Foreign Correspondent Banking – The Good, The Bad and The Ugly

Foreign correspondent accounts have long been used by financial institutions to facilitate cross-border transactions. However, as a result of its susceptibility to money laundering and terrorist financing, this practice is encountering heightened concern among U.S. banking regulators. In this rigorous environment, it is increasingly important for financial institutions to take positive actions designed both to safeguard their operations against illicit transactions and, in the event their correspondent business comes under regulatory scrutiny, to establish a defensible position.

What is a foreign correspondent account?

A “correspondent account” is statutorily defined as “an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.”1 Laying the foundation for its Anti-Money Laundering (AML) guidance on foreign correspondent accounts, the Federal Financial Institutions Examination Council (FFIEC) adds some detail explaining, “An ‘account’ means any formal banking or business relationship established to provide regular services, dealings, and other financial transactions. It includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit.”2 Moving from that neutral view, the FFIEC later takes a more positive tone, stating, “Foreign financial institutions maintain accounts at U.S. banks to gain access to the U.S. financial system and to take advantage of services and products that may not be available in the foreign financial institution’s jurisdiction. These services may be performed more economically or efficiently by the U.S. bank or may be necessary for other reasons, such as the facilitation of international trade.”3

The Good: Benefits of foreign correspondent banking

The concept of foreign correspondent banking is an accepted practice that can be very beneficial to financial institutions and their customers. Correspondent banks essentially act as a domestic bank’s agent abroad in order to service transactions originating in foreign countries. Championing a positive view, the Bank for International Settlements observes, “Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion”.4

The Bad: Challenges of foreign correspondent banking

Notwithstanding the benefits related to foreign correspondent banking, this practice also presents significant challenges, with regulatory burden featured prominently. Extensive rules governing foreign correspondent accounts implement the provisions found in USA PATRIOT Act sections 312 (imposing due diligence and enhanced due diligence requirements on U.S. financial institutions maintaining foreign correspondent accounts), 313 (preventing foreign shell banks from having access to the U.S. financial system) and 319(b) (authorizing federal law enforcement to investigate any foreign bank maintaining a U.S. correspondent account). The decline in correspondent banking relationships has much to do with the challenge of regulatory compliance, as recently noted by the American Bankers Association, “[O]ne key factor leading to the decline in correspondent/respondent banking relationships is the heightened regulatory burden on banks related to anti-money laundering and counter terrorism compliance.”5

The Ugly: Foreign correspondent banking as a means to launder money and finance terrorism

The regulatory strictures are not without good reason. There have been instances of foreign correspondent accounts being used to launder money and to potentially finance terrorism. Even in the early rush to implement the USA PATRIOT Act, the OCC, though taking a balanced view, expressed its concern, stating, “Although [correspondent] accounts were developed and are used primarily for legitimate purposes, international correspondent bank accounts may pose increased risk of illicit activities.”6 In recent years, the U.S. government has sent a strong message to financial institutions that fail to create a process to prevent criminal behavior. Financial institutions that disregard their obligations under the Bank Secrecy Act or operate without effective anti-money laundering programs have been the subject of enforcement actions resulting in hefty penalties. In 2012, a Virginia-based bank that allowed itself to be used to launder drug money flowing out of Mexico agreed to pay a record $1.92 billion to U.S. authorities, including hundreds of millions of dollars in civil money penalties to the Office of the Comptroller of the Currency, the Federal Reserve, and the Treasury Department.7 In 2015, a German-based bank and its U.S. branch accused of violating laws barring transactions with Iran, Sudan, Cuba and Myanmar, as well as abetting a multi-billion dollar securities fraud, agreed to pay $1.45 billion in fines.8 In both of these high-profile cases, government authorities cited Bank Secrecy Act violations including: (1) failure to have an effective AML program, (2) failure to conduct adequate due diligence or to obtain “know your customer” information with respect to foreign correspondent bank accounts, and (3) failure to detect and adequately report evidence of money laundering and other illicit activity. Mirroring the U.S. actions, the international Financial Action Task Force has sounded this stern warning in addressing the cross-border financial activities of Iran and North Korea: “Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices … .”9

The Solution: How financial institutions can best protect themselves from a harmful correspondent banking relationship

In order to meet its obligations to measure, monitor and control risks, a financial institution should consider the following actions:

1. Ensure BSA/AML policies and procedures are reviewed at least annually and adjusted to address any new risks related to correspondent banking activities.

2. Perform an annual risk assessment to determine the adequacy of its BSA/AML/OFAC program, especially as it relates to correspondent banking.

3. Conduct due diligence on counterparties to understand the nature and extent of the various aspects of the correspondent’s business, including, but not limited to, ownership, products, services, customers, locations, etc. Due diligence should be ongoing based upon the nature and scope of the correspondent activities and should include periodic validation of the counterparties and their activities by the correspondent bank.

4. Ensure that adequate expertise and resources are available to establish a BSA/AML/OFAC program capable of effectively and timely monitoring the volume and nature of activities processed through the correspondent account.

5. Ensure that the correspondent bank, and not the initiating bank, administers the systems used to process correspondent banking transactions, thus allowing the correspondent bank to independently identify exceptions, generate reports and analyze data to support its BSA/AML/OFAC program.

6. Perform monitoring of processed correspondent banking transactions in a timely manner, preferably through the use of an automated system that can effectively aggregate transactions and create “alerts” in order to identify potentially suspicious transactions.

7. Ensure that the correspondent bank establishes an enhanced due diligence (EDD) protocol that will be followed for investigative purposes when transactions trigger a BSA/AML alert in the monitoring system.

Steven Szaroleta and Walter Donaldson are co-authors of this article.

Steven Szaroleta and Walter Donaldson are co-authors of this article.
© 2016 Dinsmore & Shohl LLP. All rights reserved.

1 31 U.S. Code § 5318A(e)(1)(B)
2 https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_027.htm
3 http://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_047.htm
4 http://www.bis.org/cpmi/publ/d136.pdf
5 http://www.aba.com/Advocacy/commentletters/Documents/cl-BIS-CorrespondentBanking2015Dec.pdf
6 http://www.occ.gov/topics/bank-operations/financial-crime/money-laundering/money-laundering-2002.pdf
7 http://www.reuters.com/article/us-hsbc-probe-idUSBRE8BA05M20121211
8 http://www.justice.gov/opa/pr/commerzbank-ag-admits-sanctions-and-bank-secrecy-violations-agrees-forfeit-563-million-and
9 http://www.fatf-gafi.org/documents/documents/public-statement-october-2015.html#DPRK

In three weeks! Attend the 3rd Annual Bank & Capital Markets Tax Institute West – December 3-4 in San Diego

When: December 3-4, 2015
Where: The Westin San Diego, San Diego, California

Register today!

We are proud to announce that BTI West will be coming back for a third year! For 49 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis.The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Bank Tax & Capital Markets Institute Conference – West will feature a full one-day program consisting of keynote presentation, deep-dive technical sessions, and peer exchange and networking time.

In three weeks! Attend the 3rd Annual Bank & Capital Markets Tax Institute West – December 3-4 in San Diego

When: December 3-4, 2015
Where: The Westin San Diego, San Diego, California

Register today!

We are proud to announce that BTI West will be coming back for a third year! For 49 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis.The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Bank Tax & Capital Markets Institute Conference – West will feature a full one-day program consisting of keynote presentation, deep-dive technical sessions, and peer exchange and networking time.

Buyer Beware! Despite Tokenization, Mobile Payments are not Bulletproof

Virtual Card Present – A New Breed of Mobile Credit Card Fraud 

As credit card fraud rises, ensuring the security of mobile payments is important for merchants and consumers alike. To combat fraud, the next generation of mobile payment platforms employ tokenization to create more secure mobile payments systems. While tokenization may reduce the susceptibility to mobile payment fraud, it is not bulletproof, leaving room for a new breed of credit card fraud.

Tokenization is a process in which sensitive information, such as a credit card number, is replaced with a randomly generated unique token or symbol. Tokenization helps simplify a consumer’s purchasing experience by eliminating the need to enter and re-enter account numbers when shopping on mobile devices. Tokens benefit merchants too, by eliminating the need for them to store payment card account numbers. Merchants have decreased risk as they are not directly handling sensitive and regulated data. The result is overall increased transaction security and reduction in mobile payment fraud.

For example, Apple Pay uses tokenization to ensure all personal account numbers (PANs) are replaced with randomly generated IDs, or tokens, that are then used to authorize one-time transactions. Although Apple Pay users upload credit card information to their devices, neither Apple nor retailers ever have direct access to this sensitive financial data. The security of the iPhone’s tokenization is further bolstered by the use of a biometric fingerprint that is stored on an isolated chip, separate from the token.

Even with the use of tokenization, there remains a weak link in securing mobile payments: ensuring a mobile payment system provides its app to a legitimate user, rather than a fraudster. And criminals love a weak link.

While Apple Pay’s use of tokenization coupled with the biometric authentication provides strong security, hackers are committing a new type of fraud by exploiting this weakness in user authentication. To circumvent tokenization (and biometrics), hackers have been loading iPhones with stolen card-not-present data to create Apple Pay accounts. This essentially turns the stolen credit card data back into a “virtual” physical card – à la Apple Pay.

The responsibility for this new type of Virtual Card Present (VCP) rests with the card issuers, who have the burden of establishing that Apple Pay cardholders are legitimate customers with valid cards. Some banks have begun addressing the issue of user authentication by requiring customers to call to activate Apple Pay, ensuring their identities are verified.

VCP fraud is sure to increase as additional entrants, such as Samsung and Loop Pay, enter the market with their own mobile payment systems. The largest Apple Pay competitor, CurrentC, backed by the Merchant Customer Exchange (MCX), a consortium of large retailers, is set to be launched later this year. While boasting “Security at Level” including passcode, paycode and cloud protection, how CurrentC intends to combat VCP fraud is yet to be seen.

As cybercriminals grow more sophisticated, mobile payment providers and issuers should react to VCP by focusing on developing innovative and strong user authentication solutions.

This article appeared in the October 2015 issue of The Metropolitan Corporate Counsel. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C. Copyright ©2015 Sills Cummis & Gross P.C. All rights reserved

© Copyright 2015 Sills Cummis & Gross P.C.

Only three weeks away! Register for the 50th Annual Bank and Capital Markets Tax Institute East – November 4-6, 2015

When: November 4-6, 2015

Where: Hilton Orlando Lake Buena Visa, Orlando, FL

Register now!

For the past 49 years Bank and Capital Markets Tax Institute (BTI) has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry. With cutting-edge sessions, speakers and networking opportunities BTI is the must attend event for all forward-thinking tax professionals.

Now in its 50th year, BTI 2015 will continue to provide attendees with unmatched tools and resources to ensure that you continue to remain current on the ever-changing issues facing the industry. Essential updates will be provided on key industry topics such as General Banking, Community Banking, IRS Developments, GAAP, Tax and Regulatory Reporting, and much more.New to the program this year, we’ve added sessions on Regulatory Banking, Tax Process, Technology & Efficiency, and much more!

Who Should Attend?

Job Function

  • Accountant
  • Attorney (Tax)
  • Business Development
  • Comptroller
  • Consultant
  • Chief Financial Officer (CFO)
  • Internal Auditor
  • Partner/Senior Manager
  • Tax Advisor
  • Tax Officer/Specialist
  • Tax Research/Manager
  • Treasurer
  • Other Corporate Finance Management
  • Administrator (Government)
Organizations

  • Commercial Bank
  • CPA Firm
  • Government
  • Investment Bank
  • Law Firm
  • Online Bank
  • Retail bank
  • Savings and Loans
  • Technology/Software Industry Provider
  • Consultant: Business/Finance
  • Consultant: Other
  • Academia/Non-Profit

BTI West is coming back for a 3rd year! Register for the Bank and Capital Markets Tax Institute West – December 3-4 in San Diego

When: December 3-4, 2015
Where: The Westin San Diego, San Diego, California

Register today!

We are proud to announce that BTI West will be coming back for a third year! For 49 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis.The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Bank Tax & Capital Markets Institute Conference – West will feature a full one-day program consisting of keynote presentation, deep-dive technical sessions, and peer exchange and networking time.

Attend the 50th Annual Bank and Capital Markets Tax Institute East – November 4-6, Lake Buena Visa, FL

When: November 4-6, 2015

Where: Hilton Orlando Lake Buena Visa, Orlando, FL

Register now!

For the past 49 years Bank and Capital Markets Tax Institute (BTI) has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry. With cutting-edge sessions, speakers and networking opportunities BTI is the must attend event for all forward-thinking tax professionals.

Now in its 50th year, BTI 2015 will continue to provide attendees with unmatched tools and resources to ensure that you continue to remain current on the ever-changing issues facing the industry. Essential updates will be provided on key industry topics such as General Banking, Community Banking, IRS Developments, GAAP, Tax and Regulatory Reporting, and much more.New to the program this year, we’ve added sessions on Regulatory Banking, Tax Process, Technology & Efficiency, and much more!

Who Should Attend?

Job Function

  • Accountant
  • Attorney (Tax)
  • Business Development
  • Comptroller
  • Consultant
  • Chief Financial Officer (CFO)
  • Internal Auditor
  • Partner/Senior Manager
  • Tax Advisor
  • Tax Officer/Specialist
  • Tax Research/Manager
  • Treasurer
  • Other Corporate Finance Management
  • Administrator (Government)
Organizations

  • Commercial Bank
  • CPA Firm
  • Government
  • Investment Bank
  • Law Firm
  • Online Bank
  • Retail bank
  • Savings and Loans
  • Technology/Software Industry Provider
  • Consultant: Business/Finance
  • Consultant: Other
  • Academia/Non-Profit