## 031617

## Source details

**Canonical URL:** [031617](https://www.imf.org/-/media/files/publications/pp/031617.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/pp/031617.pdf.md)
- [Structured JSON version](/-/media/files/publications/pp/031617.pdf.json)

---

### Executive summary — recent developments and immediate consequences
- Correspondent banking relationships (CBRs) have been under pressure in several countries during 2012–2016; cross-border payments have remained broadly stable overall.
- Major currency concentration:
  - USDs account for about 50 percent of correspondent banking transactions, making USD CBRs critical for access to the global financial system.
- Immediate consequences observed in some jurisdictions:
  - Financial fragilities accentuated where cross-border flows concentrate through fewer CBRs or use alternative arrangements.
  - Potential long-run effects include:
    - increasing costs of financial services;
    - negatively affecting bank ratings.
- Key short-run policy priorities:
  - enhance respondent banks’ capacity to manage risks;
  - improve communication between correspondent and respondent banks;
  - strengthen and effectively implement regulatory and supervisory frameworks in line with international standards, particularly for AML/CFT;
  - remove impediments to information sharing.
- Contingency:
  - If all commercial banks in a country were to lose CBRs, temporary public-backed mechanisms to provide payment clearing services should be considered.

### Drivers of CBR withdrawal
- Core driver:
  - Decisions are business decisions by correspondent banks based on profitability and risk assessments.
- Interrelated contributing factors include:
  - changes in the regulatory, supervisory, and enforcement environment post-global financial crisis;
  - more rigorous prudential requirements and higher capital costs;
  - economic and trade sanctions;
  - anti-money laundering and combating the financing of terrorism (AML/CFT) standards and their enforcement;
  - tax transparency standards (e.g., FATCA).
- Profitability and cost pressures:
  - Correspondent banking is characterized as high-volume, low-return, and balance-sheet-intensive.
  - Macroeconomic pressures (surplus liquidity, low interest rates) compressed margins.
  - Compliance costs increasing over the past 15 years reduce profitability.
  - SWIFT customer security requirements: self-attestation from second quarter of 2017; enforcement of mandatory controls starting January 2018.
- Risk assessment and regulatory clarity:
  - Correspondent banks’ risk tolerance and concerns about clarity, consistency, and implementation of home-jurisdiction regulatory expectations (notably “know your customer’s customer” issues) have influenced termination decisions.
- High-profile enforcement and penalty effects:
  - Penalties and enforcement actions (notably in the U.S. and EU) have raised perceived reputational and settlement risk.
  - Evidence on fines (as presented): 14,457; 6,035; 4,455.

### Measurement, concentration, and geographic patterns
- Measurement approaches:
  - Concentration analyzed by transaction volume and payment flow value; volume is a more stable indicator than value (values subject to inflation and exchange-rate distortions).
  - Median CPMI statistics for 2012–2015 showed: number of ACs fell; value fell; volume rose — collectively suggesting increased concentration.
- Geographic and country-group patterns (2012–2015):
  - Regional pockets with pronounced pressure: the Caribbean (most severely affected in World Bank survey), small countries with low transaction volumes in Europe and Central Asia, the Caribbean, Africa, and Pacific Islands (Fiji, Tonga, Vanuatu), and fragile states under sanctions or civil unrest.
  - Pacific and Caribbean islands among small states experienced the largest declines in CBR volume.
  - Cross-country regressions find a positive but weak relationship between changes in number of ACs and changes in CBR value/volume (low R²).

### Consequences and channels of impact
- Macro-financial channels affected:
  - disruption to trade finance, remittances, aid flows, and other cross-border payments;
  - reduced access to foreign funding for banks and constrained ability to provide foreign-currency loans for trade finance;
  - potential erosion of financial inclusion and longer-term growth prospects.
- Financial inclusion and remittances:
  - Two-thirds of non-profit organizations (NPOs) surveyed faced banking problems; many attributed wire transfer problems to correspondent banking issues.
  - Remittances are highly material in some countries: e.g., remittances amounted to approximately 18 percent of GDP in Samoa, with about 80 percent channeled through MTOs.
- Ratings and market perceptions:
  - Rating agencies have begun factoring CBR withdrawal into bank rating actions (Moody’s 2016a, b).
- Magnitude and timing:
  - Impacts vary by country and whether withdrawal is gradual (re-evaluation of business models) or sudden (sanctions, civil unrest).

### Selected quantitative and country observations
- Panama:
  - Total number of CBRs remained stable at 463–464 between March 2015 and End-February 2016 (62 relationships lost, 63 new relationships established).
- Liberia:
  - Ten global banks terminated about 48 percent of CBRs (36 out of 75); most affected banks lost about 78 percent of their CBR accounts versus banking system average loss of 46 percent.
- Belize:
  - Only 2 of the 10 domestic and international banks had CBRs with full banking services at one point.
  - The Central Bank of Belize lost three of its five CBRs in the last two years.
  - Transaction costs increased; one large bank increased wire transfer fees from about US$100 to US$300.
  - Processing time for wire transfers increased from “within 24 hours” to “several days.”
- Sudan:
  - Lost almost half of its CBRs between 2012 and 2015.
- Bahamas:
  - Six institutions lost CBRs but represented a small share of system assets; authorities amended AML/CFT Guidelines and introduced new wire transfer regulations.
- Samoa and Pacific cases:
  - Remittances vulnerability and increased remittance costs documented across several Pacific islands (see Annex II country notes).

### Remittances costs and trends (Box 3 summary)
- Global average cost of remittances:
  - 6.6 percent in 2011
  - 5.7 percent in 2014
  - risen to 6 percent overall since then
- Since MTO account closures became more pronounced since 2014, remittances have increasingly used more expensive bank or nonbank channels, raising average costs.
- 2015 observation:
  - 5 percent of countries in the sample experienced an increase in costs higher than 30 percent, implying an additional fee of more than US$2 on a US$100 transfer.
- Data note:
  - Staff calculations based on WB Remittance Prices Worldwide database for a transfer of USD 200 in less than an hour (fixed sample composition; weighted across source countries using bilateral remittance values).

### Policy responses and recommended measures
- Overarching approach:
  - Strengthened, coordinated, and collective public–private action is required; responses must be tailored, prioritized, and sequenced to country circumstances.
- First-port-of-call measures for affected countries:
  - strengthen respondent banks’ capacity to manage risks (risk-based AML/CFT implementation, customer due diligence, transaction monitoring);
  - improve communication between correspondent and respondent banks (clarify risk tolerances and expectations; issue policy statements);
  - remove legal and regulatory impediments to information sharing (e.g., data privacy constraints);
  - enhance supervision and effective implementation of international standards (AML/CFT, Basel Core Principles).
- Other initiatives (limited or longer-term impact):
  - market-based solutions (bundling services, volume- or risk-based pricing) — may have limited immediate effect and could raise costs for end-users;
  - KYC utilities, digital identity, Legal Entity Identifier (LEI), improved payment messages — can lower compliance costs but take time to implement;
  - publicly financed programs to subsidize compliance costs or maintain access — possible but risk market distortions and budget constraints.
- Alternative arrangements and mitigation:
  - second- and third-tier correspondent replacements, increased use of nested CBRs, switching currencies where feasible, reliance on trade finance and letters of credit — each has limitations (cost, scalability, integrity risks).
- Emergency / temporary public measures:
  - Consider temporary public involvement (public-backed vehicles, central bank processing, deposit-in-origin-country mechanisms for remittances) if all commercial CBRs are lost; such measures should be time-bound, limited, and have exit strategies.

### Communication, capacity building, and operational solutions
- Build frequent dialogue between correspondent and respondent banks to clarify risks, expectations, and remedial steps.
- Strengthen respondent banks via targeted technical assistance and training from correspondent banks, RDBs, and the Fund.
- Automation and digitalization:
  - Digitalizing account documentation and onboarding processes improves information quality/timeliness and reduces long-run due diligence costs.
  - National or regional pooling of IT solutions and commercial databases can assist smaller banks.
- Structural options:
  - Downstreaming (transparent channeling of transactions through an intermediary with robust controls) and consolidation of small respondent banks to achieve economies of scale.
  - Termination of high-risk business lines as a risk-based measure where capacity is insufficient.

### Legal, regulatory, and information-sharing impediments
- Conflicting requirements:
  - Customer due diligence obligations can conflict with data protection and privacy laws, hindering cross-border information sharing and transmission of suspicious transaction reports.
  - Principle 12 of the Basel Core Principles: a banking group should not open a branch or subsidiary if material information cannot be accessed.
- Examples of legal fixes:
  - Mexican authorities adopted regulations to remove legal barriers from banking secrecy laws to permit domestic banks to share additional information on certain cross-border transactions with registered foreign correspondent banks.
- Clarification efforts:
  - FATF guidance (October 2016) clarified that FATF recommendations do not require correspondent banks to conduct CDD on customers of customers and emphasized that enhanced due diligence should be commensurate with assessed risks.
  - BCBS consultative work (November 2016) on KYC utilities and supervisory roles.

### Fintech, distributed ledger technologies, and risks
- Fintech potential:
  - Emerging Fintech (virtual currencies, distributed ledger technology) could facilitate faster, lower-cost cross-border payments and alter market structure over time (example: mobile cross-border payments experiments in East Africa).
- Operational and regulatory challenges:
  - Many fintech solutions still interface with banks and face AML/CFT concerns.
  - Blockchain limitations include transaction throughput far below centralized networks, cybersecurity vulnerabilities, and unresolved sustainability of cost advantages (proof-of-work vs. proof-of-stake).
  - Authorities should set: (i) clear legal regimes; (ii) proportionate AML/CFT measures; (iii) fund safeguarding measures; (iv) contingency plans for operational disruptions; (v) robust risk controls and access criteria.

### Fund role, surveillance, and capacity development
- The Fund’s activities:
  - Surveillance and FSAPs to monitor risks and advise on policies where CBR withdrawal is macro-critical.
  - Facilitation of stakeholder dialogue (FSB, FATF, BCBS, World Bank, regional bodies).
  - Technical assistance and training to help countries strengthen AML/CFT, regulatory, and supervisory frameworks and improve data gathering.
- Recent scale of Fund engagement:
  - Between 2012 and mid-2016, 87 FSAPs completed across regions.
  - AML/CFT TA missions FY12-16 by region:
    - WHD: 161
    - AFR: 103
    - APD: 196
    - MCD: 161
    - EUR: 78
    - Total (FY12-16): 481 missions (AML/CFT TA).
  - Ongoing projects: 146 active projects in 121 countries.
- Operational guidance for Article IV and bilateral surveillance:
  - Discuss CBR issues when they reach macro-criticality in Article IV consultations; include tailored background notes and HQ support as needed.
  - Country-level capacity development sequencing:
    - Step 1: diagnostic module with data gathering and country-specific action plan;
    - Follow-up TA tailored to identified drivers (example: Angola TA).
  - Regional capacity development: regional seminars, training, and KYC utilities leveraging RTACs and regional development banks (Caribbean Initiative outlined as a pilot).

### Data gathering, monitoring, and analytical priorities
- Importance of improved data:
  - Countries should gather and monitor actual CBR payment data (e.g., SWIFT) and statistical analysis by source and affected countries to inform tailored responses and contingency planning.
  - Fund TA example: work with Angolan authorities using SWIFT CBR payment flow data and network analysis.
- SWIFT operational facts (Annex I):
  - Bank-to-bank channels: 67 percent of total volume.
  - “On-us” payments: 13 percent.
  - Payments settled via cross-border FMIs: 20 percent.
  - Two primary message-channeling methods:
    - Serial method (MT 103 travels through intermediaries; payment info and settlement travel together).
    - Cover method (MT 103 sent direct; settlement via intermediary MT 202 COV).
  - Common message types: MT 103, MT 202, MT 202 COV, MT 300, MT 700.

### Tail-risk scenarios and contingency planning
- Tail-risk: severe loss of CBRs arising from broader policy failures could require deeper Fund engagement, potentially a Fund-supported program to restore external/domestic imbalances and include AML/CFT-related program measures where critical and within member control.
- Emergency measures the Fund could support:
  - preconditions for payment flows;
  - frameworks for humanitarian assistance;
  - support for special payment corridors or temporary public mechanisms where commercial corridors vanish.

### Regional and country initiative examples
- Caribbean Initiative:
  - Launch event on February 22, 2017; roundtable with global correspondent and respondent banks to develop regional responses.
  - Priorities identified: strengthen respondent banks’ capacity, enhanced communication, targeted training/TA, automation of due diligence, exploration of KYC utilities and LEI.
  - Mixed views on regional correspondent bank creation and insurance mechanisms; central bank CBRs as emergency measure noted but with moral hazard/reputational risks.
- Angola:
  - Use of nested USD CBRs via intermediary banks (Portugal, South Africa) and increased use of euro CBRs for outflows.
  - Staff advice: strengthen AML/CFT and prudential frameworks; risk-based supervision; improve understanding between global correspondent and Angolan respondent banks.
- Samoa pilot:
  - Five key interventions: national AML/CFT strategy; upgrade sanctions and FIU capabilities; FATCA IGA; KYC utility hosted by FIU; documenting limited links between MTOs and offshore sector to ease correspondent concerns.
- Belize:
  - Major global banks terminated around 22 CBR accounts (out of 31) across 9 of 11 commercial/off-shore banks in 2015–2016.
  - Central Bank of Belize lost three of five CBRs; central bank provided temporary processing for some wires.
  - Recommended measures: more effective AML/CFT implementation, stricter licensing, enhanced respondent bank CDD systems, closer engagement with correspondent banks, consolidation of transactional traffic.

*Source: Excerpt from IMF staff analysis on correspondent banking relationships, 2012–2016 data and country case assessments.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments and immediate consequences
- Correspondent banking relationships (CBRs) have been under pressure in several countries; cross-border payments have remained stable and economic activity has been largely unaffected so far, despite a recent slight decrease in the number of CBRs.
- In a limited number of countries, financial fragilities have been accentuated where cross-border flows are concentrated through fewer CBRs or maintained through alternative arrangements.
- These fragilities could undermine affected countries’ long-run growth and financial inclusion prospects by:
  - increasing costs of financial services;
  - negatively affecting bank ratings.
- Major currency concentration: USDs account for about 50 percent of correspondent banking transactions, making USD CBRs critical for access to the global financial system.

### Drivers of CBR withdrawal
- The withdrawal of CBRs reflects correspondent banks’ business decisions based on the assessment of profitability and risk of the relationships.
- Factors shaping withdrawals are multiple, interrelated, and vary case-by-case, notably:
  - changes in the regulatory, supervisory, and enforcement environment post-global financial crisis (GFC);
  - more rigorous prudential requirements;
  - economic and trade sanctions;
  - anti-money laundering and combating the financing of terrorism (AML/CFT) standards;
  - tax transparency standards.
- Correspondent banks’ lack of confidence in respondent banks’ capacity to effectively manage risk is often central to decisions to terminate CBRs.

### Policy responses and recommended measures
- Addressing withdrawal of CBRs will take time and requires strengthened, coordinated, and collective public–private action.
- First-port-of-call measures for countries affected by CBR withdrawal:
  - enhance respondent banks’ capacity to manage risks;
  - improve communication between correspondent and respondent banks;
  - strengthen and effectively implement regulatory and supervisory frameworks in line with international standards, particularly for AML/CFT;
  - remove impediments to information sharing.
- Other initiatives to address underlying drivers—particularly those related to correspondent banks’ profitability and risk assessment concerns—should be considered but tend to have more limited impact.
- In the event of a complete loss of CBRs by all commercial banks in a country, the public sector should consider the feasibility of temporary mechanisms, including public-backed vehicles, to provide payment clearing services.

### Role of the Fund and ongoing engagement
- The Fund has an important role in monitoring risks and advising its membership on policies to mitigate adverse impacts from CBR withdrawal through:
  - surveillance and Financial Sector Assessment Programs (FSAPs);
  - facilitating dialogue among stakeholders;
  - technical assistance and training to help affected countries enhance monitoring of CBRs and strengthen legal, regulatory, and supervisory frameworks.
- The Fund has been collaborating on an ongoing basis with the Financial Stability Board, World Bank, G20, Financial Action Task Force, Arab Monetary Fund, Committee on Payments and Market Infrastructures, and other stakeholders.
- Going forward, the Fund will continue to support member countries in addressing issues arising from the withdrawal of CBRs to ensure financial stability and promote financial inclusion.

*EXECUTIVE SUMMARY — March 16, 2017*

### 14.      The withdrawal of CBRs during 2012–15 varied significantly across countries. In

### 14.      The withdrawal of CBRs during 2012–15 varied significantly across countries.

### Overview and key patterns
- Overall cross-border payments remained stable during 2012–15, with changes in the number of ACs, value, and volume relatively small for most countries, though some experienced large declines.
- The USD appears to be the currency most affected by the withdrawal of CBRs, with even non-U.S. licensed correspondent banks increasingly withdrawing from providing services in this currency (CPMI, 2016).
- Fund staff analysis indicates that in 2016 cross-border payments flowing through the largest regional financial centers remained broadly unchanged, and the size of volume and value of payment corridors between them was little affected.
- Based on median CPMI statistics for 2012–2015:
  - The number of ACs fell.
  - The value of transactions fell.
  - The volume of transactions increased.
  - Taken together, these median movements suggest that concentration increased.

### Measurement and interpretation of concentration
- Concentration can be analyzed using:
  - Total number of transactions (volume).
  - Total amounts of payment flows (value).
- The size of the total value channeled through payment corridors relative to the size of the economy may indicate total risk, but:
  - Values can be distorted by inflation and exchange rates.
  - Volume provides a more stable indicator.
- Implications:
  - An increase in volume could yield greater efficiency through economies of scale and reduced unit costs (Cook and Soramäki, 2014).
  - A substantial increase in concentration (for either volume or value) could make counterparties more vulnerable to operational disruptions or failures since flows are occurring through a smaller number of correspondents.
- Note of caution: results must be interpreted carefully since data do not control for the size of the economy and financial sector; observed declines in CBRs may reflect regulatory changes, re-evaluation of respondent banks’ business models, specific parent-bank dynamics, or supervisory strategies in some countries.

### Geographical and country-group patterns
- Surveys and CPMI data indicate regional pockets where pressure on CBRs has been more pronounced, including:
  - The Caribbean (identified as the most severely affected in World Bank survey results).
  - Small countries with low transaction volumes in Europe and Central Asia, the Caribbean, Africa, and the Pacific Islands (including Fiji, Tonga, and Vanuatu).
  - Fragile states under sanctions or civil unrest among the most affected across metrics.
- Median-based country-group observations (2012–2015):
  - Advanced economies, emerging markets, low income countries, fragile states, and small states showed significant variation in gains and losses of ACs, value, and volume.
  - Pacific and Caribbean islands among small states experienced the largest declines in CBR volume.
- Correlations:
  - There is a positive, although weak, relationship between changes in number of ACs and changes in CBR value/volume, with significant variation across countries (CPMI 2016 staff calculations; low R² in plotted regressions).

### Consequences of CBR withdrawal — macro-financial channels and impacts
- Multiple macro-financial channels can be affected by withdrawal of CBRs:
  - Disruption of financial services and cross-border flows, including trade finance, remittances, and aid flows.
  - Potential undermining of financial stability, inclusion, growth, and development goals.
- Financial inclusion impacts:
  - A survey (Eckert, Guinane, and Hall, 2017) indicates two-thirds of non-profit organizations (NPOs), considered categorically high risk, are experiencing banking problems (delays of wire transfers, increased fees, account closures, refusal to open accounts), with many attributing wire transfer problems to correspondent banking issues.
- Banking system and funding impacts:
  - Loss of CBRs could reduce banks’ access to foreign funding and their ability to provide foreign currency loans for trade finance or service foreign currency denominated debt, compounding bank vulnerabilities.
- Ratings and perceptions:
  - Rating agencies have begun to factor CBR withdrawal into financial institution rating downgrades (Moody’s 2016a, b).
- Magnitude and timing:
  - The magnitude and impact vary by country and whether withdrawal arises from gradual re-evaluation of business models or more sudden events (sanctions or civil unrest).

### Survey and Article IV findings
- Perception-based surveys in 2015 and 2016 (varying methodology and scope) reinforced regional patterns and highlighted limitations (response rate, respondent bias) but provided useful insights:
  - Most respondent banks that lost CBRs were able to find replacements or rely on alternative arrangements.
  - Regional surveys included Caribbean Association of Banks, ASBA 2016, Arab Monetary Fund, IMF and World Bank surveys of Arab banks, and IMF and Union of Arab Banks survey.
- Article IV assessments:
  - CBR withdrawal was discussed in 49 Article IV consultations between 2015 and 2016.
  - Staff assessments found:
    - CBR pressures had a direct impact on a limited number of countries’ financial systems (quantitative data limited; assessments mainly qualitative).
    - In 23 countries staff judged the impact to be moderate or no significant impact.
    - In 4 countries staff judged the impact to be adverse.
    - Belize was assessed as having a loss of CBRs that “taken systemic proportions,” with the Central Bank of Belize reportedly affected.
  - No country team quantified a macro-economic impact, but several emphasized the need for careful monitoring given potential future negative implications for remittances and financial inclusion.

### Selected country experiences and specific quantitative observations
- General note: jurisdictions have used mitigation and preemptive measures; outcomes vary by case.
- The Bahamas:
  - Six institutions had recently lost CBRs; these represented a small share of total banking system assets.
  - Canadian and other international banks maintained direct or indirect access to USD CBRs relying on group-wide AML/CFT frameworks.
  - Authorities strengthened risk-based regulation and supervision; Central Bank finalized amendments to AML/CFT Guidelines and introduced new wire transfer regulations.
- Belize:
  - Only 2 of the 10 domestic and international banks had CBRs with full banking services at one point.
  - The Central Bank of Belize lost three of its five CBRs in the last two years.
  - On aggregate, international transaction volumes were not yet noticeably affected (most losses occurred late 2015 or early 2016), but transaction costs increased; one large bank increased wire transfer fees from about US$100 to US$300.
  - Processing time of wire transfers increased from “within 24 hours” to “several days.”
  - Growth rate of deposits fell, driven by a significant decrease in deposits in international banks partially offset by increases in domestic banks.
  - Domestic banks implemented alternative arrangements, including replacing CBRs.
  - Authorities considered potential solutions such as collective action to increase business volume to a smaller number of correspondent banks; introduction of a scheme to purchase CBR insurance policies; creation of a U.S.-licensed special purpose vehicle to process international transactions; and payment of higher CBR service fees.
- Kuwait:
  - Kuwaiti banks had not faced CBR withdrawal. Several domestic banks preemptively severed links with some domestic charities and foreign exchange houses to avoid perceived risk. The Central Bank of Kuwait participated in international forums and maintained communication with foreign banks and regulators.
- Lebanon:
  - A few foreign banks severed relationships with some smaller Lebanese banks owing to foreign government measures related to ML/TF concerns.
  - Authorities have been strengthening AML/CTF regulatory environment, risk assessment framework, and addressing identified gaps on international tax compliance and exchange of information.
- Liberia:
  - Broad-based withdrawal of CBRs since 2013: all commercial banks lost at least one CBR.
  - Ten global banks terminated about 48 percent of CBRs (36 out of 75); the most affected banks lost about 78 percent of their CBR accounts, compared to the banking system average loss of 46 percent.
  - Advance notice for severing relationships narrowed from six months to overnight.
- Panama:
  - Total number of CBRs remained stable at 463–464 between March 2015 and End-February 2016 (62 relationships were lost, but Panamanian banks established 63 new relationships).
- Sudan:
  - Sudan lost almost half of its CBRs between 2012 and 2015.

### Policy-relevant implications highlighted by staff
- Monitoring and contingency planning:
  - Careful monitoring is needed as further losses of CBRs could have negative implications for remittances, financial inclusion, and the broader economy.
- Authorities’ mitigation actions observed across cases:
  - Strengthening AML/CFT regulatory and supervisory frameworks.
  - Engaging with regional stakeholders and correspondent banks to replace or preserve relationships.
  - Exploring alternative arrangements and collective actions to sustain correspondent access (examples include insurance schemes, special purpose vehicles, and accepting higher service fees).
- Fragility of alternative arrangements:
  - Many countries access USD payment network through USD CBRs with parent/group related or intermediary banks; these arrangements are fragile and may not be available to all respondent banks or clients, but are less fragile for branches/subsidiaries of global banks with sound parent compliance frameworks.

*Source: Excerpt from IMF staff analysis on correspondent banking relationships, 2012–2016 data and country case assessments.*

### Box 2. The Withdrawal of CBRs: Selected Cases (continued)

### Box 2. The Withdrawal of CBRs: Selected Cases (continued)

### Selected country cases
- Some CBRs terminated in March 2014; addressing deficiencies in the AML/CFT framework would have strengthened the case for containing the loss of CBRs and even reinstating some CBRs. A dedicated unit had been set up at the central bank to address gaps within the current AML/CFT framework.
- Morocco
  - The risk of a loss of CBRs was highlighted in the Risk Assessment Matrix in Morocco’s 2016 Article IV Staff Report.
  - Likelihood of the risk assessed to be high (for USD flows); anticipated impact assessed to be low (as most cross-border payments are in euro rather than USD).
- Panama
  - Changes in capital regulations in source countries, concerns over compliance with tax rules and international standards on financial sector integrity, and increased due diligence by foreign banks, particularly with links to the U.S., had curtailed some smaller Panamanian banks’ access to correspondent banks.
  - Total number of CBRs remained stable at 463–464 between March 2015 and end-February 2016, as 62 relationships had been lost, while Panamanian banks had managed to establish 63 new relationships.
  - Stress testing a large-scale loss of CBRs showed some liquidity problems in the aftermath; foreign-sourced funding might have spilled over to solvency in the medium run as funding costs might have risen and fee income could have fallen.
  - Authorities’ mitigation actions included strengthening banking regulatory and supervisory framework and expanding supervisory coverage to include leasing and factoring companies, financial cooperatives, fund-remittance companies and debit and credit card companies, as required by the new AML/CFT legislation. Cooperation with other supervisors in the region was considerably strengthened to enhance enforcement of AML/CFT standards.
- Samoa
  - To maintain their CBRs, respondent banks had been withdrawing from providing banking services to MTOs, increasing fragility of the remittances sector and likely increasing the cost of remittances.
  - Remittances amounted to approximately 18 percent of GDP of which about 80 percent were channeled through MTOs.
  - Authorities took steps including active engagement with global stakeholders and publication of the national AML/CFT strategy; committed to establish a database to facilitate remittances by enhancing compliance.
- West Bank and Gaza (WBG)
  - A global bank began limiting its correspondent banking services to Palestinian banks as part of a regional “derisking” strategy; given its small presence this did not appear to have a significant impact.
  - Israeli banks cite AML/CFT concerns and continue to warn of, but have yet to act on, plans to terminate correspondent services with Palestinian banks; Israeli authorities put in place temporary financial and judicial assurance to help preserve Israeli-Palestinian CBRs.
  - Terminating CBRs could undermine the payment system, increase cash-based transactions, weaken trade, and erode the tax base. Severe consequences are possible given the central role of the shekel in WBG and economic ties with Israel via trade, employment, and remittances.
  - Palestinian authorities are working to bring WBG’s AML/CFT regime in line with international standards.

*Source: Article IV staff reports, West Bank and Gaza, Report to the Ad Hoc Liaison Committee, bilateral discussions with respondent banks.*

### Pressures on CBRs and financial fragilities (key findings)
- Most countries, even some not reporting a decline in CBRs, expressed concern about increases in the cost, processing time and/or scrutiny of CBRs.
- Potential implications include effects on productivity, cost of doing business, and scope of financial services provided.
- Market-structure implications:
  - Indigenous and smaller banks appear to be more affected by CBR withdrawal than foreign-owned banks.
  - Offshore banks highlighted as more vulnerable to losing access to CBRs.
- Beyond correspondent banking, certain customer categories experienced increased scrutiny and account closures as a result of pressure from CBRs; particularly affected are MTOs, but also charities, foreign exchange houses, online gaming, and offshore businesses.
- Concentration risks:
  - In 1 out of 5 countries (mainly emerging and developing economies), remittances represent close to 10 percent of GDP.
  - Decreased access of MTOs to the banking system could pose financial stability risks, affect financial inclusion and development, and reduce adequate financial services coverage in remote and rural areas.
  - Some bank-facilitated payment flows related to trade may have moved into other payment instruments (open accounts, cash-in-advance, letters of credit, documentary collections).
  - Example: Africa’s trade with China is largely U.S. dollar-denominated and channeled through U.S. banks, relying more on letters of credit and documentary collections rather than single customer credit transfers.

### Remittances: costs and flows (Box 3 summary)
- Global average cost of remittances:
  - 6.6 percent in 2011
  - 5.7 percent in 2014
  - risen to 6 percent overall since then
- Since account closures for MTOs became more pronounced since 2014, remittances have increasingly been transferred using more expensive services of banks or other nonbank financial institutions, raising average costs.
- Regional patterns: recent increases in remittance costs were most pronounced in East Asia and Pacific, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa.
- Notable country trends since 2014: Pacific (Samoa, Vanuatu); East Asia (China, Vietnam); Central America (El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama); South Europe (Turkey); Middle East (Egypt, Jordan).
- 2015 spike: 5 percent of all countries in the sample experienced an increase in costs higher than 30 percent, implying an additional fee of more than US$2 on a US$100 transfer.
- In many cases initial fee increases did not persist and were followed by declines; continued financial innovation may influence transfer cost evolution.
- Data and methodology note: staff calculations based on WB Remittance Prices Worldwide database. Costs of transfer of USD 200, in less than an hour. Fixed sample composition. Weighted across source countries using bilateral remittance values.

### Drivers of the withdrawal of CBRs
- Overall
  - Decisions by global banks to withdraw from correspondent banking are ultimately individual business decisions driven by banks’ assessment of risks and profitability of the CBR.
  - Profitability is a function of income, cost and capital; risk assessment considers the risks of a specific relationship and the institution’s own risk tolerance.
  - Factors are multiple, interrelated, and vary case-by-case.
- Evidence from Article IV consultations and FSAPs:
  - Main drivers in the U.S. 2016 Article IV: broader realignment of banks’ business models, increasing economic/financial/reputational risks, tighter post-crisis regulation, broader reporting requirements (including AML/CFT), and conflict of regulations (e.g., data privacy constraints on cross-border information sharing that prevented U.S.-based banks from undertaking needed due diligence).
  - Germany FSAP: withdrawal by German banks driven mainly by business and risk-return considerations, lower risk appetite, and implementation of a risk-based approach under international standards.
  - U.K. FSAP: international post-crisis reform agenda and national initiatives affecting CBRs and provision of financial services by U.K. banks to certain customer categories, notably MTOs and NPOs.

#### A. Profitability considerations
- Correspondent banking is high-volume, low-return, and balance-sheet-intensive; became less attractive in the post-GFC macroeconomic environment.
- Macroeconomic pressures on banks’ profitability: shift from direct cross-border lending to local lending by foreign banks’ affiliates; global banks refocusing activities on key markets.
- Global regulatory reforms raised capital requirements relative to pre-crisis levels, increasing cost of capital.
- Surplus liquidity and low interest rates compressed margins, reducing interest earned from respondent banks’ balances and making correspondent banking less profitable.
- Increasing compliance costs are weighing on profit margins:
  - Compliance costs have been increasing over the past 15 years and contribute to banks’ decisions to withdraw from CBRs.
  - Drivers include implementation and enforcement of AML/CFT requirements, expanding international and bilateral economic and trade sanctions regimes, and emerging tax transparency initiatives.
  - Efficiency of compliance screening and risk management affects costs; absence of sufficient business volume undermines economies of scale, affecting withdrawal decisions in small states and with small respondent banks.
- Cyber risk-related costs:
  - Measures to safeguard against cyber risks could further increase compliance costs.
  - SWIFT introduced mandatory customer security requirements and an associated assurance framework requiring customers to provide detailed self-attestation against mandatory controls from the second quarter of 2017, with enforcement of mandatory controls starting from January 2018.

#### B. Risk assessment considerations
- Two main factors in a correspondent bank’s risk assessment:
  - The correspondent bank’s own risk tolerance.
  - The bank’s perception and assessment of the actual risks, including its ability to manage those risks.
- The correspondent bank’s risk tolerance is informed by:
  - (i) the extent it considers regulatory expectations are consistent and clear;
  - (ii) its implementation of the risk-based approach under the AML/CFT standard;
  - (iii) its perception of high-profile enforcement actions and remedial supervisory actions.

#### Risk tolerance and regulatory clarity
- Despite intensified efforts by home jurisdiction regulators to clarify customer due diligence scope, some global banks remain concerned about clarity and consistency of regulatory expectations.
- Regulators in key financial centers have made efforts to publish regulations and enforcement actions to help banks assess compliance risk exposure.
- Consultation with global banks revealed a range of views, particularly on clarity of U.S. regulatory expectations and the need to conduct due diligence on a customer’s customer (“know your customer’s customer”).
- Some banks find regulatory expectations unclear, inconsistently communicated, unevenly implemented by individual examiners, or not well understood, leading to overcautious use of enhanced due diligence and, in some instances, termination of certain types of CBRs.
- Some banks seek regulatory certainty rather than mere clarity.

*Source: Article IV staff reports, West Bank and Gaza, Report to the Ad Hoc Liaison Committee, bilateral discussions with respondent banks.*

### 31.      The proper and proportionate implementation of the risk-based approach including

### The proper and proportionate implementation of the risk-based approach including

### Drivers of CBR withdrawal and correspondent bank risk appetite
- The proper and proportionate implementation of the risk-based approach under the AML/CFT standard may lead to instances of CBR withdrawal when:
  - A correspondent bank is unable to conduct the required level of customer due diligence to mitigate identified risks.
  - A correspondent bank has reason to believe the respondent bank is involved in money laundering or terrorist financing activities.
  - Regulatory requirements in the correspondent bank’s jurisdiction call for termination where there is suspicion of fraudulent activity by the respondent bank or its customers (for example, tax evasion, fraud, or corruption).
- High-profile enforcement actions have influenced banks’ risk appetite:
  - Penalties imposed by U.S. authorities, and to a lesser extent by EU authorities, raised awareness about the potential size of settlements and fines and reputational risks.
  - The possibility of revocation of U.S. licenses (jeopardizing ability to clear USD) and the introduction of personal liability of bank managers in key jurisdictions (including the U.S. and the U.K.) may have affected global banks’ risk tolerance.
  - Most large fines for misconduct related to customer due diligence have been levied for breach of the U.S. economic and trade sanctions framework.
- Evidence on fines (as presented):
  - Fines of $100 million and above that were imposed on Banks from 2009-2017: 14,457; 6,035; 4,455.

### Remedial actions, supervisory expectations, and market signaling
- Remedial actions voluntarily undertaken by banks in lieu of enforcement actions have shaped perceptions of regulatory expectations:
  - U.S. regulators increased use of consent orders and remedial measures to resolve violations.
  - Global banks entering into non-prosecution and deferred prosecution agreements have taken remedial actions that may go beyond regulatory requirements.
  - The U.S. Joint Fact Sheet indicates “the vast majority (about 95 percent) of BSA/OFAC compliance deficiencies identified by the Financial Service Authorities, FinCEN, and OFAC are corrected by the institution’s management without the need for any enforcement action or penalty.”
  - Some global banks have looked to these agreements for clarity on the level of compliance expected and indicators of “higher risk,” influencing internal risk tolerance and approaches to maintaining or scaling back CBRs.

### Assessment of risks associated with a specific CBR
- Key elements correspondent banks consider when assessing a specific CBR:
  - The risk environment; respondent bank’s size, customer base, business model, ownership and control structure; and effectiveness of the respondent bank’s compliance framework.
  - Country- or region-level risks including corruption, tax evasion, fraud, money laundering, and terrorism financing.
- Examples of elevated concerns that may trigger enhanced due diligence or termination:
  - Respondent banks serving categories of customers associated with higher risks (e.g., MTOs, exchangers, NPOs, casinos, offshore financial institutions and corporations, and politically exposed persons).
  - Small indigenous banks with business models involving high-risk activities such as online gaming—correspondent banks may lack confidence and choose to terminate CBRs.
  - Opaque ownership and control structures making beneficial ownership ascertainment challenging.
- Information quality and timeliness:
  - Low quality of information and poor responsiveness by respondent banks inhibit correspondent banks’ ability to assess and manage relationship-specific risk.
  - Causes may include low capacity, resources, or controls within the respondent bank; weak AML/CFT requirements or poor supervision in the respondent bank’s jurisdiction; and lack of transparency of legal entities and arrangements that are customers of the respondent bank.
  - Absence of beneficial ownership information can prevent correspondent banks from satisfying themselves that OFAC or other economic and trade sanctions are not being violated.

### Legal and regulatory impediments to risk management
- Conflicting regulatory or legal requirements can hinder management of CBR risks:
  - Tension between customer due diligence obligations and data protection and privacy laws restricts exchange of customer information across borders.
  - Data protection and privacy requirements can prevent correspondent banks from conducting effective customer due diligence on respondent counterparts and can hinder transmission of suspicious transaction reports within banking groups.
  - Some impediments to information sharing may be constitutional in nature.
  - Principle 12 of the Basel Core Principles for Effective Banking Supervision indicates a banking group should not be allowed to open a branch or subsidiary if material information cannot be accessed.

### Policy responses, industry initiatives, and coordination
- Addressing CBR withdrawal requires coordinated and collective action by public and private stakeholders:
  - Initiatives by the Fund, the World Bank, and the FSB include facilitation of international dialogue to develop coordinated policy responses and support industry initiatives.
  - The FSB established in March 2016 a Correspondent Banking Coordination Group to implement an action plan presented to the G20 in November 2015 with four elements:
    - (i) further examination of dimensions and implications of the CBR decline facilitated by improved data collection by multilateral institutions and national authorities;
    - (ii) clarification of regulatory expectations, including more guidance by the FATF;
    - (iii) domestic capacity building in countries that are home to affected respondent banks; and
    - (iv) strengthening tools for due diligence by correspondent banks.
- Data gathering and monitoring:
  - Countries concerned with CBR withdrawal should continue gathering data and monitoring pressures on CBRs to inform tailored approaches and contingency planning.
  - Improvements in statistical analysis by source and affected countries, including use of actual CBR payment data (e.g., SWIFT), would assist understanding and monitoring.
  - Contingency measures could include enhanced communication among stakeholders, mapping domestic financial systems’ linkages with correspondent banks and alternative payment arrangements, and enhancing institutional capacity.
- Regional efforts (examples):
  - Caribbean: Regional bodies have raised awareness; CARICOM appointed a high-level advocacy group; CDB and JNBS offered support; Caribbean Association of Banks conducted a survey and outreach; ECCB members decided to consolidate national AML/CFT supervision into one regional operation under the ECCB.
  - Gulf Cooperation Council: High-level engagement with the U.S. government; public-private dialogues in November 2015 and June 2016 to discuss illicit finance, correspondent banking, de-risking, implementation of AML/CFT standards, and maintenance of cross-border CBRs.

### Tailoring, sequencing, and priority of responses
- Responses should be tailored, prioritized, and sequenced depending on the intensity of CBR withdrawal impact:
  - No one-size-fits-all solution given multiple drivers; priorities depend on measures’ impact and effectiveness.
  - In countries with significant withdrawal, alternative arrangements and market innovations could help contain and mitigate impacts though they may not address underlying drivers.
  - In the event of complete loss of CBRs by all banks in a country, temporary measures including possible limited public entity involvement may be necessary.
  - The Fund’s role includes bilateral surveillance, capacity development, facilitating dialogue among parties, and engagement through Fund-supported programs where relevant.
- Immediate policy focus:
  - Targeted measures to enhance respondent banks’ capacity to manage risks.
  - Increase correspondent banks’ confidence and appetite to manage CBR-related risks.
  - Strengthen regulatory frameworks and effective implementation.
  - Improve communication and clarification of regulatory expectations.
  - Remove impediments to information sharing.
  - Continue data gathering and monitoring pressures on CBRs to tailor measures.

*Source: IMF staff summary of chapter content.*

### 41.      Greater communication between correspondent and respondent banks on risk

### 41.      Greater communication between correspondent and respondent banks on risk

### Communication and capacity building
- Frequent dialogue between banks is necessary to build a common understanding of risks, clarify correspondent banks’ concerns, and build familiarity and confidence in the CBRs.
- Correspondent banks should clearly communicate their risk tolerance policies and expectations, including issuing policy statements on transactions that are prohibited and which they consider “high risk.”
- Respondent banks should explain their risk management frameworks and practices, and their efforts to enhance capacity and strengthen risk management and compliance programs.
- Public and private stakeholders should join forces to strengthen respondent banks’ capacity:
  - Correspondent banks can intensify targeted technical assistance (TA) and training to strengthen respondent banks’ capacity.
  - Sharing of best practices between correspondent and respondent banks, and between respondent banks themselves, can help identify gaps and weaknesses and guide remedial actions.
  - Regional development banks (RDBs) can play an important role in providing training to enhance respondent banks’ risk-management capacity.
  - The Fund can support training to these RDBs.

### Automation, digitalization, and operational solutions
- Automation of due diligence processes can improve the quality and timeliness of information available to correspondent banks:
  - Some small respondent banks still manually process onboarding and monitoring information, which is unlikely to reassure correspondent banks.
  - Digitalizing account documentation (e.g., identification information, business correspondence, account activity, and checks) would enhance compliance screening procedures and reduce long-run costs of customer due diligence.
  - National or regional initiatives (e.g., pooling with other banks to develop IT solutions or to access commercial databases identifying high-risk customers) could assist, but implementation would take time and be subject to resource availability.
- If capacity cannot be achieved at the individual respondent bank level, possible actions include:
  - Consolidating transactional traffic through “downstreaming,” where transactions of several respondent banks are transparently channeled through an intermediary bank with robust controls in place (distinct from nested relationships).
  - Consolidating small-sized respondent banks to achieve economies of scale required to support investments and sound due diligence processes—helpful where a country or region is overbanked.
  - Terminating high-risk business lines (e.g., online gaming and offshore) using a risk-based approach if respondent banks lack capacity to manage associated risks to maintain CBRs.

### Regulation, supervision, and international standards
- Improving regulation and supervision, particularly for AML/CFT, and ensuring effective implementation is crucial to provide the confidence required by correspondent banks.
- Efforts should be made to strengthen regulatory and supervisory frameworks and their effective implementation, in line with international standards, including AML/CFT standards and the Basel Core Principles for Effective Banking Supervision.
- Targeted AML/CFT diagnostic studies could assess gaps and weaknesses and identify remedial actions.
- Political buy-in at the highest levels of government is required to adopt necessary reforms, along with sufficient supervisory capacity and resources.
- Harmonization of AML/CFT legislation and consolidation of supervision at a regional level could benefit groups of smaller countries:
  - Consolidation can achieve the scale necessary for reforms and ensure financial institutions in the region adhere to the same standards, providing a level playing field for correspondent banks.
  - Example: the ECCB is consolidating all AML/CFT supervision into one regional operation under its responsibility, which would require strengthened governance and capacity of regional supervisors.

### Clarification of regulatory expectations and international initiatives
- Continued efforts by home supervisors to clarify regulatory expectations and ensure consistent implementation would help alleviate global banks’ concerns:
  - U.S. regulators published in August 2016 a Joint Fact Sheet on Foreign Correspondent Banking outlining supervisory and enforcement processes with respect to AML and sanctions in relation to correspondent banking.
  - In October 2016, the U.S. Office of the Comptroller of Currency (OCC) issued Risk Management Guidance on Periodic Risk Reevaluation of Foreign Correspondent Banking to describe corporate governance best practices for periodic evaluations of risk and account retention/termination decisions.
  - The U.K. Financial Conduct Authority (FCA) issued Financial Crime Guide (FCA, 2015) and now considers whether strategies related to CBR withdrawal affect consumer protection or competition issues (FCA, 2016).
- Despite these initiatives, global banks report the need for home regulators to continue clearly communicating that they do not follow a “zero-tolerance” approach and to ensure consistent implementation by all relevant regulators within a country.
- Box 5 — Efforts by the FATF and BCBS to clarify international standards:
  - The FATF has taken steps, including publishing guidance on CBRs in October 2016, which:
    - (i) clarified that the FATF recommendations do not require financial institutions to conduct customer due diligence on the customers of their customers;
    - (ii) highlighted that not all CBRs carry the same level of money laundering and terrorism financing risks, hence any enhanced due diligence measures have to be commensurate to the degree of risks identified;
    - (iii) identified ways to verify respondent bank’s information and to document higher risks;
    - (iv) noted that correspondent banks should conduct ongoing monitoring and maintain ongoing communication and dialogue with respondent banks; and
    - (v) defined requirements associated with establishing nested relationships.
  - The BCBS is revising the correspondent banking annex of guidelines on the sound management of risks related to money laundering and terrorism financing; a consultative document issued in November 2016 discusses KYC utilities and the role supervisors can play concerning the quality of payment messages.

### Information sharing and legal barriers
- Removing impediments to information sharing could improve correspondent banks’ ability to manage risks:
  - Privacy laws in some countries may prevent transmission of additional information by respondent banks concerning transactions, originators, and beneficiaries.
  - Ways to tackle obstacles include amendments to legal frameworks where required.
  - Example: Mexican authorities adopted regulations to remove legal barriers from banking secrecy laws to permit domestic banks to share specific additional information on certain cross-border transactions with registered foreign correspondent banks.
  - Where no legal barriers exist, respondent banks can re-draft banking contracts or add supplementary agreements to allow sharing of information (CPMI, 2016).

### Measures with limited impact and market-based solutions
- Additional measures under consideration could help alleviate pressure on CBRs but are unlikely to solve the problem; they generally take time and may have limited immediate effects:
  - Market-based solutions to increase correspondent banks’ profitability include bundling banking products and considering volume- or risk-based pricing.
    - Some correspondent banks bundle services (e.g., credit card clearing, letters of credit, fixed-income and wealth management) with CBRs, but impact on maintaining CBRs appears limited.
    - Risk-pricing correspondent services could factor compliance costs into fees; respondent banks could pass higher costs to customers, possibly affecting financial development and inclusion and pushing payments into informal channels.
  - Improving compliance screening procedures via KYC utilities, digital identity, improved payment messages, and use of the Legal Entity Identifier (LEI) can lower compliance costs:
    - KYC utilities and centralized information repositories facilitate information sharing (e.g., SWIFT KYC Registry).
    - Some global banks are establishing KYC utilities within financial conglomerates; some countries are creating national KYC utilities using trusted government-collected personal data (e.g., Singapore).
    - Digital identity can facilitate sharing (e.g., Estonia’s e-residency).
    - Improvements to payment messages (e.g., Mexican authorities designating mandatory message types/fields) and promotion of the LEI can help identify entities and improve automatic screening.
    - These initiatives will take time; banks cannot rely solely on them to meet due diligence requirements.
  - Publicly financed programs could reduce compliance costs to safeguard access to finance for certain customer categories:
    - Governments could consider financing support to CBR maintenance costs or a domestic AML/CFT utility to cover part of compliance costs on grounds that access to international payment systems is a public good.
    - Such interventions may create market distortions, face budget constraints, and be difficult to scope (e.g., defining categories at risk of exclusion).

### Alternative arrangements and mitigation strategies
- Respondent banks have attempted alternative arrangements to substitute lost direct CBRs, though these do not always address underlying drivers:
  - Options include: (i) finding replacements through second- and third-tier correspondent banks; (ii) increasing use of nested CBRs; (iii) switching to CBRs in other foreign currencies where feasible; and (iv) relying on other cross-border financial services such as letters of credit and trade finance.
  - Limitations:
    - A sudden increase in payments through nested CBRs may lead to enhanced scrutiny and higher costs.
    - Switching currency may be infeasible for trade denominated in a specific currency.
    - Trade finance and letters of credit provide additional scrutiny but tend to be more expensive.
- New players filling gaps:
  - Some smaller U.S. banks, other banks, and specialized institutions offer correspondent banking or nested correspondent accounts, but global correspondent banks need confidence in their compliance screening.
- Regional institution proposals:
  - Creation of a regional U.S. banking institution (e.g., considered by the Caribbean) to provide regional banking services would be complex, costly, time-consuming, require extensive licensing and regulatory approval, and be subject to the same regulatory requirements and enforcement risks as global banks.
- Alternative remittance channels:
  - Existing channels include MTOs, postal networks, credit unions, telecommunication companies, courier companies, and trade-based remittance systems.
  - Postal payment services: many post offices provide money orders; the Worldwide Electronic Postal Payment Services Network and the Universal Postal Union provide infrastructure and principles for postal payment services.
  - Limitations of postal network usage in cross-border remittances include limits on transactions, liquidity problems in disbursing outlets in receiving countries, and delays.

*Source: 031617 - 41.      Greater communication between correspondent and respondent banks on risk*

### 57.      Emerging Fintech solutions could facilitate cross-border flows and potentially provide

### 031617 - 57.      Emerging Fintech solutions could facilitate cross-border flows and potentially provide

### Fintech potential for cross-border payments
- Emerging Fintech solutions and new payment initiatives may provide alternatives for cross-border payments compared to CBRs or traditional MTOs, notably through the use of virtual currencies and distributed ledger technology or “blockchain.”
- These alternatives promise much faster—potentially instantaneous—cross-border flows, at a fraction of the current cost.
- Fintech has potential applications that could enhance existing cross-border payment infrastructure and, if successful, could substantially change market structure over time by altering the increasing return to scale now observed in payments services and creating room for market-based transactions outside larger banks.
- Example: mobile phone operated cross-border payments currently being experimented within East Africa.
- Operational limits: some Fintech startups may be operationally limited in the volume of transactions they are able to handle depending on their business model.
- To address challenges posed by Fintech, authorities should establish:
  - (i) a clear legal regime;
  - (ii) proportionate AML/CFT measures to prevent financial integrity risks;
  - (iii) fund safeguarding measures such as insurance, similar guarantee schemes, or “pass-through” deposit insurance;
  - (iv) contingency plans for operational disruptions;
  - (v) risk controls and access criteria in payment systems (Khiaonarong, 2014).

### Risks, regulatory and supervisory challenges
- Fintech solutions so far still interface at some point with the banking system, where similar AML/CFT concerns may appear as in regular banking transactions.
- Emerging technologies raise new regulatory and supervisory challenges; effective oversight frameworks for new payment methods need to be developed to safeguard public confidence and financial stability.
- Regtech may hold potential to enhance compliance with existing regulatory obligations.

### Box 6 — Possible Role of Blockchain within Correspondent Banking
- Blockchain/distributed ledger technologies may offer a potential solution to the withdrawal of CBRs and facilitate many other types of payments in the future.
- Blockchain characteristics: unchangeable, digitally recorded data in packages called blocks, stored in a linear chain; inherently resistant to modification—once recorded, data in a block cannot be altered retroactively.
- Suggested benefits: better risk management, reduced costs, and an alternative payment platform, especially for small value transfers.
- Challenges before widespread adoption:
  - Need to bring emerging technologies into the regulatory framework to avoid systemic risk, risk of money laundering, terrorist financing, and other illegal activity, and to protect users.
  - Solution providers must be able to handle larger flows of transactions; current number of transactions per second for existing crypto-currencies are several orders of magnitude below centralized networks’ rates.
  - Cybersecurity and resilience are crucial; blockchain code has been exploited in the Decentralized Autonomous Organization hack, and users face phishing and social engineering attacks. Distributed ledger technologies might be subject to collective action problems, game theory-based attacks, and attacks unique to distributed ledger and blockchain technologies.
  - Lower cost advantages might not be maintained; the cost advantages of the “proof-of-work” system might not be sustainable, and the suggested “proof-of-stake” has not had a long enough track record to be recognized as a viable solution.
- Source cited in box: He, et. al. (2016).

### Temporary public measures in the event of abrupt and comprehensive loss of CBRs
- In the event of a complete loss of CBRs by banks, consideration may be given to the use of public entities or centralized payments systems as temporary measures.
- Such an abrupt event would likely be sudden rather than gradual; mechanisms involving public sector entities can offer useful insights for responding to extreme circumstances (e.g., civil unrest).
- Possible regional initiatives: setting up regional payments arrangements; temporary mechanisms with foreign central banks in globally systemic countries to settle low risk transactions (contingent on foreign central banks’ interest); possible use of central bank CBRs to process payments on behalf of commercial banks’ clients.
- Design considerations and risks:
  - Legal constraints may prevent central banks from acting as counterparty in commercial transactions; these would need to be addressed.
  - Public entities attempting bundled transactions would likely face the same AML/CFT challenges as respondent and correspondent banks and could risk their own CBRs if undertaking transactions global banks categorize as high risk.
  - Any public intervention should be time-bound and limited, with exit strategies encouraging reestablishment of commercial CBRs in the medium and long term.
- Public sector intervention may be needed where categories of customers (such as NPOs and MTOs) are severely affected:
  - Possible establishment of a special ad-hoc temporary payment mechanism to facilitate payment transactions for specific categories of customers.
  - Example referenced: consideration of a Somali—U.K. Safer Corridor Pilot in 2013 to address banks’ AML/CFT concerns and assist Somali authorities to build a regulated financial sector; mobilization of the pilot was not required as remittances continued to flow.
- Box 7 — A Potential Temporary Public Response to the Flow of Remittances (summary):
  - Temporary mechanism could entail deposit of remittances into the recipient country’s government bank account in the origination country (central bank, treasury, or embassy bank account).
  - The origination-country bank would not transfer remittances; deposited funds would be used by the recipient government for local payments in the origin country while the recipient government pays out remittances to intended beneficiaries in the home country.
  - Preconditions: depositors’ trust in the recipient government’s integrity and capacity to distribute funds; discussion with the bank and regulator to ensure compliance with AML/CFT standards and applicable requirements.

### The Fund’s role and policy responses
- Staff will continue a multipronged approach to support member countries in coordination with the FSB, multilateral development banks and other stakeholders.
- Elements of the approach depend on the impact of CBR withdrawal in each country and include:
  - Facilitating international dialogue on regulatory expectations;
  - Enhancing data gathering efforts across the membership;
  - In countries where concentration in cross-border flows accentuates financial fragilities, Fund surveillance and FSAPs will identify drivers, monitor risks, and provide policy advice;
  - Tailored capacity development programs to address CBR withdrawal issues;
  - In extreme systemic loss of CBRs, supporting efforts to put in place preconditions for payment flows and frameworks for humanitarian assistance as needed.
- Staff commitments and actions:
  - Facilitate candid and constructive dialogue among parties to achieve practical responses via participation in FSB, FATF, and BCBS forums.
  - Engage regulators of correspondent banks to communicate regulatory expectations and provide guidance on banks’ voluntary remedial actions.
  - Encourage member countries to work closely with correspondent banks to promote greater transparency on decisions to terminate CBRs and provide sufficient time for respondent banks to find alternatives, notably for remittances.
  - Monitor industry initiatives for feasibility, cost, impact, integrity, and supervisory issues and bring together relevant stakeholders to develop emergency measures (including special payment corridors) where commercial banks risk losing all CBR relationships.
- Examples of Fund engagement and capacity development (Box 8 highlights):
  - Published a Staff Discussion Note on the issue in June 2016, highlighted by the Managing Director in a speech and a high-level conference at the 2016 Annual Meetings.
  - In surveillance, assessed macroeconomic and financial stability impact where withdrawal of CBRs is macro-critical; issued a note to staff to help country teams discuss these issues in Article IV consultations and guide data gathering.
  - FSAPs and assessments: Between 2012 and mid-2016, 87 FSAPs were completed across all regions among the Fund membership.
  - Technical assistance and training: Over the past four years, the Fund has provided technical assistance (TA) and training to approximately 170 countries to help strengthen supervisory and regulatory frameworks, including AML/CFT frameworks.
  - Active projects and missions: The Fund currently has 146 ongoing projects in 121 countries (including TA provided through Regional Technical Assistance Centers).
  - AML/CFT TA missions by region (number of FY12-16 missions, including from Long-Term Experts):
    - WHD: 161
    - AFR: 103
    - APD: 196
    - MCD: 161
    - EUR: 78
  - Total (FY12-16): 481 missions (AML/CFT TA).
  - The Fund contributes to AML/CFT evaluation efforts of the FATF and its regional bodies.
- Staff will use the Fund’s convening power to support emergency measures and stimulate coordination among stakeholders where needed.

### Data gathering and surveillance priorities
- Continued data-gathering efforts are necessary to enhance understanding of CBR withdrawal drivers and impacts.
- Follow-up analytical work has been agreed with authorities of the MENA and Sub-Saharan Africa regions to be carried out closely with the Arab Monetary Fund and the Association of African Central Banks.
- National authorities are encouraged to improve their own data collection, including by accessing SWIFT payment data.
- Recent Fund TA work using Angolan authorities’ own SWIFT CBR payment flow data and network analysis could be extended to other countries to better understand nature, scale and scope of CBR withdrawal.
- The Fund will continue monitoring risks via surveillance where the impact from loss in CBRs is considered macro-critical, taking into account relevance of remittances, trade financing or other CBR-channeled capital flows for macroeconomic and financial stability and potential impact on access to financial services.
- Surveillance can be discussed with currency union institutions to provide regional perspectives and enable accumulation of cross-country experience with policy options for advice based on best practices.

*Source: IMF staff.*

### Box 9. Operational Guidance on Inclusion of CBR Issues in Bilateral Surveillance

### 031617 - Box 9. Operational Guidance on Inclusion of CBR Issues in Bilateral Surveillance

### Operational guidance for Article IV consultations and bilateral surveillance
- Whenever issues arising from the withdrawal on CBRs rise to the level of macro-criticality, they should be discussed during the Article IV consultation and covered in the related staff report.
- Staff may also discuss CBR-related issues as part of policy advice where the member country agrees to discuss these issues on a voluntary basis.
- The country team should assess macro-criticality of CBR-related issues in all cases.
- During the mission:
  - The country team will discuss CBR-related issues with the authorities, as appropriate, with support from LEG/MCM.
  - When significant risks for domestic or balance of payments stability, or global stability are identified, or when there is scope for voluntary coverage, LEG/MCM staff will make available to the Article IV team a tailored background note on CBR-related issues in line with the findings of this Board Paper and will be ready to provide headquarter-based support during their mission.
  - The background note will include talking points, questions and other supporting material tailored to the member country’s circumstances for use in interactions with the authorities.
  - Should CBR-related issues be particularly complex or require specialized knowledge, LEG/MCM staff could potentially join the Article IV mission, subject to availability.
- Following the mission:
  - The staff report would include a discussion of the member country’s current access to CBRs, the pressure faced by these relationships and the actions being considered to mitigate the potential consequences.
  - These elements should be included in the policy discussion and in the staff appraisal.
  - To the extent that CBR-related risks could materially alter the baseline, these should be captured in the risk assessment matrix as appropriate.
  - Staff will provide advice on measures needed to prevent the loss of access to CBRs or to mitigate the fallout of such an event.

### Capacity development: country-level and regional approaches (paragraph 65)
- Anticipated increase in demand for capacity development activities by countries affected by the withdrawal of CBRs; within current budgetary envelope staff plans to deliver TA and training targeted to specific circumstances.
- Country-level CBR capacity development program (sequenced and targeted approach):
  - First step: a diagnostic module to identify the scale and scope of the problem and the relevant drivers specific to the requesting country.
  - Diagnostic module would include a data gathering component and the development of a country-specific action plan.
  - Based on identified drivers and TA priority needs, consideration could be given to include other technical assistance modules focusing on strengthening regulatory and supervisory frameworks and enhancing data collection (example: TA undertaken in Angola).
- Regional-level capacity development:
  - Deliver regional responses and initiatives where drivers are common across countries (example: economies of scale for smaller Caribbean countries).
  - Convene regional seminars and provide regional training involving authorities, financial institutions, correspondent banks and their regulators, in collaboration with other public sector TA providers including regional development banks.
  - Use Regional Technical Assistance Centers and Training Centers to deliver regional training.
  - Design a new training course (online or at centers) on issues related to CBRs withdrawal drawing on the Fund’s experiences to date.
  - The recently launched Caribbean Initiative is a pilot following this approach.

### Tail-risk scenarios and possible Fund engagement (paragraph 66)
- Surveillance and capacity development expected to be broadly sufficient across membership, but tail-risk scenarios could require deeper Fund engagement.
- Example tail-risk: a severe loss of CBRs stemming from a deeper-seated complex of policymaking challenges across a range of areas, implying significant macroeconomic impacts and difficulties in financing the country's balance of payments.
- In such a context a Fund-supported program may be considered to help restore external and domestic imbalances, within existing frameworks, including ensuring adequate safeguards in case of use of Fund resources.
- Measures on CBR withdrawal could be involved in programs if viewed:
  - (i) of critical importance for achieving the goals of the member’s program or for monitoring the implementation of the program; and
  - (ii) within the member’s control.
- Such program measures could be accompanied by advice and TA on AML/CFT to help restore CBRs or help prevent remaining CBR corridors from being cut off.

### Issues for Directors (paragraph 67)
- Do Directors support staff ongoing involvement on CBR issues when relevant in the context of surveillance and Fund-supported programs?
- Do Directors agree with staff analysis of the feasibility, impact, and challenges of policy responses and industry initiatives, and on the role of public sector in the event of complete loss of CBRs?
- Do Directors agree with a tailored, prioritized, and sequenced approach to addressing the withdrawal of CBRs, depending on the country specific context?
- Do Directors endorse staff’s proposals for future engagement with authorities, including through capacity development both at national and regional levels?

### Annex I — Channeling payments through the SWIFT network (key operational facts)
- Based on analysis of payment flows through SWIFT:
  - Use of bank-to-bank channels were 67 percent of total volume.
  - “On-us” payments carried out through a bank’s own branches accounted for 13 percent.
  - Payments settled via cross-border financial market infrastructures were 20 percent of the total (SWIFT, 2011).
- SWIFT message standards and common message types:
  - MT 103—Single customer transfer, which instructs a funds transfer;
  - MT 202—General financial institution transfer, which request the movement of funds between financial institutions except if the transfer is related to an underlying customer credit transfer that was sent with the cover method, in which case the MT 202 COV must be used;
  - MT 202 COV—General financial institution transfer, which requests the movement of funds between financial institutions, related to an underlying customer credit transfer that was sent with the cover method;
  - MT 300—Foreign exchange confirmation on agreement to buy and sell two currencies;
  - MT 700—Issuance of a documentary credit, indicating the terms and conditions.
- Two methods for channeling payments through SWIFT:
  - Serial method: MT 103 (or equivalent) travels through one or more intermediaries; payment information and settlement instruction travel together.
  - Cover method: MT 103 with payment information is sent directly through the SWIFT network from the originating bank to the receiving bank; settlement instruction (the cover payment) is sent via intermediary banks through the path of direct CBRs.
  - Both methods are used when an originating bank has no bilateral account relationship with the receiving bank; they can help fulfill AML/CFT and other regulatory requirements provided all relevant payment fields are accurately completed.
- Risk mitigation:
  - Analysis of payment messages can help mitigate risk from wire stripping (changing or removal of material information from wire payments).
  - Mitigation requires improvements in compliance culture, staff capacity to identify wire stripping, and internal processes and controls.

### Annex II — CBR loss in Pacific Islands and remittances concerns (selected survey findings)
- Fiji:
  - CBRs have remained broadly intact; main challenge is local banks' ability to generate sufficient transaction volumes.
  - Pricing and execution of money transfers have remained reasonable despite termination of relationships with remittance agents by the two major banks.
  - The cost of remittances to Fiji, especially from New Zealand, have increased since mid-2015.
- Kiribati:
  - No (relationships becoming more difficult); anecdotal evidence of increased compliance costs.
  - Money transfers: No; Repatriation of remittances: No.
- Marshall Islands:
  - The country’s sole domestic commercial bank is at risk of losing its U.S. CBRs.
  - Money transfers: No, however, the loss of the CBR will have strongly negative consequences as the MTO operators rely on the domestic bank for remittances.
  - Repatriation of remittances: No.
- Palau:
  - Loss of CBRs has not been an issue; three U.S. FDIC-insured banks conduct all foreign transactions.
  - Money transfers: No. Repatriation of remittances: No. The remittance sector is very small in Palau.
- Papua New Guinea:
  - Level of compliance to maintain CBRs is increasing annually; increased costs; some institutions lost CBRs or imposed stringent requirements on remittance service providers.
  - Money transfers mainly done by commercial banks and authorized dealers and are becoming costly due to compliance requirements.
  - The amount of remittances coming into PNG would be less than outbound payments and not considered costly.
- Samoa:
  - CBRs largely maintained but increasingly at risk; Non-compliance with FATCA led to loss of a CBR for one local bank.
  - Environment for MTOs more difficult with account closures and complex requirements.
  - Yes, the cost of remittance has increased recently.
- Solomon Islands:
  - Number of CBRs has declined; a major regional bank exited and was subsumed by a local bank, increasing CBR concentration.
  - A few small MTOs have ceased operations.
  - The closure of some MTOs is beginning to have an impact on the cost of sending remittances.
- Tonga:
  - Establishing CBRs with U.S. banks has become more difficult; one Australian bank agreed to open USD correspondent bank accounts for local banks.
  - Most bank accounts of money remitters' agents in Australia and New Zealand have been closed.
  - The cost of remittances from New Zealand to Tonga has increased.
- Tuvalu:
  - NBT has maintained key working international CBRs, but access to some currency clearing services is complicated.
  - Money transfers: Yes; Repatriation of remittances: No.
- Vanuatu:
  - Loss of CBRs has not emerged as a serious issue, but inclusion in the FATF list may pose difficulties.
  - Cost of money transfers increased until ANZ lowered the cost; costs remain high due to receiving bank fees.
  - The repatriation of remittances to Vanuatu has been costly for seasonal workers and those providing financial assistance to families in Vanuatu.
- Note: "1/ Refers to all money transfers, including trade-related transfers and remittances."

### Annex III — CBR and Remittances: Country Vulnerability Matrix (high-level notes)
- Figure maps CBR loss and remittances vulnerabilities using data from WB Remittance Cost Database and staff calculations.
- Cost of remittance numbers reflect fixed sample across years, in percent of transferred amount.
- Average cost of remittance refers to transfer of USD 200 in less than an hour, weighted across source by bilateral remittances.
- Red denotes vulnerabilities above cross country averages based on the first five data columns.
- Examples of country-specific indicators included in the matrix (selected entries, preserving original numeric values):
  - Gambia, The: CBR change series includes -18%, 18%, 28%, 20%, 10%, 12.4, 11.5, 14.0, 13.9, 13.5, 18.5.
  - Jamaica: -5%, 17%, 9%, 17%, 22%, 7.6, 7.4, 7.9, 8.0, 8.6, 8.1.
  - Jordan: -11%, 9%, 39%, 14%, 38%, 5.9, 4.7, 4.9, 4.7, 5.2, 5.1.
  - Lebanon: -9%, 4%, 12%, 15%, 55%, 9.0, 8.8, 9.4, 9.4, 9.1, 9.2.
  - Tonga (in matrix): -8%, -26%, 0%, 28%, 37%, 11.2, 10.6, 9.3, 10.6, 7.9, 8.4.
  - Vanuatu (in matrix): -4%, 74%, 18%, 4%, 42%, 12.6, 9.0, 11.2, 12.8, 15.7, 16.8.
- Matrix columns/indicators include: Change in number of active CBRs, Change in Cost of remittances, Change in Remittance value, Remittances / GDP, Access to financial services, Cost of Remittances (percent, transfer of USD 200 in less than an hour).
- Red denotes vulnerabilities above cross country averages based on the first five data columns.

*Source: IMF Staff.*

### Annex IV. Country Examples and Caribbean Initiative

### Annex IV. Country Examples and Caribbean Initiative

### Testing a tailored, prioritized, and sequenced approach
- Fund staff are testing a tailored, prioritized, and sequenced approach to developing responses in some countries and regions affected by CBR withdrawal.
- Staff have provided advice to countries, including Angola and Samoa, to better understand the nature, scale, and scope of CBR withdrawal, to identify specific drivers, and to develop targeted and prioritized responses.
- Fund staff have recently launched a Caribbean Initiative to develop regional responses to the withdrawal of CBRs in the Caribbean region, with a first event which took place on February 22, 2017.
- A similar approach could be followed in other countries such as Belize.

### The Withdrawal of CBRs in Angola
- Drivers and context:
  - The decision to terminate CBRs in Angola was likely driven by different factors operating concurrently (Angola, 2016, staff report).
  - Retrenchment by global banks since the GFC led to a reconsideration of the geographical reach of their business models in light of changed global macroeconomic conditions, regulatory demands, banks’ own risk management requirements and the perception of Angola as a higher risk country.
- Mitigating developments:
  - Angolan respondent banks had found alternative payment channels, including greater use of nested CBRs in USD through intermediary banks in countries such as Portugal and South Africa.
  - There had been a much greater use of euro CBRs for payment flows out of Angola.
- Staff advice to Angolan authorities:
  - Continue strengthening the supervisory and regulatory prudential and AML/CFT framework to address existing legal deficiencies, including with regard to preventive measures for politically exposed persons.
  - Undertake a risk-based supervision of financial institutions.
  - Enhance the understanding between global correspondent and Angolan respondent banks on information needs under a risk-based approach.
- Ongoing actions:
  - Angolan authorities engaged in high-level dialogue with home authorities of global correspondent banks to better understand regulatory expectations around CBRs.
  - Work underway to strengthen supervisory and regulatory prudential frameworks and enforcement in line with regional and global peers.
  - Open public-private sector dialogue through local roundtables, workshops and regional groups.
  - Central bank activities include a regular data questionnaire and analysis of CBR payment data.
  - The Fund provided TA to better understand the nature, scale, and scope of CBR withdrawal and to help fine-tune policy responses.

### The Withdrawal of CBRs in the Asia and Pacific Region (Samoa and other small states)
- Survey and observed impacts:
  - Challenges for small states highlighted in a survey conducted in June–July 2016 (see Annex II).
  - In Samoa, Tonga, and Fiji, closure of MTO accounts at home and in Australia and New Zealand were occurring with increased frequency.
  - In Kiribati, Marshall Islands, Samoa, Tonga, and Tuvalu, survey responses indicated that CBRs had been withdrawn or were increasingly strained, primarily manifesting in the remittance sector and rendering the remittance system increasingly fragile.
- Contributing factors:
  - Weaknesses in AML/CFT compliance in the context of high levels of remittances, and non-compliance with the U.S. Foreign Account Tax Compliance Act (FATCA), contributed to banks’ decisions to withdraw CBRs.
  - MTOs’ compliance with customer due diligence requirements is weak and hampered by the lack of availability of formal means of identification in many small states that do not issue national identification documents.
- Fund TA and pilot in Samoa — five key interventions discussed:
  - Develop a national strategy for AML/CFT and considerably increase the number of AML/CFT specialists throughout the financial and legal system to improve compliance, including updating legislation, implementing the Asia/Pacific Group on Money Laundering mutual evaluation Assessment recommendations, and encouraging active engagement with key stakeholders.
  - Upgrade the sanctions regime; implement a sanctions framework and have the Financial Intelligence Unit (FIU) subscribe to an AML/CFT utility to disseminate updates on sanctioned individuals and corporations to the financial sector, including the Samoa International Finance Authority and MTOs.
  - Ensure compliance with FATCA through negotiation of an intergovernmental agreement (IGA) with the U.S. Treasury on FATCA implementation.
  - Establish a national database—a KYC utility—to enhance compliance and reduce costs; the proposed KYC utility to be hosted by the FIU, which should have the necessary legal authority to collect data, including KYC data on senders and receivers of remittances.
  - Document and emphasize the limited links between the MTO remittance channel and the off-shore financial sector and other companies to help ease correspondent banks’ concerns over the MTO remittances channel.
- Potential regional applicability:
  - Collecting KYC data on individuals receiving or sending remittances through MTOs, including KYC data on banks’ customers and beneficial ownership information for companies, may be possible given the relatively small population sizes of the islands.
  - A utility within the FIUs, which are already established in many of these countries, could help address correspondent banks’ concerns about AML/CFT compliance and privacy protection.

### The Withdrawal of CBRs in Belize
- Scope and impact:
  - Major global banks terminated around 22 CBR accounts (out of 31) in 9 of Belize’s 11 commercial and off-shore banks in 2015 and 2016.
  - Only a large Canadian-owned bank (19 percent of the system’s assets) had not lost any CBRs.
  - The Central Bank of Belize had also lost three of its five CBRs in the same period, including one that was used to process selected wires for banks that lost CBRs.
  - As a result, transaction costs and processing times had increased substantially.
- Containment measures and limitations:
  - The central bank assisted in temporary processing cash letters and wires using its own CBRs.
  - All domestic banks had been able to replace some of the lost CBRs, but some of these new CBRs were apparently temporary solutions with risks of additional CBR losses remaining.
- Recommended measures to reduce further loss:
  - More effective implementation of the AML/CFT framework by the authorities.
  - Stricter licensing and robust prudential requirements.
  - Adoption by respondent banks of more rigorous customer due diligence and transaction monitoring systems to facilitate information sharing with correspondent banks in a timely manner.
  - Closer engagement between correspondent and respondent banks, with correspondent banks being more transparent about their customer due diligence expectations and providing TA and training.
  - Consolidation of transactional traffic through fewer correspondent banks to generate sufficient volume.

### IMF Caribbean Initiative to Address the Withdrawal of CBRs
- Initiative launch and events:
  - In February 2017, Fund staff organized a closed-door roundtable bringing together global correspondent and respondent banks, and other stakeholders to discuss practical and actionable regional solutions to CBR withdrawal in the Caribbean.
  - The roundtable marked the launch of a collaborative initiative between the Caribbean and the IMF to develop regional responses to address CBR withdrawal in the region.
  - Two additional regional events over the next 12 to 18 months are contemplated under the initiative to further develop regional solutions and take stock of their implementation.
- Key findings from the roundtable:
  - Key drivers of withdrawal relate to concerns regarding respondent banks’ ability to manage risks, profitability, the general business and regulatory environment and meeting regulatory expectations.
  - Strengthening respondent banks’ capacity to manage risks was identified as an immediate priority.
- Short- and medium-term solutions discussed:
  - Enhanced communication among banks to foster a common understanding of risks and how to manage them.
  - Provision of targeted training and TA to strengthen respondent banks’ capacity by correspondent banks and the CDB.
  - Automation of due diligence processes by small respondent banks, subject to resource availability.
  - Consideration of KYC utilities, LEI, Fintech, and, in some instances, volume-based pricing and bundling of services — seen as useful but limited in impact and time-consuming to implement.
  - Switching to CBRs in other currencies deemed irrelevant in a region trading primarily in USD.
  - Insurance mechanisms considered nonviable to address reputational or enforcement risks.
- Deeper solutions if capacity remains weak:
  - Consolidation of transactional traffic and reconsideration of some high risk business lines viewed as solutions with significant potential impact.
  - Downstreaming: correspondent bank relationship with an intermediary bank which has relationships with other banks; intermediary bank should support robust compliance risk management programs and ensure transparency and flow of information to the correspondent bank.
  - Consolidation of small-sized respondent banks could help ensure sufficient transaction flows and economies of scale for due diligence, but may not address country-level regulatory concerns and could increase costs with implications for financial inclusion.
  - Respondent banks unable to manage risks associated with some high-risk businesses or services (e.g., online gaming and off-shore businesses) may need to terminate those businesses or services, potentially transferring them to banks with more robust risk management and control systems.
- Regional-level solutions and views:
  - Consolidation of AML/CFT supervision and effective implementation of standardized AML/CFT regulations seen as key longer-term solutions to provide a level playing field.
  - Focus on strengthening governance arrangements and capacity of regional supervisors to ensure effective implementation of those regulations.
  - Mixed views on establishing a regional correspondent bank in the U.S. and on setting up a regional information repository, particularly since these measures would not necessarily address underlying risk issues.
- Emergency and ad hoc measures:
  - Use of central banks’ own CBRs seen as the most effective emergency solution but could create significant moral hazard and reputational risks.
  - Mixed views on establishing regional payment arrangements, special payment corridors for certain categories of customers, or subsidizing compliance costs.
- Role of the IMF and next steps:
  - Participants strongly encouraged the Fund to continue to use its convening power to facilitate dialogue among all stakeholders and to provide TA and training in collaboration with regional development banks.
  - Staff plans to hold the second event later this year to follow up on implementation of the concrete solutions identified by participants.
  - Staff will continue to provide AML/CFT TA and training at the domestic level and will also provide training to the CDB, leveraging the Fund’s technical assistance center in the Caribbean.
  - Training to officials of the CDB has been approved by the Board Decision DEC/A/13710.

*Annex IV. Country Examples and Caribbean Initiative*

### References

### References

### IMF and IMF-affiliated staff notes, reports, and working papers
- Alwazir, Jihad, Fazurin Jamaludin, Dongyeol Lee, Niamh Sheridan, and Patrizia Tumbarello, “Challenges in Correspondent Banking in the Small States of the Pacific,” (IMF Working paper), International Monetary Fund, Washington. http://www.imf.org/en/Publications/WP/Issues/2017/04/07/Challenges-in-Correspondent-Banking-in-the-Small-States-of-the-Pacific-44809
- Erbenová, Michaela, Yan Liu, Nadim Kyriakos-Saad, Alejandro López-Mejía, Giancarlo Gasha, Emmanuel Mathias, Mohamed Norat, Francisca Fernando, and Yasmin Almeida, 2016, “The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action,” IMF Staff Discussion Note 16/06, International Monetary Fund, Washington. https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf
- He, Dong, Karl Habermeier, Ross Leckow, Vikram Haksar, Yasmin Almeida, Mikari Kashima, Nadim Kyriakos-Saad, Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, and Concepcion Verdugo-Yepes, 2016, “Virtual Currencies and Beyond: Initial Considerations,” IMF Staff Discussion Note 16/03, International Monetary Fund, Washington. https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf
- International Monetary Fund (IMF), 2009, “International Transactions in Remittances: Guide for Compilers and Users,” Washington. http://www.imf.org/external/np/sta/bop/2008/rcg/pdf/guide.pdf
- International Monetary Fund (IMF), 2015, “International Banking after the Crisis: Increasingly Local and Safer?” Global Financial Stability Report, Chapter 2, Washington, April. https://www.imf.org/External/Pubs/FT/GFSR/2015/01/pdf/c2.pdf
- International Monetary Fund (IMF), and Union of Arab Banks, 2015, “The Impact of De-Risking on MENA Banks,” Joint Survey, Washington. http://www.nmta.us/assets/docs/DOBS/the%20impact%20of%20derisking%20on%20the%20mena%20region.pdf
- International Monetary Fund (IMF), 2016, “Financial Integration in Latin America,” IMF Staff Report, Washington. www.imf.org/external/np/pp/eng/2016/030416.pdf
- Khiaonarong, Tanai, 2014, “Oversight Issues in Mobile Payment,” IMF Working paper 14/123, International Monetary Fund, Washington. https://www.imf.org/external/pubs/ft/wp/2014/wp14123.pdf

### Bank for International Settlements, CPMI, and supervisory bodies
- Basel Committee on Banking Supervision, 2012 “Core Principles for Effective Banking Supervision,” Basel. http://www.bis.org/publ/bcbs230.pdf
- Basel Committee on Banking Supervision, 2016, “Revised on Correspondent Banking,” Consultative Report, Basel. http://www.bis.org/bcbs/publ/d389.htm
- Committee on Payments and Market Infrastructures (CPMI), 2014, “Non-Banks in Retail Payments,” Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d118.htm
- Committee on Payments and Market Infrastructures (CPMI), 2015, “Digital Currencies,” Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d137.htm
- Committee on Payments and Market Infrastructures (CPMI), 2016, “Correspondent Banking,” Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d147.pdf
- Committee on Payments and Market Infrastructures (CPMI) and Technical Committee of the International Organization of Securities Commissions (IOSCO), 2016, “Guidance on Cyber Resilience for Financial Market Infrastructures,” Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d146.pdf

### International organizations, standards, and policy guidance
- Arab Monetary Fund, International Monetary Fund, World Bank Group, 2016 “Withdrawal of Correspondent Banking Relationships (CBRs) in the Arab Region.” Abu Dhabi. https://www.imf.org/en/News/Articles/2016/09/02/PR16392-AMF-IMF-WB-launch-Report-withdrawal-of-Correspondent-Banking-Relationships-in-Arab-region
- Financial Action Task Force (FATF), 2012, “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation,” The FATF Recommendations, Paris. http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf
- Financial Action Task Force (FATF), 2016, “Guidance on correspondent banking.” http://www.fatf-gafi.org/publications/fatfrecommendations/documents/correspondent-banking-services.html
- Financial Stability Board, 2015, “Report to the G20 on Actions Taken to Assess and Address the Decline in Correspondent Banking,” Basel. http://www.fsb.org/2015/11/report-to-the-g20-on-actions-taken-to-assess-and-address-the-decline-in-correspondent-banking
- Wolfsberg Group. 2014, “Wolfsberg Anti-Money Laundering Principles for Correspondent Banking.” http://www.wolfsberg-principles.com/pdf/standards/Wolfsberg-Correspondent-Banking-Principles-2014.pdf
- World Trade Organization (WTO), 1994, General Agreement on Trade in Services. https://www.wto.org/english/docs_e/legal_e/26-gats.pdf

### Regional, national, and sectoral reports and guidance
- Association of Supervisors of Banks of the Americas (ASBA), 2016, “Impact of Compliance/Regulatory Risk in Financial Activity (‘De-Risking’) in the Americas,” Mexico City. http://www.asbaweb.org/E-News/enews-44/Docs/banksup/02banksup.pdf
- Boyce, Toussant, 2016, “Strategic Solutions to “De-Risking” and the Decline of Correspondent Banking Relationships,” Caribbean Development Bank Draft Discussion Paper, St. Michael, Barbados. http://www.caribank.org/wp-content/uploads/2017/03/DiscussionPaper_Solutions-De-RiskingCBRs_May2016.pdf
- European Central Bank (ECB), 2015, “Ninth Survey on Correspondent Banking in Euro,” Frankfurt. https://www.ecb.europa.eu/pub/pdf/other/surveycorrespondentbankingineuro201502.en.pdf
- European Commission, 2013, Proposal for a Directive of the European Parliament and of the Council Concerning Measures to Ensure a High Common Level of Network and Information Security Across the Union,” Brussels. http://eeas.europa.eu/policies/eu-cyber-security/cybsec_directive_en.pdf
- Financial Conduct Authority (FCA), 2016, “De-risking: Managing Money-Laundering Risks.” https://www.fca.org.uk/firms/money-laundering/derisking-managing-risk
- Financial Conduct Authority (FCA), 2015 “Financial crime: a guide for firms.” https://www.fca.org.uk/firms/financial-crime
- New York State Department of Financial Services (DFS), 2016, “Cybersecurity Requirements for Financial Services Companies.” http://www.dfs.ny.gov/legal/regulations/proposed/rp500t.pdf
- Gardineer, Grovetta, 2016, “Risk Management Guidance on Foreign Correspondent Banking,” Washington. https://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-32.html
- U.S. Treasury, et.al, 2016, “Joint Fact Sheet on Foreign Correspondent Banking.” https://www.treasury.gov/press-center/press-releases/Documents/Foreign%20Correspondent%20Banking%20Fact%20Sheet.pdf
- Erbenová et al., 2016 (see IMF Staff Discussion Note 16/06 entry above)

### Research papers, working papers, and academic analyses
- Artingstall, David, Nick Dove, John Howell, and Michael Levi, 2016, “Drivers and Impacts of Derisking: A Study of Representative Views and Data in the U.K. by John Howell & Co. Ltd. for the Financial Conduct Authority,” Shamley Green, Surrey, United Kingdom. https://www.fca.org.uk/your-fca/documents/research/drivers-impacts-of-derisking
- Cook, Samantha and Kimmo Soramäki, 2014, “The Global Network of Payment Flows, Swift Institute Working Paper No. 2012-006, The Swift Institute. https://www.swiftinstitute.org/wp-content/uploads/2014/09/SWIFT-Institute-Working-Paper-No.-2012-006-Network-Analysis-of-Global-Payment-Flows_v5-FINAL.pdf
- Lipis, Leo and Colin Adams (2014), “Cross Border Low Value Payments and Regional Integration: Enablers and Disablers,” Swift Institute Working Paper No. 2014-005, The Swift Institute. https://www.swiftinstitute.org/wp-content/uploads/2014/11/SWIFT-Institute-Working-Paper-No-2014-005-Cross-border-LVP-Regional-Integration-Lipis_v4-FINAL.pdf
- Niepmann, Friederike and Tim Schmidt-Eisenlohr, 2013, “International trade, Risk, and the Role of Banks,” Staff Report No. 633, Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr633.pdf
- Sy, Amadou and Tao Wang, (2016), “De-risking, Reminbi Internationalization, and Regional Integration: Trends in African Payment Flows, Africa Growth Initiative at Brookings.” https://www.brookings.edu/wp-content/uploads/2016/09/global_20160908_african_payment_flows.pdf
- Niepmann & Schmidt-Eisenlohr, 2013 (see Federal Reserve Bank of New York Staff Report No. 633 entry above)

### Industry, market, and technical notes
- Depository Trust and Clearing Corporation (DTCC), 2016, “Systemic Risk Barometer Results Overview—2016 Q3.” http://www.dtcc.com/~/media/Files/Downloads/In%20the%20News/12712-Systemic-Risk-Glossy-Q3-2016-rd6.pdf?la=en
- International Payments Framework Association (IPFA), 2011, “Riding the Wave of Global Transaction Services and Payment Systems.” http://neu.ipf-a.org/wp-content/uploads/ipfa_report_nov011.pdf
- KPMG, 2014, “Global Anti-Money Laundering Survey 2014,” Washington. http://www.kpmg-institutes.com/institutes/advisory-institute/articles/2014/02/anti-money-laundering-survey-2014.html
- Moody’s Investor Service, 2016a, “Moody’s Downgrades Bantrab’s Rating; Under Review for further Downgrade,” Global Credit Research, 24 June 2016. https://www.moodys.com/research/Moodys-Downgrades-Bantrabs-Ratings-Under-Review-for-Further-Downgrade--PR_350981
- Moody’s Investor Service 2016b, “Moody's changes the outlook on Guatemala's Banco Industrial to stable from negative; Affirms Ratings,” Global Credit Research, 5 July 2016. https://www.moodys.com/research/Moodys-changes-the-outlook-on-Guatemalas-Banco-Industrial-to-stable--PR_351396
- Poon, Joseph and Thaddeus Dryja, 2016, “The Bitcoin Lightning Network: Scalable Off-chain Instant Payments.” https://lightning.network/lightning-network-paper.pdf
- FinCEN. 2005. “Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States.” Financial Crimes Enforcement Network Guidance, Washington. https://www.fincen.gov/statutes_regs/guidance/html/guidance04262005.html
- Security Council Report, 2013, “UN Sanctions,” Special Research Report 3, New York. http://www.securitycouncilreport.org/special-research-report/un-sanctions.php
- Eckert, Sue, with Kay Guinane and Andrea Hall, 2017, “Financial Access for U.S. NonProfits,” Charity and Security Network, Washington, DC. http://www.charityandsecurity.org/FinAccessReport
- Sheets, Nathan, 2015, Remarks at the Center for Global Development, U.S. Treasury Department, Washington, November 12. https://www.treasury.gov/press-center/press-releases/Pages/jl0264.aspx

### World Bank and other development bank outputs
- World Bank, 2015a, “Withdrawal from Correspondent Banking: Where, Why, and What to do About It,” Working Paper 101098, Washington. http://documents.worldbank.org/curated/en/113021467990964789/Withdraw-from-correspondent-banking-where-why-and-what-to-do-about-it
- World Bank, 2015b, “Report on the G20 Survey on De-Risking Activities in the Remittance Market,” Working Paper 101071, Washington. http://documents.worldbank.org/curated/en/2015/11/25478384/report-g20-survey-de-risking-activities-remittance-market

*Source: 031617 - References*

---


_Source: https://www.imf.org/-/media/files/publications/pp/031617.pdf_