What is correspondent banking? Exploring Swift, AML, FATF, and the Wolfsberg Principles

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What is correspondent banking? Exploring Swift, AML, FATF, and the Wolfsberg Principles


This content is contributed or sourced from third parties but has been subject to Finextra editorial review.

Correspondent banking, believe it or not, continues to be a hot topic. Cross border payments are still not as efficient as they should be, meaning international trade is still not real-time, and those financially excluded can only benefit from instant payments by using correspondent banking networks. While there is a need to resolve these issues, some banks are hesitant to provide correspondent banking services in certain currencies considering economic uncertainty, regulatory burdens, as well as the threat of money laundering and terrorist financing. It could be argued that the industry needs to buy in to correspondent banking to tackle issues with cross-border payments.

Cross border payments: will the G20 or ISO 20022 fix issues?

The G20’s roadmap focuses on aligning regulatory, supervisory and oversight frameworks for cross-border payments. With ISO 20022, the interaction between data frameworks and cross border frameworks will also be reviewed, and in turn, governments can look to develop intra-regional cross-border payment systems. However, global harmonisation is difficult to achieve; P27 wasn’t the best of examples.

A year on from the downfall of the pan-Nordic payment infrastructure, Camilla Åkerman, secretary general, Nordic Payments Council, will discuss why it is now time for a domestic focus at NextGen Nordics in Stockholm in April. Ahead of her keynote, Åkerman mentioned that “significant progress has already been made in achieving harmonisation for ordinary credit transfers, in terms of using Swift standards, however, challenges arise when attempting to facilitate instant cross-border payments that normally follow local formats. Nonetheless, various initiatives are underway to implement instant payment systems that can enable seamless cross-border transactions.”

Speaking about the EPC’s rulebook for processing One-Leg-Out credit transfers, how organisations like TCH and EBA are working together through the IXB initiative to enable instant cross-border payments, and the ASEAN 5 implementing a multilateral cross-border scheme based on the BIS’ Project Nexus, she added that: “These initiatives demonstrate the growing recognition of the need for instant and seamless cross-border payments.”

Can correspondent banking networks make cross border payments instant and seamless? In short, the answer is yes. Without correspondent banking relationships, it would be harder and more expensive for banks to push cross border transactions through. Correspondent banking networks also permit cross-border money flows in a controlled and transparent manner, which reduces the risk of money laundering and terrorist financing.

AML, CFT, and what the FATF advises

The Financial Action Task Force, also known by its French name, Groupe d'action financière, is an intergovernmental organisation founded in 1989 based on the G7’s plan to combat money laundering. In 2001, its mandate was expanded to include terrorism financing. FATF states that correspondent banking relationships “are subject to anti-money laundering/counter-terrorist financing measures: the FATF Recommendations require financial institutions to identify and manage the risks associated with these business relationships and to apply specific due diligence measures when they are conducted on a cross-border basis.”

From 2015, the FATF provided guidance on how to apply a risk-based approach to correspondent banking relationships. With the FSB, a four-point action plan was created.

  1. Further examine the dimensions and implications of the issue;
  2. Clarifying regulatory expectations, as a matter of priority, including more guidance by the FATF;
  3. Domestic capacity-building in jurisdictions that are home to affected respondent banks; and
  4. Strengthening tools for due diligence by correspondent banks.

More recently, in 2018, this plan was expanded upon following the Wolfsberg Group’s – an association of 13 global banks - Correspondent Banking Due Diligence Questionnaire (CBDDQ) which aimed to address the decline in the number of correspondent banking relationships by facilitating due diligence processes. The guidance was updated and advised the financial services industry on how to set up an anti-bribery programme, as well as promoting a culture of ethical business practices.

In 2023, the Office of Financial Sanctions Implementation (OFSI) released an amendment to a regulation after the start of the Russia-Ukraine war which prohibits UK banks from processing payments previously processed by designated banks or which are intended for a designated bank. “So, if a UK bank receives funds that have been routed from or via a designated bank, directly or indirectly, the UK bank should not process the transaction even if the account holders sending and receiving the funds are not designated for the purposes of the asset freeze or otherwise sanctioned.”

Fintech and its role in correspondent banking

Geopolitical events have meant that Swift can be prohibited from providing financial messaging services to specific financial institutions that are sanctioned by EU regulation – which is good for mitigating money laundering or terrorist financing but makes it harder to get funds to civilians in need. This is where fintech comes in. Fintech companies operating in this space can support expedited onboarding to replace a lost correspondent banking relationship, at a much lower cost. Further to this, fintech firms can provide access to multiple local real-time payments automated clearing house (ACH) infrastructures, proprietary money transfer operators (MTOs) networks and mobile payments in certain regional areas.

Distributed ledger technology, CBDC and stablecoins may also offer alternative methods of payment, but these are in the early stage of development. A more realistic option is payment-as-a-service where financial players can partner with fintech firms to access cross border payments systems, without having correspondent banking relationships. This model can also be used as a redundancy for when banks get cut off from certain currencies due to geopolitical changes, providing speed, agility, and scalability to move funds across borders efficiently. 


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This content is contributed or sourced from third parties but has been subject to Finextra editorial review.