Recommendations for Reducing Risk of Money Laundering and Terrorist Financing in Correspondent Banking
I. Introduction
1. Financial and Capital Market Commission (hereafter – Commission) has developed "Recommendations for Reducing Risk of Money Laundering and Terrorist Financing in Correspondent Banking[1]" (hereafter – Recommendations) to promote unified credit institution understanding of risks associated with correspondent account[2] services, and to prevent credit institution involvement and attempted involvement in money laundering and terrorist financing (hereinafter – ML/TF) where possible.
2. Recommendations are intended for credit institutions and foreign bank branches (hereinafter – credit institutions) to ensure the implementation of requirements of the Law On the Prevention of Money Laundering and Terrorism Financing[3] (hereafter – OPMLTF Law).
3. Commission issues the recommendations in order to:
3.1 explain the risks associated with providing services to respondents opening a correspondent account;
3.2. clarify the measures provided in normative acts for ML/TF risk[4] reduction and prevention in the field of correspondent banking.
4. Recommendations were developed by collecting the shortcomings and positive examples of correspondent banking observed by the Commission while monitoring the financial and capital market players, also including the normative act provisions of the Republic of Latvia (e.g. OPMLTF Law, Regulation No. 125 of 27.08.2008 of the Commission On Enhanced Customer Due Diligence (hereafter – Regulation No. 125)) and international financial institution operating standards.
5. Financial Action Task Force[5] (hereafter – FATF) assessment of correspondent banking services recognises a high risk of ML/TF, as credit institutions have a limited ability to verify the respondent customer’s identity when providing the aforementioned services to a foreign credit institution, since virtually no information on respondent customers is available.
6. Correspondent account transactions are executed in respondent customers’ name and interest, and they may be both legal and natural persons, as well as other financial service providers. Correspondent’s customer is the respondent. As the information on the respondent’s customers and their transactions is usually not available to the correspondent, this condition causes increased risk of the correspondent becoming involved in money laundering, terrorism financing or attempts of such activities
7. The payments made within the correspondent banking relationship may involve significant money flow without additional information on the parties involved in the transaction. Taking into account that payments in correspondent accounts may also be made for the needs of foreign banks, it is important to determine and assess the ML/TF risk of foreign credit institutions that wish to establish or have already established a correspondent banking relationship.
8. Credit institutions and financial institutions shall operate in compliance with international and national conformity requirements that are established in each State according to its legal system.
9. Before establishing a correspondent banking relationship with another credit institution, initial due diligence should be concluded. It is not only applied to comply with the requirements of normative acts, but also to fulfil the risk management requirements to ensure that the credit institution fully recognises the respondent to whom services are offered.
10. Credit institution shall take into account and ensure that respondent due diligence is a continuous process applied from the moment of establishing a business relationship and continued throughout the business relationship. Due diligence shall be applied on a regular basis irrespective of the services offered to the respondent. The extent of due diligence depends on the respondent’s ML/TF risk.
11. Minimum requirements for customer (respondent) due diligence are provided in OPMLTF Law and Commission Regulation No. 125. When determining the required extent of due diligence, credit institutions may also take into account the Wolfsberg Group Principles for the establishment and maintenance of correspondent banking relationships[6].
12. When assessing the respondent’s ML/TF risk level, the justification for adequate due diligence application to the particular respondent should be obtained. In addition to information and data that will be acquired form the potential respondent, publicly available information on the respondent may be used if required.
II. Measures for ML/TF risk reduction when establishing a business relationship
13. When establishing a correspondent banking relationship, the credit institution shall determine the ML/TF risk associated with the respondent (as with all customers). During the initial risk assessment significant information on the possible ML/TF risk may be acquired by determining the potential respondent’s registration country and country where the credit institution (or credit institution branch) initiating the correspondent banking relationship operates.
14. Before establishing a correspondent banking relationship, irrespective of the respondent’s country (country that issued the respondent’s licence), the respondent shall be identified and submitted to further due diligence to be able to assess the respondent’s risk level.
15. Before resolving upon establishing the relationship, at least the following information should be acquired:
15.1. potential respondent’s permanent place of residence (country of origin), as well as the domicile (country) of the respondent’s parent company or holding company (depending on the submitter’s legal status – branch, subsidiary company, representation);
15.2. potential respondent’s legal form (public or private company; if public – establish whether its shares are admitted to trading in the regulated market (whether are they listed on an internationally recognised stock exchange));
15.3. potential respondent’s owner and management structure (determine the persons controlling the merchant, identification data, and determine whether they include politically exposed persons);
15.4. potential respondent’s business and customer base (determine what services the respondent offers to its customers, evaluating the associated risks in respect of geography of the offered services);
15.5. understanding the potential respondent’s reasons for using correspondent services.
16. Section 24 of OPMLTF Law provides that, when establishing a correspondent banking relationship with such credit institution (respondent) that is registered and operates in a third country[7], a credit institution shall take a number of measures, such as assess the measures related to the prevention of money laundering and terrorism financing taken by the respondent, and document the respective responsibility of the respondent in the field of the prevention of money laundering and terrorism financing.
17. Therefore it is significant to apply timely and sufficient customer (respondent) due diligence at the inception of the correspondent banking relationship, i.e. also ensure appropriate implementation of the “know your customer” principle[8] when establishing correspondent banking relationships[9].
18. In assessing the respondent’s ML/TF risk in cases when the respondent’s licence is issued by an EU Member State or a country, where normative acts in respect of ML/TF are recognised as equivalent to EU normative act requirements (equivalent country), corresponding competent institution, other factors that may contribute to increased ML/TF risk should also be assessed:
18.1. The respondent’s status in the country of residence should also be evaluated, depending on ownership structure (subsidiary company, branch or other). Acquisition of such information will allow the level of owner involvement in respondent action management and influence on important decision making to be determined;
18.2. When determining the respondent’s ownership structure, information on possible involvement of politically exposed persons in respondent action management should also be acquired;
18.3. One of the factors when assessing the respondent’s ML/TF risk is the acquired information on the extent to which other respondents use the services offered by the corresponding respondent. If the potential respondent himself offers correspondent account services within a correspondent banking relationship, this fact should be taken into account when assessing the possible ML/TF risk.
19. When planning to initiate a relationship with respondents from third countries, one should bear in mind that Clause 3 of the second part of Section 22 of the OPMLTF Law provides the application of enhanced customer due diligence when establishing a correspondent banking relationship with respondents from third countries.
20. When establishing a relationship with respondents from third countries, the credit institution shall apply measures provided in the first and second part of Section 24 of the OPMLTF Law:
20.1. the information required to comply with Clause 1 of the first part shall be acquired from independent and credible sources[10], not relying only on the respondent’s own produced and submitted information. Information submitted by the respondent acquired from such a source shall be verified in the case of any concerns about the information and/or information source. If required, publicly available information may be used to determine the potential respondent’s reputation and supervision quality (including on regulatory requirement violations in the recent past);
20.2. to comply with Clause 2 of the first part, an assessment of the measures related to the prevention of money laundering and terrorism financing taken by the respondent[11] shall be provided. If the respondent is registered (and/or operates) in the jurisdiction on which FATF has provided a public report in respect of its ML/TF prevention system quality[12], the policy and procedure package developed by the respondent shall be assessed considering the information given in the FATF report;
20.3. Clause 3 of the first part shall be regarded to ensure that the decisions on establishing a correspondent banking relationship with a credit institution from a third country are made by the board of administration, as they are associated with taking high ML/TF risks;
20.4. Clause 4 of the first part shall be regarded by signing a separate agreement or section in the agreement on establishing a correspondent banking relationship, stipulating the respondent’s obligation of the respective customer due diligence and transaction supervision, as well as the correspondent’s right to refuse the services if the respondent does not or cannot provide explanations on the nature of the transaction or the customer in whose interest the transaction is executed;
20.5. to comply with Clause 5 of the first part, the credit institution shall ascertain that the respondent which uses services related to direct access to correspondent accounts has verified the identity of the customers having direct access to correspondent accounts and has applied enhanced customer due diligence thereof, and, upon request, is able to provide relevant customer due diligence data;
20.6. to comply with the second part, the credit institution shall acquire confirmation that the respondent does not allow direct or indirect use of its accounts for the needs of shell banks[13], and has confirmed that its customers do not use shell bank services;
20.6.1. Business relationship shall be discontinued as soon as the respondent is known to permit the use of its accounts for shell bank needs.
21. When assessing the respondent’s risk at the inception of the relationship[14], the same principles as mentioned in Paragraph 8-10 and 12-13 of Commission Regulation No. 125 shall be applied. Additionally, the Wolfsberg Group[15] recommendations in respect of ML/TF prevention in correspondent banking[16] and other documents[17] prepared by Wolfsberg Group may be consulted.
III. Measures for ML/TF risk reduction when providing transaction supervision
22. When providing services to foreign respondents, additional aspects that during the relationship may increase the credit institution’s risk of becoming involved in money laundering, terrorism financing or attempts of such activities, shall be considered.
23. When providing transaction supervision during the business relationship, the credit institution shall apply the following measures:
23.1. Respondent’s account transactions (history) shall be monitored;
23.2. Respondent’s most active customers shall be determined and information on these customers shall be acquired in the public space[18];
23.3. If necessary, an explanation of the executed transactions shall be requested from the respondent;
23.4. Enhanced monitoring shall be applied to transactions executed with the involvement of several countries or territories characterised as high risk countries or territories[19];
23.5. Additional due diligence measures shall be applied to transactions initiated in countries with a high corruption index and aimed at low tax or no tax countries or territories, or payments from jurisdictions with a high drug use index to drug producing jurisdictions.
[1] Correspondent Banking – providing banking services in compliance with mutual agreements from one credit institution (correspondent) to another (respondent). Respondents may receive a wide array of services, including payment and billing transactions. Respondent – a credit institution receiving the services provided by the correspondent within the established Correspondent Banking relationship.
[2] Correspondent account – bank account reflecting the transactions executed within the established Correspondent Banking relationship on the basis of a previously signed agreement.
[3] OPMLTF Law – Law On the Prevention of Money Laundering and Terrorism Financing. Law effective in the Republic of Latvia (http://likumi.lv/doc.php?id=178987) with the purpose of preventing money laundering and terrorism financing.
[4] ML/TF risk – possibility of a credit institution to become involved in money laundering, terrorism financing or attempts of such activities.
[5] Inter-governmental body with the objective to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
[6] http://www.wolfsberg-principles.com/pdf/home/Wolfsberg-Correspondent-Banking-Principles-2014.pdf.
[7] Third country – a country other than a European Union Member State or European Economic Area country.
[8] "Know your customer" principle – the process of investigation of the information and documents acquired during customer’s identification and due diligence with the aim to provide sufficient basis for initiating and/or maintaining a relationship with the customer.
[9] FATF acknowledges that insufficient assessment and management of ML/TF risk (see No. 7) of Correspondent Banking may cause a situation when the credit institution offering services to a respondent may become involved in money laundering, terrorism financing or attempts of such activities.
[10] Source from which the credit institution acquires information on customers – legal persons, is considered independent if it is not linked to the credit institution or its customers. The source is considered credible if the included information is identical to information included in public registries of Latvia or other countries, and the information is regularly updated, or the obligation of legal persons to submit information to this source arises from normative act requirements (e.g. the obligation for legal persons whose financial instruments are listed in a regulated market to submit certain information is established by Laws or market organisers).