Increasing KYC-C Risks in the Eurozone?

Actimize AML Product Team, Anti-Money Laundering

Anyone who works in the anti-money laundering area in financial services knows that European regulators have been placing an extreme focus on correspondent banking the past few years. This push follows the theme of transparency in the payments and corporate ownership areas that regulators have been scrutinizing. Correspondent banking was the first area to really feel this though, because it is an area where opaqueness in financial transactions is common. Thus the idea of “KYC-C” was born – “Know Your Correspondent’s Correspondent.”

But what are financial organizations doing about correspondent banking today in Europe – and are we beginning to see the end of the push?

KYC-C is emerging globally for financial institutions — not just awareness of how their correspondents are trading from a geographic and business perspective, but also how their correspondent’s correspondents are trading. This requires an extra level of sophistication, not to mention more time dedicated to reviewing KYC-C data and transactions money flows. Some of the things that need to be reviewed include “Is the correspondent bank receiving the correct mix of international transactions as they indicated they would?” and “Are they sending money out in the correct mix?” Financial institutions also need to check that the business areas served continue to fit the appropriate profiles. All of these are main factors to be considered for financial institutions who work in the correspondent banking field.

The difficult part is trying to determine how your correspondent banking partner is conducting their business and if it aligns to what you expect of them. The level of due diligence required to on board and maintain a correspondent relationship is also increasing, making these types of relationships extremely expensive to maintain. So what can financial institutions do to maintain their correspondent banking network while monitoring for changes that could affect how they work with the correspondent in the future?

Onboarding and monitoring are two key areas where financial institutions should prioritize when dealing with the problem:

Onboarding: Onboarding a new correspondent bank is an extremely time and cost intensive process. Some of the critical areas that require special attention include:

  • Integrate onboarding to your core customer onboarding program. Correspondent banks should be part of your entity onboarding process. They should have their own distinct flow, but questionnaires, document requests, data validation, etc. should be utilized and run through your centralized risk assessment program.
  • Use a KYC-C data utility. Often the biggest delay in onboarding a correspondent bank is waiting on documents from the correspondent. Many organizations now operate KYC-C utilities which are housing documents of incorporation, patriot certifications, Wolfsburg group questionnaires, and more, in a centralized manner which enables you to get the documents securely, and quickly.
  • Focus on behaviour: When working with a new correspondent bank, ensure you get clear information on the types of businesses with which they work. Check the mix between cash, check, credit, their geographic spread, and who their correspondents are. This type of information is critical to gather as it will enable you to monitor the correspondent better over time.

Monitoring: No longer can you ignore how your correspondents operate after onboarding. Banks must now have a comprehensive monitoring program in place, from behavioural to transactional, which allows the bank to act more quickly when potential risks arise.

  • Transaction monitoring: Currently one of the most under-utilized elements of a KYC-C program within banks, this will continue to be a large focus with regulators going forward. Banks must be utilizing transaction monitoring systems for their KYC-C programs around SWIFT and other payment messaging traffic. Ensure that your system enables monitoring of the payment traffic going to the correspondent banks, while also allowing for monitoring on payment messages where your correspondent is only an intermediary.
  • Customer monitoring: As mentioned above, it’s important to properly on board and get expected behavioural data from your correspondent. While the transaction monitoring system is reviewing payment transactions, your customer risk assessment engine should be monitoring the expected behaviour of your correspondent and looking for things such as volume of messages, expected geographic spread, and other identifying patterns.
  • News & Messaging Monitoring: Further, look to utilize third-party data and analytics to look for instances where the correspondent may be involved in suspicious behaviour that may be uncovered and identified in news sources. Also note that payment traffic analytics from SWIFT, which can show how your correspondent banking partner’s messaging traffic looks, should be reviewed as well

Overall, financial institutions must closely watch how their correspondent banking network is transacting. Fortunately, there are tools available today which can help financial institutions address the risks posed by correspondent banking networks. The key, though, is working with a provider who can package these multiple elements into a singular experience which provides a complete view of your KYC-C monitoring program. Otherwise, with a disjointed system, you will continue to see break downs in your onboarding and monitoring programs which will then continue to expose needless risk.


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