BIS reviews correspondent banking activities

MANILA, Philippines - The committee on payments and market infrastructures (CPMI) of the Bank for International Settlements (BIS) has issued a consultative report on correspondent banking.

Correspondent banking is an essential component of the global payment system, especially for cross-border transactions.

Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting, inter alia, international trade and financial inclusion.

Until recently, banks have maintained a broad network of correspondent relationships, but there are growing indications that this situation might be changing.

In particular, some banks providing these services are cutting back the number of relationships it maintain.

The CPMI consultative report provides some basic definitions, outlines the main types of correspondent banking arrangement, summarizes recent developments and touches on the underlying drivers.

The report then reviews certain technical measures relating to (i) know-your-customer (KYC) utilities; (ii) increased use of the legal entity identifier (LEI); (iii) information-sharing mechanisms; and (iv) improvements in payment messages.

Following a detailed assessment of the advantages and disadvantages of each of these technical measures, the report puts forward four recommendations for consideration by the industry and authorities.

The use of KYC utilities provided that they store at least a minimum set of up-to-date and accurate information, which can be supported as an effective means to reduce the burden of compliance with some KYC procedures for banks active in correspondent banking business.

In addition to the general promotion of LEIs for legal entities meanwhile, relevant stakeholders may consider specifically promoting the use of the LEI for all banks involved in correspondent banking as a means of identification which should be provided in KYC utilities and information-sharing arrangements.

In a cross-border context, this measure is ideally to be coordinated and applied simultaneously in a high number of jurisdictions.

The work already conducted by the authorities with responsibility for AML/CFT the Financial Action Task Force (FATF) and the Basel Committee on Banking Supervision AML/CFT Expert Group (AMLEG)) is very much appreciated.

It is recommended that the FATF and AMLEG be invited to: (i) provide additional clarity on due diligence recommendations for upstream banks, in particular to what extent banks need to know their customers’ customers; (ii) further clarify data privacy concerns in the area of correspondent banking; and (iii) detail, to the extent possible, the type of data that information-sharing mechanisms could store and distribute in order to be a useful source of information.