Killing your correspondent

The cost of know your customer (KYC) programmes is proving to be too much to bear for some of the world’s larger banks. Bankers estimate KYC has increased IT costs in transaction banking by up to 15%. Fines to settle money laundering allegations with American authorities cost UK banks HSBC and Standard Chartered US$2.6billion net in 2012. Firms are questioning the value of their correspondent relationships as a result, which may drive up client costs.

HSBC was fined after a five-year long investigation; its spend on anti-money laundering in the US had increased by nine times since 2009 and he department now has ten times the number of staff that it had in 2010.

Clearly this was necessary not only to correct the “past mistakes” that CEO Stuart Gulliver admitted it had made, but also to increase trust in the bank, to publicly show that it was doing something.

The head of the Vatican Bank, Ernst von Freyburg recently told the Financial Times that he was spending a seven-figure sum on a regulatory consultancy to help with the bank’s compliance with money laundering regulations and related poor reputation.

These investments have to be clearly weighed-up against the profitability of the services. Profitability does not always win out. Reputational risk is high on the agenda, with governments perhaps more than the public.

Where the costs are perceived to be too high, major banks are cutting ties with smaller correspondent banks who they partner to facilitate less volatile business in overseas markets, such as transaction banking and trade finance.

Pulling back from these relationships is likely to increase the costs of multinational clients, who will have now to establish individual banking relationships with local firms in every country in which they operate. Understandably, concern about the regulation is mounting.