- Correspondent Relationship
- 4th AMLD
- 5th AMLD
- German GwG
- BaFin-Interpretation and Application Guidance on the German GwG
In the intricate world of international finance, correspondent relationships play a pivotal role. These relationships, established between banks and financial institutions, facilitate a range of services, from international fund transfers to foreign exchange. Understanding the regulatory landscape, shaped by EU directives and German laws, is crucial for institutions engaged in these relationships, particularly in the realm of anti-money laundering (AML) and counter-terrorist financing (CTF).
The Essence of Correspondent Relationships: Correspondent relationships, as defined in the 4th Anti-Money Laundering Directive (AMLD) of the EU, involve the provision of banking services by one bank (the correspondent) to another (the respondent). This includes services like account management, cash management, and cheque clearing. The 5th AMLD, building on its predecessor, emphasizes enhanced due diligence, especially in cross-border correspondent relationships involving third-country institutions.
German GwG and Correspondent Relationships: Germany’s Money Laundering Act (GwG) offers a nuanced definition of these relationships. According to the GwG, they encompass not only traditional banking services but also other similar services provided by obliged entities. This broad scope ensures comprehensive oversight and risk management in correspondent banking.
Cross-border Correspondent Relationships: The cross-border aspect of correspondent banking is particularly significant due to its international nature. The 5th AMLD places stringent requirements on EU member states to enforce enhanced due diligence when dealing with third-country correspondent banks. This includes obtaining detailed information about the respondent institution, ensuring senior management approval, and documenting responsibilities. The German GwG and BaFin guidelines echo these requirements, emphasizing the need for thorough risk assessment and transparency in cross-border correspondent relationships.
Challenges and Compliance in Cross-border Correspondent Banking: Navigating the complexities of cross-border correspondent relationships requires adherence to a myriad of regulations. Financial institutions must not only understand the nature of their respondent’s business but also assess their AML/CTF controls. The German GwG further mandates that obligations be clearly documented, and relationships with shell banks are strictly prohibited.
Correspondent relationships are integral to the global financial system, enabling institutions to extend their reach beyond local borders. However, with this convenience comes the responsibility of compliance with robust AML/CTF regulations. The EU’s 4th and 5th AMLDs, along with Germany’s GwG and BaFin’s guidelines, provide a framework for secure and compliant correspondent banking, ensuring the integrity of the international financial system.
The Fourth Anti-Money Laundering Directive (AMLD) of the European Union, specifically Directive (EU) 2015/849, includes provisions that define and regulate correspondent relationships in the financial sector. The focus on „correspondent relationship“ is mainly found in Articles 3, 19, and 24 of the Directive. Here’s a summary of these articles:
Definition of Correspondent Relationship
- Article 3 provides a clear definition of what constitutes a correspondent relationship. It includes the following key elements:
- Banking services provided by one bank (the correspondent) to another bank (the respondent).
- Services covered include current or other liability accounts, cash management, international funds transfers, cheque clearing, payable-through accounts, and foreign exchange services.
- It also extends to relationships between and among credit and financial institutions where similar services are provided, including securities transactions or funds transfers.
Due Diligence in Cross-Border Correspondent Relationships
- Article 19 outlines specific due diligence measures that must be undertaken for cross-border correspondent relationships with third-country respondent institutions:
- Gathering sufficient information about the respondent institution to understand its business nature and assess its reputation and the quality of supervision.
- Assessing the respondent institution’s anti-money laundering (AML) and counter-terrorist financing (CFT) controls.
- Requiring senior management approval before establishing new correspondent relationships.
- Documenting the respective responsibilities of each institution involved in the correspondent relationship.
- Ensuring that for payable-through accounts, the respondent institution has performed due diligence on its customers who have direct access to the accounts of the correspondent institution, and can provide customer due diligence data upon request.
Prohibition of Correspondent Relationships with Shell Banks
- Article 24 imposes a prohibition on credit institutions and financial institutions from engaging in correspondent relationships with shell banks:
- Member States must ensure that their financial institutions do not enter into or continue a correspondent relationship with a shell bank.
- Financial institutions are also required to take appropriate measures to avoid engaging in correspondent relationships with institutions that allow their accounts to be used by shell banks.
In summary, the 4th AMLD places significant emphasis on the regulation and monitoring of correspondent banking relationships, especially in cross-border contexts. It mandates thorough due diligence, senior management approval, and ongoing monitoring to prevent money laundering and terrorist financing through these relationships. Moreover, it explicitly prohibits relationships with shell banks, underscoring the need for transparency and accountability in the banking sector.
The Fifth Anti-Money Laundering Directive (AMLD) of the European Union, specifically Directive (EU) 2018/843, introduces an amendment to Article 19 as it relates to correspondent relationships, particularly with a focus on cross-border correspondent relationships involving payment execution with third-country respondent institutions. Here’s a summary of the amended portion of Article 19:
Amended Article 19 in the 5th AMLD:
- The amendment in the 5th AMLD modifies the introduction part of Article 19. The key aspects of this amendment include:
- The focus is specifically on cross-border correspondent relationships that involve the execution of payments with third-country respondent institutions.
- Member States are required to ensure that, in addition to the customer due diligence measures outlined in Article 13, their credit institutions and financial institutions undertake specific actions when entering into a business relationship.
- This implies a heightened level of due diligence and scrutiny for such relationships, particularly where they involve third-country institutions, i.e., institutions based outside of the EU.
Implications of the Amendment:
- The amendment emphasizes the importance of thorough due diligence before establishing correspondent banking relationships, especially when these involve financial institutions in third countries.
- It reflects an increased awareness and need for enhanced security measures in international financial transactions, aiming to mitigate the risks of money laundering and terrorist financing.
- The amendment ensures that EU member states uniformly apply stricter controls over cross-border correspondent banking relationships, especially in transactions involving non-EU countries.
In summary, the 5th AMLD’s amendment to Article 19 reinforces the EU’s commitment to strengthening the regulatory framework surrounding correspondent banking relationships. It specifically targets cross-border correspondent relationships involving payment executions with third-country respondent institutions, requiring enhanced due diligence and compliance measures to ensure the integrity and security of the international financial system.
The German Money Laundering Act (GwG) contains specific provisions concerning correspondent relationships, primarily focusing on the definition of such relationships and the enhanced due diligence requirements. Here’s a summary of the relevant sections with a focus on „correspondent relationship“:
- Section 1 (21) defines a correspondent relationship as a business relationship where specific services are provided. These services include:
- Banking services such as current accounts, payment accounts, cash management, international funds transfers, foreign exchange transactions, and cheque clearing. These services are provided by obliged entities (as defined in section 2 (1) no. 1, the correspondents) to CRR credit institutions or companies in third countries with equivalent activities (the respondents).
- Other services than banking services, as long as they are legally permissible, provided by obliged entities (as per section 2 (1) nos.1 to 3 and 6 to 9, the correspondents) to other CRR credit institutions, financial institutions (as per Article 3 point (2) of Directive (EU) 2015/849), or equivalent entities in third countries (the respondents).
Enhanced Due Diligence Requirements
- Section 15 (3) No. 4 identifies a higher risk of money laundering or terrorist financing in cross-border correspondent relationships with third-country respondents. Enhanced due diligence is also required when respondents are from a European Economic Area country if a heightened risk is identified.
- Section 15 (5a) No. 7 allows competent supervisory authorities to require enhanced due diligence measures in certain high-risk scenarios. These measures may include reviewing, amending, or terminating correspondent relationships with third-country entities, if necessary.
- Section 15 (7) requires obliged entities to fulfill specific enhanced due diligence requirements when establishing a business relationship in the context of a correspondent relationship:
- Obtain sufficient information about the respondent to understand their business nature, reputation, AML/CTF controls, and the quality of supervision.
- Obtain approval from senior management before establishing a relationship with the respondent.
- Determine and document the respective responsibilities of participants in fulfilling due diligence requirements.
- Ensure no business relationship is established or continued with respondents known to use shell bank accounts.
- Ensure that the respondent does not permit payments through payable-through accounts.
In summary, the German GwG places a significant emphasis on the management and regulation of correspondent relationships, particularly those involving cross-border activities and third-country institutions. The Act mandates comprehensive due diligence procedures, senior management approval, and continuous monitoring to mitigate the risks associated with money laundering and terrorist financing in these types of financial relationships. Additionally, it provides authority to supervisory bodies to intervene in high-risk scenarios, including the potential termination of risky correspondent relationships.
BaFin-Interpretation and Application Guidance on the German GwG
The BaFin Interpretation and Application Guidance on the German Money Laundering Act (GwG) provides detailed insights into the management and regulation of cross-border correspondent relationships. The guidance specifically addresses Section 15 (3) no. 4 and (7) of the GwG. Here’s a summary focusing on „correspondent relationship“:
- Correspondent relationships are defined as business relationships where specific banking or similar services are provided:
- These services include operating a current or other payment account and providing related services (like cash management, international funds transfers, foreign exchange transactions, and cheque clearing) for CRR credit institutions or equivalent entities in third countries.
- The term „banking services“ is limited to those associated with payment transactions and does not encompass all banking activities listed in section 1 (1) sentence 2 of the KWG.
- Correspondent relationships also extend to services similar to banking services provided by obliged entities for other CRR credit institutions or equivalent entities in third countries, including services related to securities transactions or funds transfers.
Cross-border Correspondent Relationships
- Enhanced due diligence obligations apply to obliged entities in cross-border correspondent relationships with third-country respondents.
- For correspondent relationships with respondents in the European Economic Area, enhanced due diligence is required only if the country is considered high-risk or included in a FATF list.
Measures to be Implemented
- Under section 15 (7) of the GwG, obliged entities must implement specific measures before establishing a business relationship in these cases:
- Obtain sufficient information about the respondent to understand the nature of their business, reputation, AML/CTF controls, and quality of supervision. The volume of information required depends on the risk level, nature of services provided, and transparency of payments.
- Obtain consent from a member of management for establishing the business relationship.
- Determine and document the respective responsibilities of the parties involved regarding due diligence obligations.
In summary, the BaFin Guidance on the GwG highlights the importance of enhanced due diligence and risk assessment in managing correspondent relationships, especially those involving third-country entities. It emphasizes obtaining detailed information about the respondent’s business and regulatory environment, senior management approval, and clear documentation of responsibilities in due diligence processes. These measures are aimed at mitigating risks associated with money laundering and terrorist financing in cross-border financial transactions.
- Directive (EU) 2015/849 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32015L0849
- Directive (EU) 2018/843 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32018L0843
- German Anti-Money Laundering Act (Geldwäschegesetz – GwG) https://www.bafin.de/SharedDocs/Downloads/EN/Aufsichtsrecht/dl_gwg_en.html
- BaFin-Interpretation and Application Guidance on the German Money Laundering Act (October 2021) https://www.bafin.de/SharedDocs/Downloads/EN/Auslegungsentscheidung/dl_ae_auas_gw2021_en.html