When we use the terms AML and KYC, we usually think first of the relationship between bank and customer. This of course is the focus in the fight against money laundering and terrorist financing. But equally important are the connections and transactions with correspondent banks. Those are foreign credit institutions with which a domestic bank maintains business relationships to process international transfers and other international transactions.
Acting as a correspondent bank for international transactions always carries the risk of becoming involved in financial crimes. Therefore, credit institutions should obtain sufficient information about the partner institution before entering business relationships. Furthermore, risks should be evaluated continuously. Factors such as the quality of the regulations and banking supervision to which the foreign institute is subject should be included in the assessment. Additionally, group affiliation, business areas and target customers, as well as internal mechanisms for recognizing and combating illegal transactions should be taken into consideration.
Appropriate transaction monitoring is also required by law. Banks can make use of intelligent software solutions to minimize the risk involved in processing foreign transactions. So, the SWIFT message belonging to each transaction is broken down and analyzed. Moreover, each participant in the message is monitored in relation to the complete payment chain. Defined key risk indicators, rules, and behavior changes over certain periods of time are used to detect abnormalities. Depending on the result of the analysis, appropriate measures can be taken.
Through the system of correspondent banks, foreign credit institutions gain access to the domestic financial market. Bank customers get the opportunity to make cross-border payments without having to take care of the processing themselves. This promotes international trade and services. However, foreign transactions are particularly susceptible to financial crime. Careful and efficient correspondent bank monitoring is therefore indispensable for credit institutions.