Call for stricter bank supervision in developing countries

Bank supervision and anti-money laundering standards need to be toughened in global geopolitical hotspots as a way of tackling the recent decline in so-called correspondent banking, a global group of policymakers has said.

The Financial Stability Board, the group of policymakers and regulators that makes recommendations to the G20 nations, said on Monday that its members should assist other countries in drafting legislation and training supervisors to combat the problem, including “training of law enforcement on how to investigate money laundering or large-scale corruption”.

“Stronger supervision of financial institutions in the impacted jurisdictions where respondent banks are located may encourage correspondent banks to retain correspondent banking relationships and reduce the negative impacts of any changes in access to such relationships,” the Basel-based FSB said.

Banks in developed economies have increasingly severed their relationships with lenders in geopolitical hotspots or those with perceived weak controls because they fear they might fall foul of regulators’ anti-money laundering and sanctions rules in the wake of stinging multi-billion-dollar fines. But policymakers now worry that banks have gone too far and legitimate businesses — and even whole regions — are being cut off from banking services as a result.

European banks in particular are severing their relationships fastest, according to July statistics compiled by the Bank for International Settlements — the central bank for central banks — and cited by the FSB.

The decline in Europe comes after banks including BNP Paribas and HSBC were fined $8.9bn and $1.9bn respectively by the US Department of Justice over sanctions and money-laundering failures.

The July survey showed fewer, more concentrated flows of money since 2011, with 40 countries reporting a drop-off of more than 10 per cent.

The FSB, which is chaired by Mark Carney, the governor of the Bank of England, will publish the results of its own survey early next year after having received data from 300 banks across 50 nations.

The FSB’s programme on the issue comes after the Financial Action Task Force, the international group that makes recommendations around money-laundering legislation, said in October that it was not up to a correspondent bank to check another’s customer — the so-called process of “knowing your customer’s customer”.

“Good progress has been made to assess and address this issue but additional steps are needed to move from awareness raising to action. Given the number of actors involved, international co-operation and co-ordination are key,” said Alexander Karrer, a Swiss central banker who leads the FSB’s working group on correspondent banking.