Correspondent banking investigations are challenging, because Know Your Customer (KYC) information may not be available for all parties involved in the transactions. An experienced analyst can efficiently separate expected activity from potentially suspicious activity, ensuring time and resources are responsibly allocated. This post defines correspondent banking, summarizes major risk factors, and provides tools for identifying entities lacking KYC information.
Correspondent (intermediary) banking networks evolved as a solution to facilitate global trade. It is not practical or economically feasible for every bank to have partnerships with one another; many smaller institutions do not have the transaction volume to support building the infrastructure need to participate directly in the global payments space. A bank functions as a correspondent when it facilitates funds transfers between two or more financial institutions where no partnership exists between the originating (sending) bank and the beneficiary (receiving) bank. Some of the more common red flags requiring further investigation include negative news, wires conducted in high-risk jurisdictions, entities using cross-border banking, unusual transaction patterns, and transactions that may represent reputational risk for a bank.
Streamlining negative news searches saves time. If a news aggregator groups results into categories, first sort the list by category and then eliminate duplicated results. Next, determine if the negative news is financially relevant or not, and escalate or mitigate accordingly. If the transactions appear to lack red flags described in the negative news, actions were taken to prevent recurrence, and there appears to be a plausible business purpose, it is possible the activity had been a one-time situation and is not recurring in the present investigation. Also watch for entities possessing a legal name and a “doing business as” (DBA) name, as each may return unique news results. It is much more efficient to catch these instances early on than to identify them later and have to re-run negative news searches and possibly incorporate additional investigation or mitigation. There is also the risk that additional negative news based on a DBA name could change what was viewed as a mitigated alert to one that requires escalation. For example, an entity’s legal name could be significantly different from its DBA name, which reveals a relationship to a parent company or other potentially related entity. In this example, additional research may be necessary to determine if the two entities are in fact related, and if so incorporate any additional negative news uncovered by a search of the related entity’s name.
High Risk Jurisdictions
Activity conducted in high-risk jurisdictions is not a red flag on its own; but requires additional due diligence to ensure there are no suspected ties to sanctioned jurisdictions. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is responsible for maintaining the Sanctions Programs, which is periodically updated based on foreign policy and national security goals. The concern raised by high-risk jurisdictions is the use of cross-border banking. Using the “match” (column comparison) function in a spreadsheet is an efficient way to identify entities that are physically located in one jurisdiction, but banking in a different jurisdiction. Once identified, further research is necessary to determine whether the banking relationship is acceptable or potentially suspicious.
Unusual transaction patterns cover a wide range of possibilities, here are some of the most common ones. Round dollar amounts are generally expected to be infrequent unless there appears to be a reasonable explanation, such as entities engaged in service contracts, wholesale trade, or transfers between related entities that share the same parent company. Patterns of similar dollar amounts between different entities can be a red flag, especially if other red flags are present. Transactions conducted just below any perceived reporting threshold can be a concern, especially if other risk factors are present. Transactions that are highest in value and volume are considered risk factors as well, especially if they are significant outliers when compared to other activity. Lastly, many of these situations present reputational risk for an institution. Each financial institution takes an individualized approach to risk; but investigators must recognize such stated risk factors as non-negotiable aspects of an institution’s code of conduct.
When KYC Information is Not Available
KYC information may not be available because the entities represented in the transactions are not customers of the correspondent bank. It is vital to identify the entities in the public domain and where possible, their respective business models. The final elements in a transaction review are potential source of funds and whether there appears to be a plausible business relationship between the parties. Sending a Request for Information (RFI) to the bank where the entity is a customer is an option available under § 314(b) of the USA PATRIOT Act. Note that information sharing between banks is voluntary but encouraged. Prior to submitting an RFI, the following tips may be helpful in locating businesses where KYC information is not readily available, especially for foreign entities:
- In an open internet search, use quotation marks around the entity name
- If the name contains foreign words, translate the name and then search it in English
- Search the entity’s address instead of the company name, as they may operate under a DBA name
- If the entity name includes a city, remove the city name and repeat the search
- Dun & Bradstreet offers a company search that includes foreign entities
- Panjiva Global Trade Insights has records that include information such as bills of lading for cargo ships
- Open Corporates is a database of global corporate entities, which can be filtered by jurisdiction)
- EDGAR is a company filing database (for U.S. based entities) hosted by the U.S. Securities and Exchange Commission.
The tips and resources listed above will help you and your colleagues perform more efficient investigations. In doing so, your resources are more effectively deployed to pursue more in-depth investigations where necessary; that can result in more thorough and robust case investigations.