Risk Management

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Risk Management Guide on Periodic Risk Re-evaluation of Foreign Correspondent Banking

Abstract

The article examines recent guidance provided by the Office of the Comptroller of the Currency (OCC), an independent bureau of the U.S. Treasury Department directed at US banks, federal savings associations, and federal branches and agencies (collectively, banks) regarding the periodic risk assessment of correspondent accounts for foreign financial institutions (foreign correspondent accounts).

 The OCC highlighted the Corporate governance best practice suggested, particularly the need to conduct periodic risk assessments on client positions for retention or closure decisions about their overseas correspondent accounts. 

The article concludes by emphasising how it is essential to periodically evaluate and reassess this risk (risk reassessment) as part of the normal banking and financial management cycle.

Banks should also ensure that decisions to close foreign correspondent accounts resulting from risk re-evaluations are based on an analysis of the risks presented by individual foreign financial institutions and the bank's ability to manage them.

The article examines only the banks supervised by OCC that have banking relations of foreign correspondence.

1. introduction

2. The decision to close a foreign correspondent current account

3. The foreign correspondence accounts and the due diligence program

4. Periodic risk reassessments of foreign correspondent clients

5. Supervisory expectations for periodic risk reassessments

1. Introduction

Following the OCC provisions, US banks that conduct foreign correspondence banking activities must apply best practices in line with the bank's particular risk considerations.

Best practices include the following behaviours:

1. Establish and maintain a significant governance function to review the method for periodic risk reassessment and monitor the adequacy of recommendations regarding the retention or closure of the foreign correspondent's account.
2. Regularly communicate foreign correspondent account closure decisions to senior management, considering the extent to which account closure may adversely impact access to financial services for an entire group of clients or prospects or an entire geographical area.
3. Communicate with foreign financial institutions, taking into consideration specific mitigating information these institutions may provide and providing them with sufficient time to establish alternative banking relationships before closing accounts, unless this is against the law or constitutes an additional risk to the bank or national security, or disclosing law enforcement activity.
4. Ensure a clear audit trail of the reasons and methods used for closing the account.

The OCC requires supervised banks to manage their risks appropriately, comply with laws and regulations, and provide equal access to financial services and equal treatment of their clients.

In general, the OCC does not order banks to open, close, or maintain individual accounts, nor does the agency encourage banks to engage in the closure of entire categories of client accounts without considering the risks presented by a particular client or the ability of the client. 

2. The decision to close a foreign correspondent current account

The decision to terminate a banking relationship or to leave a business branch generally rests with the institution.

Banks must choose whether:

• starting or maintaining business relationships      based on their business objectives; risk assessment associated with      particular products or services;
• evaluation of the expected and actual customer      activity, and banks' ability to manage these risks effectively.

In doing so, banks must comply with national anti-money laundering (AML) requirements and tackle terrorist financing requirements established by applicable laws, including the Bank Secrecy Act (BSA).

The safety and soundness can be threatened when it fails to identify the risks of the products or activities that the bank provides or in the customers it serves.

Additionally, security and robustness can be threatened if it lacks comprehensive risk management systems and controls to mitigate the risks.

For BSA / AML, effective risk management should be an ongoing process, not a one-time exercise, and each bank's risk assessment should be periodically updated to identify changes in the bank's risk profile.

A bank's inability to conduct periodic risk reassessments, including reviewing the risks posed by bank customers, can allow money launderers, scammers, terrorists, and other criminals to access the US financial system.

Nonetheless, in recent years, banks that conduct periodic risk reassessments of overseas correspondent accounts have sometimes determined that particular statements involve risks that cannot be mitigated based on that bank's risk profile and have withdrawn from such relationships.

In some cases, the closure of foreign correspondent accounts is required by law.

These account closures can adversely affect access to financial services in the foreign financial institution's home country, resulting in the potential risk of financial inclusion for that country.

Furthermore, since banks' processes for risk reassessment, and in particular for making account closure decisions, are not always clear to foreign financial institutions that are bank clients, the findings may be perceived by such clients or others as arbitrary or lacking concrete foundations.

Such perceptions can pose a risk to banks' reputation and litigation.

3. The foreign correspondence accounts and the due diligence program

A bank establishes foreign correspondent accounts for a foreign financial institution to receive deposits from, make payments or other disbursements on behalf of, or manage other financial transactions relating to the foreign financial institution.

Regarding the latter, the bank's due diligence program must include policies and procedures to assess the risks posed by a foreign financial institution and consider all relevant factors, including the foreign financial institution's activities and markets:

• the type, purpose, and intended activity of the account;
• the nature and duration of the relationship with the foreign financial institution;
• the supervisory regime of the jurisdiction in which the foreign financial institution is authorized;
• known or reasonably available information about the foreign financial institution's AML record.

Based on these assessments, banks should design and implement controls to manage these risks effectively.

4. Periodic risk reassessments of foreign correspondent clients

These factors are particularly relevant in the context of periodic risk reassessments of foreign correspondent clients.

Banks with a clear understanding of these customers' risk profiles may be better able to provide banking services to those customers who have historically been considered to be at higher risk.

OCC-supervised banks are among the leading providers of US dollar-based foreign correspondence banking.

For a long time, there was no need to form specific guidelines relating to the management of foreign correspondence accounts that would have provided banks assistance when making risk reassessments and making decisions regarding account retention or closure.

As part of its review activities, the OCC reviewed the policies, procedures, and criteria used by some banks when conducting risk reassessments and making decisions regarding the retention or closure of accounts related to foreign correspondence accounts.

The OCC observed several practices that banks use in assessing risks in this area, consistent with safety and soundness.

The latter should be considered for the reassessment of the risk of foreign correspondent accounts and making decisions on the reassessment and closure of the risk of foreign correspondence accounts.

September 2020

by Daniele Lupi