In a guidance document issued October 21, 2016, the Financial Action Task Force (FATF) advises financial institutions that may terminate or restrict business relationships with entire countries or classes of customer in order to avoid, rather than manage, risks in line with the FATF’s risk-based approach (RBA), a practice known as de-risking. Although the guidance is focused on correspondent banking and does not address the financial access plight of nonprofit organizations (NPOs), it does have implications for NPOs’ ability to access banking services.
FATF Guidance: Correspondent Banking Services explains that FATF Recommendations do not require financial institutions to conduct customer due diligence on the customers of their customer. In a correspondent banking relationship, the guidance notes, the correspondent institution will monitor the respondent institution’s transactions “with a view to detecting any changes in the respondent institution’s risk profile or implementation of risk mitigation measures … any unusual activity or transaction on the part of the respondent, or any potential deviations from the agreed terms of the arrangements governing the correspondent relationship.”
The guidance is detailed and covers the steps financial institutions should take in their correspondent banking relationships, including identifying the risks – due diligence and developing an understanding of the respondent institution’s business; verifying respondent institutions’ information and assessing/documenting higher risks; and managing the risks – ongoing due diligence, ongoing transaction monitoring, request for information about transactions, clear terms governing the relationship, ongoing communications and dialogue and adjusting mitigation measures to the evolution of risk.
Correspondent banking relationships are very diverse in nature and cover a large range of high risk levels, the guidance explains. “The level and nature of risk may fluctuate over the course of any relationship and adjustments should be made in the correspondent institution’s risk management strategy,” it notes. Although FATF does require customer relationships to be terminated where identified risks cannot be manages in line with the risk-based approach, other options offered by Recommendation 10 should be considered first, such as refusing to conduct the transaction and/or filing a suspicious transaction report. Other management options include a limitation of services or restriction of individual products/transactions “in order to provide the possibility for clarification or remediation by the respondent institution, before the decision to terminate activity is taken.”
Regardless of the action taken, correspondent institutions should “clearly communicate their concerns to respondent institutions, at senior management level, and inform them of their concerns and the measures needed to address these concerns as a condition to maintain the correspondent banking relationship,” the guidance states.
Read the guidance here.