Bangladesh is an emerging tiger and it is ahead of many developing nations, particularly due to its consistent and steady economic growth and firm commitment from all the relevant stakeholders. Therefore, its financial activities must continue to penetrate in global financial network flawlessly and thus it partly needs to depend on the foreign banks through Correspondent Banking Relationships (CBR). In the recent past, a good number of foreign banks globally have been penalised heavily; hence, to reduce their compliance risk, scope and cost; they have been alleged of adopting parochial ‘De-Risking Strategy’ i.e. exiting CBRs with a good number of Bangladeshi (i.e. local) Banks. This has become as one of the threats for the smooth financial growth of our banking sector.On the contrary, the progressive model of Financial Inclusion and massive evolution of financial products and alternative delivery channels in Bangladesh – had created a tremendous vibe among the mass people who were unbanked & un-served before. Global think-tanks also recognise, such revolution brings few irregularities as by-products and obviously all these get tuned and rationalised with progress of human-civilisation. Hence, acknowledging the risks, banks need to proceed for the bigger country-interest. Vision of the Correspondent Banks should not be exaggerated focusing only on protecting ‘my bank /my home’ - from potential fear of global penalty. Yes, no one is here for charity but yet there is professionalism & bilateral solution on educating local banks, bringing them towards global standards, allowing them time to get familiarised and taking calculated Risk-Based Approach (RBA) progressively.
If check and balance of the CBRs cannot be ensured, issues like reduction in remittance flow, shifting of trade business to monopoly, unconscious patronisation of informal channels, hindrance of legal financial inclusion, multi-dimensional negative impact on end-users, etc. – will gradually become a mammoth problem which may twist the emerging tiger towards an extinct poor species. Are we ready to face these challenging consequences? Probably not; hence, Banks, regulators & regional stakeholders need to work altogether.
According to a BIBM report, around 60 per cent of banks faced termination decisions from foreign CBs in 2013-15. In a statistics of 2015, 63% of State-Owned, 31% of Private, 11% foreign banks’ Nostro accounts were terminated by global CBs. The World-Bank has conducted a survey on “The Termination of Business Relationships: Stories from the Field” among the developing countries and they along with BFIU had number of meetings with local Banks in 2017, which also found similar trend. Notably, there was a round-table meeting on “Access to Correspondent Banking and other Cross Border Financial Services in Emerging Market & Developing Economies” on 13 October 2017 at the Annual Conference of the World-Bank. Hence, de-risking is a global concern too.
Global concerns that partly resulted in foreign banks’ decision on restricting CBRs:
Regulatory ‘enforcement-actions’ spiked at 3.5bilion in 2012 and almost all giant banks were hugely penalised. Similarly on ‘Terrorist Financing (TF)’ - with emerge & devastation of Islamic States (IS) and increased global tension on ‘Weapon for Mass Destruction (WMD)’, particularly for North Korea; and other ‘Geo-Political Concerns’, e.g. Brexit, Arab-spring, US post-election strategies, refugee issues of Syria/ Myanmar, cyber-crime, crypto-currency/ bit-coin, etc. has increased the ‘Compliance-cost Vs. Profitability’ of the CBs; thus they preferred to choose simplified business models by exiting some products / client types or jurisdictions or both.
Local concerns that result in unfavourable impact on CBRs:According to a survey, criminals are using developing countries including Bangladesh as safer routes for Trade Based Money Laundering (TBML); around 80% of illicit flow of fund has been alleged in GFI report. Through ‘Bonded-warehouse’ facilities few traders have been evading huge government revenues. Besides, Inadequate Control Governance in State Owned Banks (SOBs), different level of KYC practices by Banks / FIs, poor Cyber Security (heist of February 2016), new dimension of Terrorism (e.g. Holey Artisan Bakery incident); adverse Corruption Index; siphoning of fund to Second Home /Off-shore tax-heavens and recent concern of misuse of Mobile Banking & Agent Banking networks, etc. are resulting unfavorably on CBRs.
Effects and magnitude of de-risking:
Negative impact of de-risking is significant. Around 158 Nostro-accounts were terminated in last 4 years (mostly in US$); and opening new A/C is challenging & expensive now. The decisions were inconsistent from global CBs and on average local banks lost between 10 to 15% of its trade finance business. A bank had to shut down its Money Service Business (MSB) in the UK with a net loss of US$ 700k. Local banks are facing Certain Restrictions from CBs which not only depriving them to get into potential-competitive market but also damaging their reputation and weakening the bargaining power with global partners. On Remittances market in 2017 there was a negative trend in comparison to 2014 & subsequent years; which raised the possibility that the de-risking of MSB/ Money Transfer Operators (MTO) by global CBs has a significant link. More than 90% of local trade is settled in USD, which is higher than the global average of 32%. As a result, the termination of CBRs endangering the imports & exports and limiting the flow of Foreign Direct Investments, which are essentials to the functioning of the Bangladesh economy.
Probable measures to address challenges of de-risking:
a) Global Initiatives: The FATF is working to further clarify the interplay between the FATF standards on correspondent banking (Recommendation 13), on customer due diligence (Recommendation 10) and wire transfers (Recommendation 16). In 2016, the World Bank Group and ACAMS (Association of Certified Anti-Money Laundering Specialists) made a good number of recommendations, e.g. ‘Correspondent Banks should be transparent about their reasons for terminating/ restricting CBRs’. Experts have recommended that, consulting Central Banks, industry associations, & regional development/ World Bank – an acceptable prescription to be made for shared platform & common standard of KYC repository, screening system & process and above all a mechanism of arbitration or advocacy by regional bodies like Asia Pacific Group (APG), Egmont Group, etc. which would reduce compliance cost and increase trust & transparency in CBRs. As industry seeks to overcome these issues on de-risking and CBRs, Financial Inclusion needs to remain front and centre, not only because it is essential to society, but also as a means of minimizing illicit flows.
b) National Initiatives: It is worthy to mention that Bangladesh Bank (BB), particularly BFIU (Bangladesh Financial Intelligence Unit) has been extremely active in tackling the de-risking problem. Good progress has been achieved also in bringing Bangladesh closer to the international standards on AML/CFT. Bangladesh was evaluated in 2016 by APG & in BASEL AML Index 2017 – where it has proven significant progress and it is just behind India among the neighbours. A project on e-KYC has been initiated along with considering biometric verification on receiving foreign remittances to mobile wallets, and reducing cash transactions, etc. are now key foresighted agendas of local think-tanks.
For probable operational solutions, both global CBs & local Respondent Banks (RBs) need to discuss & come to consensus that, as CBs have various global regulatory bodies and different risk appetite, they should, understanding the reality of local markets provide necessary supports to each-other for a win-win situation!
Regulatory Intervention is also required, as the country interest and reputation is involved. A global CB cannot exit a CBR or close a local RB’s account as & when it wishes. The global CBs neither should be paranoid on particular local adverse news nor should it be over-cautious on their global requirements and whimsically close the CBRs. Therefore, as instructions from BB are treated by the industry as guiding-obligations for betterment; it will be very prudent and beneficial for the economy & banking sector, if the BB/ BFIU/ regulator consider the following actionable: a) Issuing a circular for all Correspondent Bank (CBs) to:
• use a uniform AML questionnaire with easy & adequate interpretive notes and time during due-diligence reviews for the RBs;
• provide detail updates on CBs’ global regulatory requirements, internal risk-appetite regularly or at least on half-yearly basis;
• share bulletins, news-letters, web-training, etc. on quarterly basis and conduct at-least one large formal training / workshop for the local RBs;
• assist local RBs on how better they can ensure KYC &/or Sanction screening system/ process, etc;
• communicate clearly the concerns with any RB – which if not addressed may lead to exit of relationship well-in ahead, and provide adequate time to RB for alternative arrangements. This must be consistent for all local RBs;
• and obtain approval from the BFIU before exiting any CBR in Bangladesh.
b) BB can lead to formulate a model KYC questionnaire & answers for the RBs; considering the risk of any sub-standard answer from any RB may jeopardise the reputation of the whole country.
c) Regulator consulting World-bank, CBs & local AML Association - should advise local Banks on the requirements of suitable systems (on KYC/ CDD, Sanction screening, Transaction Monitoring, Vessel-tracking etc.) with recommendations of cost-effective systems taking leverage of global networks & negotiating centrally. It will ensure both uniform compliance standard in the industry and minimum cost for procurement & maintenance.
Inevitably, if people cannot make payments through legitimate channels, they will seek for other methods, whether that means using informal money remittance services or moving vans or suitcases full of cash across borders. Such methods will result in greater AML/CFT risks. Therefore, in a check and balance strategy we need to address the challenges of de-risking ensuring both financial integrity and financial inclusion.
The writer is the chief Anti Money Laundering Compliance Officer (CAMLCO), SEVP of Dutch-Bangla Bank Limited.