a promising solution to this problem. code (transmitted to mobile phones) and face-to-
Ave Pa’Anga Pau, a digital voucher designed in face identification. The transactions occur entirely
Tonga, does not rely on correspondent banking within the banking system, are fully transparent,
relationships and has a high degree of automated and are subject to regulatory oversight in New
AML/CFT compliance. It is purchased online Zealand and Tonga.65 The product was launched
through the internet or mobile devices. No cash is in early 2017 and by June 30 more than NZD 1
accepted. All remittance senders and receivers are million had been remitted with volumes doubling
subject to AML/CFT screening when they register. month on month. The product development was
The voucher is a retail product, and this designation supported by IFC and was aimed at demonstrating
is reflected in the design limits imposed on the that it is possible to deliver a compliant remittance
amount of remittances that individuals can transact: solution within the existing regulatory framework.
a maximum of New Zealand dollars (NZD) 1,000 It also strengthens the formal remittance
(~USD 730) per day and a cumulative maximum of channel between New Zealand and Tonga.66

31
32
CONCLUSION
T
his survey confirms what has already been signaled in previous general publications and
work undertaken by international bodies including the IMF, FSB, WB, IFC, and IDB—
in particular, that payment flows are being concentrated through fewer channels and that
global banks are being replaced by second-tier banks as correspondent banking providers. The
survey also supports the thesis that derisking has not led to significant macroeconomic impacts.
Both business considerations and AML/CFT concerns have also clearly come out as the primary
cause for terminating or restricting CBRs.
This survey also suggests that the MTOs have been Regulators and supervisors have an important
adversely affected by the closure of their accounts role to play, too. Enhancing AML/CFT regimes
by banks. The extent to which these effects are is an essential part of the solution to derisking.
having cascading effects on the flows and costs Establishing ways to monitor trends in correspondent
of remittances is still unclear and further work is banking relationships is also warranted, especially
needed. by collecting and analyzing bank-by-bank data on
a country level. This method can help authorities
Several solutions are being implemented by better understand existing vulnerabilities in their
countries, including developing KYC registries that system and adopt appropriate action.
could reduce the cost of compliance and increase the
trust of correspondent banks in the quality of their Last, there is no silver bullet to address the derisking
respondents’ AML/CFT processes. By allowing problem. In banks’ opinion, CBR remains a low-
greater transparency, traceability, and auditability, margin activity that carries high risk. No matter
Fintech are also promising solutions that can how detailed the discussion goes for the potentially
revolutionize the way banks apply and comply with perfect compliance of respondent banks and MTOs,
AML/CFT standards. In that regard, collaboration the final answer is that derisking is a business
between banks, regulators, and Fintech companies decision.
should be continued, keeping in mind that these
solutions also come with their own risks.

33
ENDNOTES
1. World Bank, “Withdrawal from 5. Financial Stability Board, “Report to the G20
Correspondent Banking Where, Why, and on Actions taken to Assess and Address the
What to Do about It,” International Bank Decline in Correspondent Banking,” Financial
for Reconstruction and Development and Stability Board, Basel, Switzerland, November
the World Bank Group, Washington, DC, 6, 2015, http://www.fsb.org/wp-content/
November 2015, http://documents.worldbank. uploads/Correspondent-banking-report-to-
org/curated/en/113021467990964789/ G20-Summit.pdf.
pdf/101098-revised-PUBLIC-CBR-Report-
November-2015.pdf. 6. Ibid.
2. The Wolfsberg Group, “Wolfsberg 7. Bank for International Settlements (BIS),

Anti-Money Laundering Principles for “Correspondent Banking,” BIS, Basel,
Correspondent Banking,” Wolfsberg Group, Switzerland, July 2016, http://www.bis.org/
2014, p. 1, https://www.wolfsberg-principles. cpmi/publ/d147.pdf; International Monetary
com/sites/default/files/wb/pdfs/wolfsberg- Fund (IMF), June 2016. The Withdrawal of
standards/8.%20Wolfsberg-Correspondent- Correspondent Banking Relationships: A
Banking-Principles-2014.pdf. Case for Policy Action, IMF Staff Discussion
Note, IMF, Washington, DC, June 2016,
3. The international community, led by the h t t p s : / / w w w. i m f . o rg / e x t e r n a l / p u b s / f t /
World Bank, started working on reducing the sdn/2016/sdn1606.pdf; The Commonwealth,
cost of sending money home in 2005. As of Disconnecting from Global Finance: De-
October 2015, these efforts were estimated to Risking—The Impact of AML/CFT Regulations
have saved migrants and their families up to in Commonwealth Developing Countries,
USD 62.5 billion, according to the Remittance Commonwealth Secretariat, London, 2016,
Prices Worldwide database. http://thecommonwealth.org/disconnecting-
from-global-finance; Charity Finance Group,
4. The World Bank Group, “Fact Finding “Briefing: Impact of Banks’ De-Risking
Summary from De-Risking Surveys: on Not for Profit Organisations,” Charity
Withdrawal from Correspondent Banking Finance Group, London, 2015, http://www.
and Report to the G20 Survey on De-Risking cfg.org.uk/Policy/~/media/Files/Policy/
Activities in the Remittance Market,” Banking/Briefing%20%20Impact%20of%20
International Bank for Reconstruction and banks%20derisking%20activities%20on%20
Development and the World Bank Group, charities%20%20March%202015.pdf.
Washington, DC, 2015, http://documents.
worldbank.org/curated/en/2015/11/25481336/ 8. Financial Stability Board, “FSB
fact-finding-summary-derisking-surveys. Correspondent Banking Data Report,” FSB,
Basel, Switzerland, 2017, http://www.fsb.
org/2017/07/fsb-correspondent-banking-data-
report/.

35
9. International Monetary Fund (IMF), The receiver specifies which message types
“Recent Trends in Correspondent Banking are permitted and sends this permission data to
Relationships: Further Considerations,” the sender; the sender checks the message type
IMF, Washington, DC, April 21, 2017, against the permission data before sending a
https://www.imf.org/en/Publications/Policy- message to the receiver.
Papers/Issues/2017/04/21/recent-trends-in-
correspondent-banking-relationships-further- 15. World Bank Group, “Withdraw from
considerations. Correspondent Banking: Where, Why,
and What to Do about It,” Working Paper
10. World Bank, “De-Risking and Other 101098, World Bank, Washington, DC, 2015,
Challenges in the Emerging Market Financial http://documents.worldbank.org/curated/
Sector: Findings from IFC’s Survey on en/113021467990964789/Withdraw-from-
Correspondent Banking,” Working Paper, correspondent-banking-where-why-and-what-
World Bank, Washington, DC, 2017, to-do-about-it.
http://documents.worldbank.org/curated/
en/895821510730571841/De-risking-and- 16. In most if not all cases, banks do not disclose
other-challenges-in-the-emerging-market- why the decision was made to terminate the
financial-sector-findings-from-IFC-s- relationship.
survey-on-correspondent-banking.
17. Note that correspondent banking is a low-
11. Mexico gave its explicit consent to disclose any margin business.
information relating to its KYC utility. Angola
was not part of the eight countries surveyed 18. In one country, recent allegations of illicit acts
but agreed to discuss derisking issues during committed by senior managers and directors
conference calls. Other information related to of prominent banks seem to have played a key
countries explicitly mentioned in the survey is role in the withdrawal of correspondent banks.
in the public domain.
19. There were also cases where the termination
12. Dirk Jan Grolleman and David Jutrsa, was done without notice.
“Understanding Correspondent Banking
Trends: A Monitoring Framework,” IMF 20. Regional banks that had been operating
Working Paper 17/216, International Monetary for many years in the Southern Africa
Fund, Washington, DC, 2017, https://www. Development Community stopped supplying
imf.org/~/media/Files/Publications/WP/2017/ USD in Angola and Zimbabwe at the request
wp17216.ashx. of U.S. banks.
13. This country was included in the studies 21. In a credit opinion dated June 28, 2016, one
because the banking services that its banks of the rating agencies decided to “downgrade
provided in the region to other respondents [Bank X’s] ratings and placed them on review
were affected. for downgrade, reflecting the bank’s loss of
all of its correspondent banking lines which
14. Relationship management application (RMA) if not addressed in a timely manner could
is a service provided by SWIFT to manage potentially prevent the bank from paying the
the business relationships between financial November 2016 coupon of “XXX’s” global
institutions. RMA operates by managing bond. The review will focus on [Bank X’s]
which message types are permitted to be ability to secure new stable and reasonably
exchanged between users of a SWIFT service. priced correspondent banking lines in a timely
ENDNOTES
36
manner. We will also reassess the probability remittanceprices.worldbank.org/sites/default/
that the bank will benefit from public support files/rpw_report_june_2017.pdf.
with a focus on any measures [Country X]’s
Superintendency of Banks and central bank 27. World Bank, “De-Risking in the Financial
may take to help ensure the bank’s ability to Sector,” Brief, World Bank, Washington, DC,
repay foreign bondholders despite the loss of October 2016, http://www.worldbank.org/en/
its correspondent lines.” topic/financialsector/brief/de-risking-in-the-
financial-sector.
22. These onsite assessments are the occasion
to enquire about the general political and 28. Carlo Corazza, “The World Bank’s Data
economic context, cases of corruptions, and Gathering Efforts: De-Risking: Key Findings
the bank’s AML/CFT monitoring system. and Recommendations,” presentation,
World Bank, Washington, DC, January
23. FATF recommendations do not require the 2016, http://pubdocs.worldbank.org/
correspondent bank to know its customer’s en/953551457638381169/remittances-
customers (KYCC). In other words, GRWG-Corazza-De-risking-Presentation-
correspondent banks are not required to Jan2016.pdf.
conduct CDD on the individual customers of
its respondent institution; see Financial Action 29. Susan Starnes, Michael Kurdyia, Arun Prakash,
Task Force, “FATF Guidance on Correspondent Ariane Volk, and Shengnan Wang, “De-
Banking Services,” FATF, Paris, 2016, http:// Risking and Other Challenges in the Emerging
www.fatf-gafi.org/media/fatf/documents/ Market Financial Sector: Findings from IFC’s
reports/Guidance-Correspondent-Banking- Survey on Correspondent Banking,” IFC
Services.pdf. Insights, September 1, 2017, https://www.ifc.
org/wps/wcm/connect/3d215edb-55da-4097-
24. SWIFT estimates that for large banks the 982c-e90409d6621a/IFC+2017+Survey+on+
due diligence cost for high-risk counterparts Correspondent+Banking+in+EMs+final+Sept
can reach as much as $50,000 per year. ember+1.pdf?MOD=AJPERES.
See SWIFT, “Addressing the Unintended
Consequences of De-Risking—Focus on 30. Agnès Joly, “De-Risking In Trade Finance—
Africa,” information paper, SWIFT, La Hulpe, Time to Act,” Insights, Société Générale,
Belgium, August 2016, file:///C:/Users/Owner/ October 17, 2017, https://www.securities-
Downloads/swift_info_paper_derisking_ services.societegenerale.com/en/insights/
africa_focused_0.pdf. banking/risking-trade-finance-time-act/.
25. World Bank, “Remittances to Rec over 31. SWIFT’s RMA enables financial institutions
Modestly after Two Years of Decline,” press to define which counterparties can send them
release, World Bank, Washington, DC, October SWIFT FIN messages and blocks unwanted
3, 2017, http://www.worldbank.org/en/news/ message traffic at the sender, providing a first
press-release/2017/10/03/remittances-to- line of defense against fraudulent transactions.
recover-modestly-after-two-years-of-decline.
32. That percentage is higher than the global
26. The International MTO Index tracks the average of 32 percent, according to SWIFT
prices of MTOs that are present in at least data, 2014.
85 percent of corridors covered in the RPW
database; see also World Bank, Remittance
Prices Worldwide 22 (June 2017), https://

37
33. World Bank, Remittance Price Worldwide, 24 “Angolan Banks FAQ Answers Investors’
(December 2017), https://remittanceprices. Questions on Correspondent Banking
worldbank.org/sites/default/files/rpw_report_ Pullback,” Moody’s Investors Service, August
december2017.pdf. 9, 2017, https://www.moodys.com/research/
Moodys-Angolan-Banks-FAQ-answers-
34. See, for example, France-Comoros 4.98 investors-questions-on-correspondent-
percent. World Bank, Remittance Prices banking--PR_370994.
Worldwide Database.
38. Moody’s, 2017.
35. Sue E. Eckert, Kay Guinane, and Andrea
Hall, “Financial Access for U.S. Nonprofits,” 39.
International Monetary Fund (IMF),
The Charity and Security Network, “Recent Trends in Correspondent Banking
Washington, DC, February 2017, https://www. Relationships—Further Considerations,” IMF,
charityandsecurity.org/FinAccessReport; Washington, DC, March 16, 2017, https://
Duke Law International Human Rights Clinic www.imf.org/~/media/Files/Publications/
and Women Peacemakers Program, Tightening PP/031617.ashx; IMF, “The Withdrawal of
the Purse Strings: What Countering Terrorism Correspondent Banking Relationships.”
Financing Costs Gender Equality and Security
(Durham, NC: Duke Law International Human 40. The MTOs have raised the issues of derisking
Rights Clinic and Women Peacemakers with authorities over several years and have
Program, 2017), https://law.duke.edu/ received the backing of both the central bank
humanrights/tighteningthepursestrings/; Tom and the government in a number of regional
Keatinge and Florence Keen, Humanitarian meetings. However, to date these interventions
Action and Non-State Armed Groups: The have had little effect.
Impact of Banking Restrictions on UK NGOs
(London: Chatham House, 2017), https://www. 41. One prominent bank in this country that
chathamhouse.org/publication/humanitarian- represents the biggest market share of
action-and-non-state-armed-groups-impact- remittances lost 25 nostro accounts, but it
banking-restrictions-uk-ngos; and Mayada El- opened 27 new CBRs with correspondent
Zoghbi, Nadine Chehade, Peter McConaghy, banks from UAE and India.
and Matthew Soursourian, “The Role of
Financial Services in Humanitarian Crises, 42. In September 2017, New York’s state banking
“Consultative Group to Assist the Poor, regulator imposed a USD 225 million fine on
Washington, DC, April 24, 2017, http://www. Habib Bank, the biggest bank in Pakistan,
cgap.org/publications/role-financial-services- and ordered it out of the United States after
humanitarian-crises. Additional empirical finding a long list of flaws in its compliance
studies are under way by the Human Security that opened the door to the financing of terror.
Collective and the Charity Finance Group. See Ben McLannahan, “New York Regulator
Kicks Pakistan’s Habib Bank Out of US,”
36. Eckert, Guinane, and Hall, “Financial Access Financial Times, September 7, 2017, https://
for U.S. Nonprofits.” www.ft.com/content/7389b858-93e8-11e7-
a9e6-11d2f0ebb7f0.
37. Despite the efforts to reduce the level
of dollarization in the domestic banking 43. There are 133 million mobile phone users in
system, Angola will continue to rely heavily one of the surveyed countries, a ubiquitous
on correspondent banks for international network that reaches into all corners, and it is
transactions. See Global Credit Research, through this network that hundis service their
ENDNOTES
38
customers. In overseas countries where the 2014), http://documents.worldbank.org/
diaspora and workers from this country reside, curated/en/134841468128111804/pdf/884820
money can be sent home by using a hundi. The PUB0Box300EPI2101090May292014.pdf.
advantages of using an illegal service outside
of the banking system are several: (a) cash can 48. In broad terms, “registration” is where an
be paid to the agent with no questions asked and RSP must identify itself to the authorities
no documentation required; (b) the exchange and provide certain information about itself
rate applied to the transaction is better than the and its service, with the authorities attaching
one that can be obtained through the official, few or no conditions to the ability of the
formal channels; and (c) the money can be provider to offer its service. “Licensing” is
accessed by beneficiaries at home within an where substantive conditions are attached. In
hour. In short, the cost–benefit of the hundi practice, the distinction between registration
system for the individual outweighs the fact and licensing is sometimes blurred.
that it is illegal for many users.
49. Financial Action Task Force, Guidance on
44. The IMF has developed a tool to understand Correspondent Banking Services, FATF,
and track CBRs trends. See Dirk Jan Paris, October 2016, http://www.fatf-gafi.
Grolleman and David Jutrsa, “Understanding org/media/fatf/documents/reports/Guidance-
Correspondent Banking Trends: A Monitoring Correspondent-Banking-Services.pdf.
Framework,” IMF Working Paper,
International Monetary Fund, Washington, 50. Ibid.
DC, October 4, 2017, https://www.imf.org/
en/Publications/WP/Issues/2017/10/04/ 51. Under the Second Payment Services Directive
Understanding-Correspondent-Banking- (PSD2), all payment and RSPs that are
Trends-A-Monitoring-Framework-45318. registered under EU legislation should have
access to banks’ payment accounts services
45. The International Organization for unless there is an objectively justified reason
Standardization (IOS) promotes global to refuse such access. According to article
standardization for specifications and 29a of the PSD, “Member States shall
requirements for materials, products, ensure that payment institutions have access
procedures, formats, information, and quality to credit institutions’ payment accounts
management. services on an objective, non-discriminatory
and proportionate basis. Such access shall
46. Massimo Cirasino, “The Committee on Payment be extensive enough to allow payment
and Settlement Systems and the World Bank institutions to provide payment services in
General Principles on International Remittance an unhindered and efficient manner. The
Services,” World Bank, Washington, DC, credit institution shall provide the competent
http://documents.worldbank.org/curated/ authority with duly motivated reasons for any
en/975781468763485550/The-committee- rejection.” In the same vein, Recital 27 of the
on-payment-and-settlement-systems-and- PSD states: “Payment service providers when
the-World-Bank-general-principles-on- engaging in the provision of one or more of
international-remittance-services. the payment services covered by this Directive
should always hold payment accounts used
47. Emiko Todoroki, Wameek Noor, Kuntay Celik, exclusively for payment transactions. For
and Anoma Kulathunga, Making Remittances payment service providers to be able to provide
Work: Balancing Financial Integrity and payment services, it is indispensable that they
Inclusion (Washington, DC: World Bank, have the possibility to open and maintain

39
accounts with credit institutions. Member 54. The Chief Data Office of the Monetary
States should ensure that access to such Authority of Singapore has named the following
accounts is provided in a non-discriminatory as the necessary components to support such
way and proportionately to the legitimate aim data exchange processes: (a) availability of the
it intends to serve. While the access could be data, (b) deployment of appropriate tools, (c)
basic, it should always be extensive enough for necessary technological infrastructure, and (d)
the payment institution to be able to provide its training staff for the relevant skill sets.
services in an unobstructed and efficient way.”
See https://ec.europa.eu/info/law/payment- 55. A correspondent bank has access to readily
services-psd-2-directive-eu-2015-2366_en. available information on a respondent bank
thereby decreasing significantly the time and
52. Distributed ledger technology refers to a cost that it would take to gather the information
novel and fast-evolving approach to recording on its own. A correspondent’s knowledge that
and sharing data across multiple data stores its respondent is using a reliable instrument
(or ledgers). This technology allows for to gather information on its clients may allay
transactions and data to be recorded, shared, concerns about the strength of the respondent’s
and synchronized across a distributed network KYC measures and result in lower risk
of different network participants. A blockchain categorization or fewer sample checks to test
is a particular type of data structure used in the system and thus to lower costs.
some distributed ledgers which stores and
transmits data in packages called blocks 56. There is an ongoing debate on the extent to
that are connected to each other in a digital which third parties (banks) would be able to
chain. Blockchains employ cryptographic and rely on data in a KYC utility and whether they
algorithmic methods to record and synchronize would be liable for any errors in data retrieved
data across a network in an immutable from a KYC utility. The prevailing view (as
manner. See World Bank, “Distributed Ledger also expressed in FATF Rec 17) is that those
Technology (DLT) and Blockchain,” Fintech who use information are ultimately responsible
Note 1, World Bank, Finance & Markets for its accuracy.
Global Practice, Washington, DC, 2017,
http://documents.worldbank.org/curated/ 57. Bank for International Settlements (BIS),
en/177911513714062215/pdf/122140-WP- “Correspondent Banking,” Committee on
PUBLIC-Distributed-Ledger-Technology- Payments and Market Infrastructures, BIS,
and-Blockchain-Fintech-Notes.pdf. Basel, Switzerland, July 2016, https://www.
bis.org/cpmi/publ/d147.pdf.
53. This first group also includes the SWIFT’s
Global Payments Initiative (GPI), which 58. Twenty full-time staff members of the Bank of
attempts to improve the efficiency of the Mexico were assigned to this project for one
global correspondent banking system through year.
providing up-to-date information about each
leg of an international payment and each 59. Remarks by Ravi Menon, managing director
institution’s compliance with the GPI service- of the Monetary Authority of Singapore, at
level agreement. In subsequent phases of GPI the Singapore FinTech Festival, Singapore,
implementation, the consortium plans to use November 14, 2017.
distributed ledger technology to help settlement
and reconciliation of nostro accounts. 60. See the KYC registry at www.swift.com/
kycregistry.
ENDNOTES
40
61. See SWIFT, “SWIFT Extends KYC Registry 64. Ibid.
Membership to All Supervised Financial
Institutions,” news release, SWIFT, Brussels, 65. Because the provider of the digital voucher is a
July 17, 2017, https://www.swift.com/ bank, it has the liquidity to handle the pay out
news-events/press-releases/swift-extends- to beneficiaries.
kyc-registry-membership-to-all-supervised-
financial-institutions. 66. Of course, this solution hinges on one bank
having a presence in both sending and
62. See “KYC as a Service,” Thomson Reuters, receiving jurisdictions allowing the banks to
https://risk.thomsonreuters.com/en/products/ net the different accounts against each other.
kyc-as-a-service.html. Where this ability is not the case, such a
solution would not be a viable option.
63. Cirasino, “The Committee on Payment and
Settlement Systems and the World Bank
General Principles.”

41

The Decline in Access To Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions

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The Decline in Access to Correspondent

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ABBREVIATIONS AND ACRONYMS III

EXECUTIVE SUMMARY VII

II. METHODOLOGY AND SCOPE 3

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES 5

IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES 17

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

ACRONYMS AND ABBREVIATIONS

AUD Australian dollar

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

ACRONYMS AND ABBREVIATIONS

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

II. METHODOLOGY AND SCOPE

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

II. METHODOLOGY AND SCOPE

III. MAIN OUTCOMES OF THE

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

Figure 1. Causes to terminate or restrict CBRs in one of the surveyed

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

Table 1. Summary of survey on account closures in one surveyed country

Total countries/jurisdictions that withdrew CBR: 17

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

Box 1. The effect of the termination of CBRs on a bank’s ratings

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

Table 2. Remittance operating account closures, 2010–2017, in one

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

III. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

IV. POSSIBLE SOLUTIONS AND

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

Box 2. Improvements to AML/CFT regimes: The case of Somalia

IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES

Box 3. e-KYC: The case of India

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

IV. POSSIBLE SOLUTIONS AND GOOD PRACTICES

THE DECLINE IN ACCESS TO CORRESPONDENT BANKING SERVICES IN EMERGING MARKETS

Send or update KYC Validation

Authorities have access to the

IV. MAIN OUTCOMES OF THE COUNTRY CASE STUDIES

Clients National authorities

Have access to the

Can query KYC