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Criminals exploit flawed correspondent banking

Modern correspondent banking - the process where one international bank conducts business transactions and facilitates wire payment transactions on behalf of another bank - is one of the main facilitators of the financing of criminal and terror networks.

Correspondent banking has a number of key deficiencies that need to be urgently addressed in order to restrict the flow of criminal and terrorist funds. These deficiencies, at both the communication and operational level, act as KYC (Know Your Customer) blind spots for the entire banking sector, including:

Data silos. The way customer data is siloed from one bank to the next makes it difficult to see the connections between the various nodes of sophisticated criminal or terrorist transactional ecosystems. Banks may know their customer but, due to silos, rarely know their customer’s customer.

Legacy systems. Too many of today’s banks are using legacy systems and technologies that fail to adequately communicate with one another, thus resisting quality KYC. Banks are limited to client, or customer, snapshots and are unable to see the bigger picture.

KYC ‘lite’. The sheer volume of wire payment transactions occurring each day means banks rely far too heavily on other banks to carry out crucial KYC checks. Unfortunately, banks increasingly perform KYC ‘lite’ due to a lack of resources — or, in some cases, to cut corners.

Correspondent banking is at the heart of the banking sector and yet is arguably its biggest weakness. Criminal and terrorist organisations know that communication between the banks is often broken and KYC glossed over in an effort to cope with the ever-rising volume of transactions. In most cases, the banks aren't being negligent but are simply relying on legacy systems that can’t cope with today’s sophisticated criminals. At best, the banks are able to know their own customer, but what about their customer’s customer?

The operational and communication deficiencies of correspondent banking are driving features in the rise of money laundering and key reasons for the financing of terrorism becoming so fluid in recent years (up to US$35.9 trillion has been laundered in the past decade).

The current reliance upon a correspondent banking chain of trust within each wire payment transaction is fundamentally flawed. Banks need to start communicating in a way that enables a helicopter view of every single party involved in a transaction, so that they can begin to see the wood for the trees. 


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