Amid stricter checks for money laundering, banks are moving away from the international money transfer practice known as correspondent banking. The shift could possibly cause payments to move underground and particularly impact nations that are dependent on remittances, Reuters reported.
Even with efforts to stem the decline in correspondent banking, The Financial Stability Board (FSB) noted on Friday (Nov. 16) that the practice still fell in popularity in 2017. Correspondent banking decreased by 4.1 percent in 2017 per the flow of SWIFT interbank payment messages. At the same time, the practice fell by 15.5 percent cumulatively from the beginning of 2011 to the conclusion of 2017.
With correspondent banking, banks depend on a foreign bank to conduct checks on customers. Banks, however, are “put off” from these checks due to stricter punishments on financing for terrorists and money laundering. But the checks by banks help to quell these kinds of violations, so the situation has caused frustration for regulators.
The FSB, however, did seek to stem the downward trend in correspondent banking through clarifications to expectations of banks and smoother customer checks. FSB Correspondent Banking Group Chair Alexander Karrer said, according to the report, “to be effective, these need to be implemented in practice by national authorities and banks.”
An International Finance Corporation (IFC) report in 2017 found that correspondent banking relationships were down, an unintended consequence of regulatory reform. Reports in The Financial in September of that year said that 27 percent of global banks surveyed have reported a drop in the number of correspondent banking relationships.
The decline had also led to a cutback in services, especially in developing countries, the IFC said at the time. In addition, the report found that Sub-Saharan Africa saw the steepest decline in correspondent banking activity, with 35 percent of banks in the region reporting a drop in such relationships, in a survey of 300 banks in 92 nations.