## _sdn1606

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### EXECUTIVE SUMMARY: Key findings and framing
- Correspondent banking relationships (CBRs) enabling domestic and cross-border payments have been terminated in some jurisdictions following the global financial crisis.
- Recent reductions in CBRs have been reported by several countries, with pressure associated with restricted access to financial services for certain customer categories, business lines, jurisdictions or regions.
- Survey and other evidence indicates smaller emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europe and the Pacific as well as countries under sanctions may be the most affected.
- Individual banks’ withdrawal decisions typically reflect cost-benefit analyses shaped by:
  - re-evaluation of business models in the new macroeconomic environment;
  - changes in the regulatory and enforcement landscape, notably more rigorous prudential requirements, economic and trade sanctions, anti-money laundering and combating the financing of terrorism (AML/CFT) and tax transparency.
- Other contributing factors: unclear regulatory expectations, risks that cannot be mitigated, and legal impediments to cross-border information sharing.
- While withdrawal has reached a critical level in some affected countries with potential systemic impact if unaddressed, macroeconomic consequences have not been identified so far at a global level.
- Current limited economic consequences partly reflect affected banks’ abilities to rely on other CBRs, find replacements, or use alternative means to transfer funds.
- Coordinated public-private efforts are called for: enhanced understanding, improved data collection, continued dialogue, and timely implementation of the Financial Stability Board’s 2015 action plan endorsed by the G20 Summit.

### I. INTRODUCTION: scope and purpose
- Multiple emerging markets and developing economies have reported reductions in correspondent banking services; recent manifestations involve large-scale CBR withdrawals.
- Understanding trends requires:
  - recognizing banks’ evolving business models and the broader decline in cross-border lending since the global financial crisis;
  - analyzing evolving regulatory expectations and enforcement;
  - distinguishing wholesale CBR withdrawals from case-by-case terminations.
- Continued pressure could disrupt financial services and cross-border money flows, potentially excluding certain customer categories (e.g., Money or Value Transfer Services and Non-Profit Organizations).
- The Staff Discussion Note comprises six sections: evidence and consequences; drivers; international responses; IMF role; and conclusions on mitigation steps.

### II. EVIDENCE AND CONSEQUENCES: observed patterns and impacts
- Core functions affected: domestic and cross-border payments, trade finance, remittances, cash clearing, liquidity management, and short-term borrowing/investment.
- Observed trends since the global financial crisis:
  - cutbacks in the number of CBRs;
  - scaling back of higher-risk services (e.g., nested correspondent banking, payable-through accounts);
  - growing market concentration;
  - increasing costs;
  - cutbacks in specific foreign currencies, particularly U.S. dollars (CPMI 2015a).
- Geographic and sectoral evidence:
  - Surveys (World Bank 2015a/2015b; IMF–UAB 2015; ASBA 2015) indicate smaller jurisdictions in Africa, the Caribbean, Central Asia, and Europe most affected.
  - Caribbean jurisdictions reported particular pressures; Pacific islands and small states affected, undermining financial inclusion.
  - Africa examples: Liberia (CBR withdrawal), Angola (banknote supply issues).
  - Botswana: correspondent banks closed central-bank accounts over AML/CFT compliance concerns.
  - Pressure also seen in larger economies in Latin America and Asia (including Mexico and the Philippines).
  - Countries under economic and trade sanctions in the Middle East and North Africa are most affected.
- Affected customers and services:
  - Most affected: Money or Value Transfer Services (MVTS), small and medium-sized exporters, and small and medium-sized domestic banks.
  - Services particularly affected: international wire transfers, clearing and settlement services, and trade finance (World Bank 2015b).
  - In jurisdictions with sizable Non-Profit Organization activity (for example, Somalia, West Bank and Gaza), CBR withdrawal could affect growth, poverty reduction, and security.
  - Increased concentration could push activities to the informal sector, raising transparency concerns.
- Adaptations and costs:
  - Some institutions relied on remaining CBRs, found replacements, or used other transfer methods.
  - Maintaining or obtaining CBRs has incurred costs: newly imposed minimum activity thresholds; higher costs (often due to due diligence) passed to consumers; pressure on respondent banks to limit exposure to certain customer categories.

### III. DRIVERS OF THE WITHDRAWAL OF CBRs: principal forces
- Primary drivers:
  - Re-evaluation of bank business models in the post-crisis macroeconomic environment.
  - Regulatory obligations and enhanced enforcement, including more rigorous prudential requirements, sanctions, AML/CFT, and tax transparency measures that increase perceived risk and compliance costs.
- These drivers shape banks’ risk and reputational cost perceptions; relative significance varies by case.

### IV. ADDRESSING THE WITHDRAWAL OF CBRs: policy responses and industry actions
- Key public and private sector responses identified:
  - Home authorities of global banks should communicate regulatory expectations clearly.
  - Affected countries should strengthen regulatory and supervisory frameworks to meet relevant international standards, supported by technical assistance where needed.
  - Clarifying standards, including on AML/CFT, could promote a baseline for regulatory expectations.
  - Industry initiatives could facilitate customer due diligence and lower compliance costs.
  - In countries facing severe loss of CBRs and diminishing access to the global financial system, public sector options may include temporary mechanisms such as regional arrangements or public-backed vehicles to provide payment clearing services.
- The Financial Stability Board’s 2015 action plan endorsed by the G20 Summit is a critical framework for timely action.

### V. THE ROLE OF THE IMF: support and engagement
- IMF staff support includes surveillance and technical assistance to promote financial inclusion and financial stability.
- Activities: bilateral surveillance, Article IV consultations, FSAPs, coordination with FSB, World Bank, G20, FATF, Arab Monetary Fund, Union of Arab Banks, CPMI, and Caribbean Task Force.
- Data-gathering and follow-up analytical work planned with Arab Monetary Fund and Association of African Central Banks.

### VI. THE WAY FORWARD: priorities
- Priorities:
  - Enhanced understanding of scope, scale, and implications of CBR withdrawal.
  - Improved data collection and continued stakeholder dialogue.
  - Timely implementation of the FSB’s 2015 action plan.
  - Clarification of regulatory expectations and standards, including AML/CFT.
  - Pursuit of industry initiatives to reduce compliance costs and facilitate due diligence.
  - Consideration of public-sector contingency mechanisms where market solutions are insufficient.

### SURVEYS AND GLOBAL BANK RESPONSES: evidence and key statistics
- About 55 percent of banking authorities reported a decline in CBRs.
- 75 percent of large global banks reported they had withdrawn from CBRs.
- 60 percent of local banks reported a decline in CBRs.
- Product impacts reported by authorities (percent reporting impact): International Wire Transfers 80, Clearing and Settlement 47, Check Clearing 39, Trade Finance 36, Cash Management Services 34, Investment Services 32, FX Services 29, Structured Finance/Foreign Investments 15, Lending 12.
- Client impacts reported by local banks (percent reporting impact): MVTS and Other Remittance Companies 67, Small and Medium Exporters 60, Small and Medium Domestic Banks 56, Money Exchange Houses 48, Financial Institutions 42, Politically Exposed Persons 26, Importers 33, Corporate Clients 35.
- Regional and country cases:
  - Caribbean: at least 16 banks across five countries had lost all or some CBRs as of May 2016.
  - Belize: only two of nine domestic and international banks (representing 27 percent of the banking system’s assets at end-March 2016) maintained CBRs with full banking services; Central Bank of Belize lost two CBRs.
  - The Bahamas: five financial institutions (about 19 percent of banking system assets) lost one or more CBRs.
  - Pacific small states: remittances can amount to one fifth of GDP in some states; remittance source shares for Pacific small states: Australia 26%, New Zealand 26%, U.S. 26%, Rest of the World 22%.
  - Liberia: 36 out of 75 CBRs were terminated between 2013 and mid-2016; one major bank indicated a cost of US$ 150 per check; one major Western bank severed its euro CBR with the Central Bank of Liberia in March 2014.
  - Angola: the only supplier of U.S. dollar bank notes discontinued that service in December 2015; only two Angolan banks have direct access to U.S. dollar CBRs after withdrawals.
  - Guinea: some 20 accounts of the central bank with seven foreign banks were closed since 2009, concentrated during 2013-15.
- Remittances and regional figures:
  - Officially recorded remittances to developing countries amounted to US$ 431.6 billion in 2015.
  - Global remittance growth was 0.4 percent in 2015.
  - Remittances to MENA contracted by 0.9 percent in 2015, compared with 4 percent growth in 2014.
  - Remittance flows to Europe and Central Asia plummeted by 20.3 percent in 2015.
  - Somalia: 40 percent of households rely on remittances.
  - Samoa: remittance inflows amount to 20 percent of GDP.
  - Philippines: 84 accounts among 32 Philippine remittance providers were closed by 33 correspondent banks in 13 major remittance-sending countries.

### DRIVERS, ENFORCEMENT, AND REGULATORY UNCERTAINTY
- Drivers cited by global correspondents and authorities:
  - Increased compliance costs and AML/CFT concerns.
  - Changes in correspondent banks’ risk appetite.
  - Low transaction volumes and perceived lack of profitability.
  - Presence of offshore sectors or concerns about supervision and legal frameworks.
  - Inclusion of higher-risk customer categories (MVTS, cash intensive firms, PEPs).
- Enforcement landscape:
  - Customer due diligence-related fines account for approximately 16 percent of total misconduct costs (Figure 4 referenced).
  - Out of 24 fines of more than US$ 100 million, all but one originate in the United States.
  - Examples of major enforcement outcomes: BNP Paribas US$ 8.9 billion; JP Morgan US$ 2.5 billion; Credit Suisse US$ 2.6 billion.
  - Trends: number of enforcement actions has recently decreased; increased use of Non-Prosecution Agreements and Deferred Prosecution Agreements.
  - Example: HSBC exited 109 correspondent relationships in the context of Deferred Prosecution Agreement negotiations.
- Regulatory communication and uncertainty:
  - Lack of clarity on scope of customer due diligence—especially on whether “Know Your Customer’s Customer” is required—can drive termination of CBRs.
  - Data protection and privacy laws can hinder cross-border information sharing and prevent effective customer due diligence.
  - FATF clarifications to date: “de-risking” defined as wholesale termination without accounting for risk or mitigation; FATF standard does not require a “Know Your Customers’ Customer” approach as a matter of course; FATF cautioned that “de-risking” could undermine AML/CFT efforts; FATF is expected to publish guidance on CBRs in October 2016.

### POLICY-RELEVANT OBSERVATIONS AND RECOMMENDATIONS
- Four broad areas for mitigation:
  - (i) Clarify regulatory expectations and address legal conflicts and impediments.
  - (ii) Strengthen regulation and supervision in line with international standards, including capacity development.
  - (iii) Promote industry initiatives to mitigate compliance costs.
  - (iv) Develop contingency plans to address the risk of complete loss of CBRs in certain jurisdictions.
- Specific measures to clarify regulatory expectations:
  - Greater outreach and education by home supervisors of global banks, including continued dialogue and improved information flows between home regulators and affected-country supervisors.
  - FATF guidance and clarifications (including October 2016 guidance on CBRs) to reduce precautionary behavior.
- Strengthening regulatory and supervisory frameworks:
  - Enhance compliance with International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation (FATF Recommendations) and Basel Core Principles.
  - Increase exchange of beneficial ownership information and cooperation among national supervisors; harmonize regulatory frameworks and facilitate cross-border information sharing.
  - Regulation and oversight of MVTS and Non-Profit Organizations regarding AML/CFT to help them obtain and maintain access to banking services.
  - Supervisory innovation examples: central bank of Somalia delegated temporary supervision of MVTS to a trusted agent (with World Bank assistance).
- Industry and market-based measures:
  - Use of “Know Your Customer” utilities, promotion of the Legal Entity Identifier (LEI), review of payment message formats, and centralized databases on identities and transactions.
  - Bundling banking products with CBRs to spread fixed compliance costs; differentiating and increasing pricing of CBRs across countries and respondent banks.
  - Consideration of innovative money transfer start-ups, virtual currencies, and blockchain, while recognizing scaling and prudential/regulatory needs.
- Contingency planning and public mechanisms:
  - Contingency plans should include enhanced communication with home authorities, mapping legal/regulatory changes, and assessing benefits/costs/risks of public or centralized payment solutions.
  - Examples of public or coordinated projects:
    - United States: Federal Reserve of Atlanta’s FedGlobal ACH arrangements with compliance and monitoring safeguards.
    - New Zealand–Pacific Remittance Project: reduced remittance costs from 15–25 percent to about 7 percent of transaction value.
    - U.K.–Somalia Safer Corridor Pilot: milestones included AML/CFT legislation and establishment of a financial intelligence unit.
  - Caution: any public vehicle must be permissible under law, operationally feasible, avoid significant additional market/credit risks, and meet AML/CFT obligations; central banks risk their own CBRs if they engage in transactions categorized as high risk.

### MOVING TOWARDS GREATER ENTITY TRANSPARENCY AND OFFSHORE IMPLICATIONS
- Opaque corporate structures can be misused for illicit purposes; international initiatives emphasize entity transparency (2016 London Anti-corruption Summit; 2014 G-20 High Level Principles on Beneficial Ownership; 2013 G-8 commitments).
- Lack of transparency may prompt banks to withdraw or avoid entering CBRs.
- Offshore jurisdictions face pressure to reassess business models relying on opacity as international transparency initiatives progress.
- National examples:
  - Mexico: strengthened AML/CFT framework; developed a domestic credit transfer system in U.S. dollars; amended legislation to remove barriers to information sharing.
  - Colombia: migrating to a risk-based supervision scheme and strengthening inter-institutional coordination; large-scale reduction of CBRs not observed for large banks, but smaller intermediaries are more affected.
- LEI and information-sharing tools:
  - LEI (20-character alpha-numeric code) may help manage ML/TF risks by improving screening and identification; feasibility to be tested.
- Alternative payment providers:
  - Start-ups offer lower-cost alternatives but currently account for a small share of global remittances (largest traditional money transfer company 13 percent in 2014; largest start-up < 2 percent).
  - Effective oversight frameworks for new payment methods should include a clear legal regime, proportionate AML/CFT measures, fund safeguarding, contingency plans, and risk controls.

### IMF ENGAGEMENT, TECHNICAL ASSISTANCE, AND DATA
- IMF engagement:
  - Issue discussed in bilateral surveillance, Article IV consultations, and Financial Sector Assessment Programs (FSAPs).
  - Between 2012 and mid-2016, 87 FSAPs completed across all regions; many identified shortcomings in banking supervision and AML/CFT.
- Technical assistance (TA) FY12–16:
  - TA on banking supervision and regulation (FY12-16 Total: 2241): WHD 829, AFR 736, APD 271, MCD 270, EUR 135.
  - AML/CFT TA (FY12-16 Total: 481): WHD 123, AFR 74, APD 136, MCD 99, EUR 49.
- Continued data-gathering, engagement with FATF peer evaluations, and coordinated TA with World Bank and other partners are priorities.
- Full engagement by national authorities is a precondition for TA success and helps limit loss of CBRs.

### POLICY RECOMMENDATIONS: concise list
- Clarify regulatory expectations and address legal conflicts and impediments to cross-border information sharing.
- Strengthen regulation and supervision to meet international standards (FATF Recommendations; Basel Core Principles); build political buy-in and supervisory capacity.
- Promote industry initiatives to reduce compliance costs (KYC utilities, LEI adoption, payment message reforms, bundling products).
- Facilitate innovative, regulated payment solutions while ensuring prudential and AML/CFT safeguards.
- Prepare contingency plans and consider carefully designed public support only where market solutions fail, ensuring permissibility, operational feasibility, risk avoidance, and AML/CFT compliance.
- Continue public-private dialogue, improved data collection, and timely implementation of the FSB’s 2015 action plan.

*International Monetary Fund Staff Discussion Note: “The Withdrawal of Correspondent Banking Relationships” (excerpts).*

### EXECUTIVE SUMMARY ......................................................................................................

### _sdn1606 - EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY: Key findings and framing
- Correspondent banking relationships (CBRs), which enable the provision of domestic and cross-border payments, have been terminated in some jurisdictions following the global financial crisis.
- Recent reductions in CBRs have been reported by several countries; pressure has been associated with restricted access to financial services for certain categories of customers, business lines, jurisdictions or regions.
- Survey and other available evidence indicates that smaller emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europe and the Pacific as well as countries under sanctions may be the most affected.
- Individual banks’ decisions to withdraw CBRs typically reflect cost-benefit analyses shaped by:
  - re-evaluation of business models in the new macroeconomic environment;
  - changes in the regulatory and enforcement landscape, notably more rigorous prudential requirements, economic and trade sanctions, anti-money laundering and combating the financing of terrorism (AML/CFT) and tax transparency.
- Other contributing factors include unclear regulatory expectations, risks that cannot be mitigated, and legal impediments to cross-border information sharing.
- While withdrawal of CBRs has reached a critical level in some affected countries with potential systemic impact if unaddressed, macroeconomic consequences have not been identified so far at a global level.
- Current limited economic consequences partly reflect affected banks’ abilities to rely on other CBRs, find replacements, or use alternative means to transfer funds. In a few jurisdictions, pressure can become systemic if unaddressed.
- Coordinated public-private efforts are called for, including enhanced understanding, improved data collection, continued dialogue, and timely implementation of the Financial Stability Board’s 2015 action plan endorsed by the G20 Summit.

### I. INTRODUCTION: Scope and purpose
- Multiple emerging markets and developing economies have reported a reduction in correspondent banking services by global banks in recent years; recent manifestations involve large-scale CBR withdrawals.
- Understanding CBR trends requires:
  - recognizing banks’ evolving business models against macroeconomic developments and the broader decline in cross-border lending since the global financial crisis;
  - analyzing evolving regulatory expectations and enforcement;
  - distinguishing wholesale CBR withdrawals from case-by-case terminations.
- Continued pressure could disrupt financial services and cross-border money flows, potentially leading to exclusion of certain customer categories (e.g., Money or Value Transfer Services and Non-Profit Organizations).
- The Staff Discussion Note comprises six sections: evidence and consequences; drivers; international responses; IMF role; and conclusions on mitigation steps.

### II. EVIDENCE AND CONSEQUENCES: Observed patterns and impacts
- Correspondent banking facilitates domestic and cross-border payments, trade finance, remittances, cash clearing, liquidity management, and short-term borrowing/investment.
- Trends observed since the global financial crisis include:
  - cutbacks in the number of CBRs;
  - changes in the nature of services provided, with higher-risk services scaled back (e.g., nested correspondent banking, payable-through accounts);
  - growing market concentration;
  - increasing costs;
  - cutbacks in specific foreign currencies, particularly U.S. dollars (CPMI 2015a).
- The term “de-risking” lacks consensus; it ranges from wholesale risk avoidance without case-by-case assessment to any form of withdrawal of financial services.
- Geographic and sectoral evidence:
  - Surveys (World Bank 2015a, 2015b; IMF–UAB 2015; ASBA 2015) indicate smaller jurisdictions in Africa, the Caribbean, Central Asia, and Europe are most affected.
  - Caribbean jurisdictions have reported particular pressures (Box 2); Pacific islands and small states are affected, potentially undermining financial inclusion (Box 3).
  - Africa examples include Liberia (CBR withdrawal) and Angola (banknote supply issues) (Box 4).
  - Botswana experienced correspondent banks closing central-bank accounts over AML/CFT compliance concerns.
  - To a lesser extent, pressure is seen in larger economies in Latin America and Asia (including Mexico and the Philippines).
  - Countries under economic and trade sanctions in the Middle East and North Africa are most affected (IMF and UAB 2015) (Box 5).
- Affected customers and services:
  - Money or Value Transfer Services, small and medium-sized exporters, and small and medium-sized domestic banks are among the most affected.
  - International wire transfers, clearing and settlement services, and trade finance appear particularly affected (World Bank 2015b).
  - In jurisdictions with sizable Non-Profit Organization activity (for example, Somalia, West Bank and Gaza), CBR withdrawal could affect growth, poverty reduction, and security.
  - Increased concentration of correspondent banks could push activities to the informal sector, raising transparency concerns.
- Adaptations and costs:
  - Some affected institutions have found alternative arrangements by relying on remaining CBRs, finding replacements, or using other transfer methods.
  - Maintaining or obtaining CBRs has incurred costs: newly imposed minimum activity thresholds; higher costs (often due to due diligence) passed to consumers; and pressure on respondent banks to limit exposure to certain customer categories.

### III. DRIVERS OF THE WITHDRAWAL OF CBRs: Principal forces
- Primary drivers include:
  - Re-evaluation of bank business models in the post-crisis macroeconomic environment.
  - Regulatory obligations and enhanced enforcement, including more rigorous prudential requirements, sanctions, AML/CFT, and tax transparency measures that increase perceived risk and compliance costs.
- These drivers inform banks’ risk and reputational cost perceptions; their relative significance varies by case.

### IV. ADDRESSING THE WITHDRAWAL OF CBRs: Policy responses and industry actions
- Key public and private sector responses identified:
  - Home authorities of global banks should communicate regulatory expectations clearly.
  - Affected countries should strengthen regulatory and supervisory frameworks to meet relevant international standards, supported by technical assistance where needed.
  - Clarifying standards, including on AML/CFT, could promote a baseline for regulatory expectations.
  - Industry initiatives could facilitate customer due diligence and lower compliance costs.
  - In countries facing severe loss of CBRs and diminishing access to the global financial system, public sector options may include considering temporary mechanisms such as regional arrangements or public-backed vehicles to provide payment clearing services.
- The Financial Stability Board’s 2015 action plan endorsed by the G20 Summit is identified as a critical framework for timely action.

### V. THE ROLE OF THE IMF: Support and engagement
- IMF staff have been supporting member countries in addressing CBR withdrawal to promote financial inclusion and ensure financial stability.
- IMF surveillance and technical assistance contribute to improved understanding, data collection, and strengthening of regulatory and supervisory frameworks.

### VI. THE WAY FORWARD: Priorities
- Priorities include:
  - Enhanced understanding of scope, scale, and implications of CBR withdrawal.
  - Improved data collection and continued stakeholder dialogue.
  - Timely implementation of the FSB’s 2015 action plan.
  - Clarification of regulatory expectations and standards, including AML/CFT.
  - Pursuit of industry initiatives to reduce compliance costs and facilitate due diligence.
  - Consideration of public-sector contingency mechanisms where market solutions are insufficient.

*International Monetary Fund Staff Discussion Note: “The Withdrawal of Correspondent Banking Relationships” (Executive Summary).*

### 10. Surveys and discussions with global banks confirm increased caution in maintaining

### _sdn1606 - 10. Surveys and discussions with global banks confirm increased caution in maintaining

### Key findings from surveys and discussions with global banks
- Banking authorities and banks report reductions in correspondent banking relationships (CBRs), with the Caribbean particularly affected by retrenchment of U.S. and U.K. banks.
- About 55 percent of banking authorities reported a decline in CBRs.
- 75 percent of large global banks reported that they had withdrawn from CBRs.
- 60 percent of local banks reported a decline in CBRs.
- While the number of U.S. dollar CBRs of selected institutions decreased during 2010-14 and the composition of correspondent banks changed, there was no effect on the volume of authorized credit lines in the surveyed institutions; in 2015 the number of banks providing correspondent banking services declined but the volume of authorized credit lines increased, as did the value of transactions.
- In Europe, total value of turnover in correspondent banking accounts fell during 2007-10 and has not recovered to pre-crisis levels, yet the volume of correspondent banking transactions has been growing since 2010.
- The number of CBRs in the euro area has decreased steadily since 2002 in a highly concentrated correspondent banking market.
- Some large banks have begun to move away from correspondent banking to payment systems for low-volume/high-value payments following the introduction of the Single Euro Payments Area in 2014.
- Some global banks have exited a number of countries as part of a risk re-evaluation in the context of increased compliance costs.

### Products and client segments most affected
- U.S. dollar wire transfers, remittances, and trade finance (including Money or Value Transfer Services) have been particularly affected.
- Banking authorities reported product impacts (percent reporting impact): International Wire Transfers 80, Clearing and Settlement 47, Check Clearing 39, Trade Finance 36, Cash Management Services 34, Investment Services 32, FX Services 29, Structured Finance/Foreign Investments 15, Lending 12.
- Local banks reported client impacts (percent reporting on impact): MVTS and Other Remittance Companies 67, Small and Medium Exporters 60, Small and Medium Domestic Banks 56, Money Exchange Houses 48, Financial Institutions 42, Politically Exposed Persons 26, Importers 33, Corporate Clients 35, Other categories varying.
- In Latin America, ASBA members reported high impacts on remittances and correspondents: Remittances and Correspondents most affected (percent impacts not fully enumerated here beyond cited charts).

### Regional and country case evidence
- Caribbean (selected cases):
  - At least 16 banks across five countries had lost all or some of their CBRs as of May 2016.
  - Main CBR providers for the Caribbean are located in the United States, Canada, and to a lesser extent Europe and the Caribbean.
  - Reasons for terminations cited: presence of offshore sectors, concerns about supervision and legal frameworks, inclusion of higher-risk customer categories (for example, Money or Value Transfer Services, cash intensive firms, specialized professionals, and politically exposed persons), changes in correspondent banks’ risk appetite, perceived lack of profitability.
  - Belize: several banks lost CBRs; only two of the country’s nine domestic and international banks (representing 27 percent of the banking system’s assets at the end of March 2016) maintained CBRs with full banking services. The Central Bank of Belize lost two CBRs. Some banks found alternatives with non-bank payment providers or nesting arrangements.
  - The Bahamas: five financial institutions (representing about 19 percent of the assets of the banking system) lost one or more CBRs. Money or Value Transfer Services sector affected; business lines impacted include credit card payments, cash management, investment services, clearing and settlement, international wire transfers and remittances.
  - Spillover: The Bahamas is a source of remittances to other countries; in Haiti about 75 percent of remittances from The Bahamas to Haiti are paid and received in the same day.
- Pacific small states:
  - Withdrawal of CBRs pressured respondent banks to reconsider customer bases; accounts of Money or Value Transfer Services were terminated in some countries, increasing fragility of remittance corridors (for example, Samoa).
  - Remittances can amount to one fifth of GDP in some Pacific small states.
  - The planned termination of a U.S.-based bank's CBR with the Marshall Islands’ only domestic commercial bank (announced in 2015 to occur by end-2016) was put on hold as of May 2016.
  - Average remittance costs from Australia and New Zealand to Pacific small states increased relative to other countries; the cost of sending remittances has widened recently.
  - Remittance source shares for Pacific small states (percent of total): Australia 26%, New Zealand 26%, U.S. 26%, Rest of the World 22%.
- Africa:
  - Liberia: 36 out of 75 CBRs were terminated between 2013 and mid-2016. All Liberian banks lost at least one CBR; the most affected bank lost 78 percent of these relationships. CBRs accounted for one-third of interbank activity; about 60 percent of banks’ income was sourced from non-interest revenue. Processing U.S. dollar checks became lengthier and costlier; one major bank indicated a cost of US$150 per check. A major Western bank severed its euro CBR with the Central Bank of Liberia in March 2014.
  - Angola: the only supplier of U.S. dollar bank notes to Angola discontinued that service in December 2015. A large global bank withdrew U.S. dollar CBRs with Angolan banks while retaining clearing for the central bank and local kwanza business. A European bank stopped clearing customer payments in U.S. dollar two months later but continued providing letters of credit. As a result, one European bank became the sole provider of U.S. dollar CBRs to Angolan banks; only two Angolan banks have direct access to U.S. dollar CBRs. Other Angolan banks route U.S. dollar services through European banks at higher cost; external trade transactions increasingly invoiced in euros; settlement of international credit and debit cards and cash management were particularly affected.
  - Guinea: some 20 accounts of the central bank with seven foreign banks were closed since 2009, with most closings concentrated during 2013-15. All major banks reported closures of CBRs with banks in the U.S., Europe, and South Africa, and a slowdown in international trade operations has been reported.
- General regional indications:
  - Authorities indicated significant declines in CBRs in the Americas, Africa, Europe and Central Asia; the Caribbean particularly affected.
  - Local/regional banks reported that U.S. and U.K. banks led reductions in CBRs.
  - Evidence that U.S. dollar wire transfers have been affected: 80 percent of authorities indicated impact.
  - In the Americas, 60 percent of ASBA members report that remittances have been affected.
  - Higher compliance costs have led to a decline in CBRs in the Middle East and North Africa (MENA) region, according to surveyed banks.

### Drivers of CBR withdrawal and bank behavior
- Drivers cited by global correspondents and authorities:
  - Increased compliance costs and AML/CFT concerns.
  - Changes in correspondent banks’ risk appetite.
  - Low volumes of transactions and perceived lack of profitability of certain correspondent banking services.
  - Presence of offshore sectors or concerns about supervision and legal frameworks in respondent jurisdictions.
  - Inclusion of higher-risk customer categories in respondent banks’ client base (e.g., Money or Value Transfer Services, cash intensive firms, PEPs).
- Observed correspondent bank responses:
  - Some global banks are exiting country exposures or scaling back CBR offerings.
  - Some large banks are shifting certain flows (low-volume/high-value payments) to payment systems (for example, SEPA effects in euro area).
  - Respondent banks have mitigated risk by closing local accounts with higher-risk customers.
  - Some banks seek replacement CBRs or rely on remaining relationships; others use parent companies or branches abroad to conduct international transactions, or turn to non-bank payment service providers and nesting arrangements.

### Consequences and operational impacts
- Impact on remittances and MVTS:
  - Account closures for MVTS were reported across regions and years (account-closure charts show notable shares across 2010–2014).
  - Increased cost and reduced ease of remittance transactions were highlighted for Pacific small states and the Caribbean.
- Trade finance and card services:
  - Trade finance, settlement of international credit and debit cards, and cash management have been affected in affected countries (e.g., Liberia, Angola).
- Concentration and market structure:
  - Evidence on increasing concentration in correspondent banking is mixed; ECB analysis includes concentration ratio indicators (Concentration Ratio 4, Concentration Ratio 8, Herfindahl) for euro correspondent banking showing differences between value and volume concentration.

### Policy-relevant observations and measures reported in the source
- Improving AML/CFT compliance in small states of the Pacific is necessary but insufficient alone to maintain remittance flows in the medium term.
- Suggested or observed approaches to maintain remittance corridors and correspondent services:
  - Mobile banking solutions.
  - Improved customer identification.
- Observations on mitigation strategies reported by banks/authorities:
  - Use of parent companies and branches abroad to conduct international transactions.
  - Use of non-bank providers of payment services and nesting arrangements.
  - Some banks and authorities seeking to replace lost CBRs or rely on remaining correspondent relationships.

*Source: Extracted from the IMF chapter "The Withdrawal of Correspondent Banking Relationships" (text provided, including World Bank 2015a/2015b, ASBA 2016, ECB 2015, IMF/UAB 2015, IMF country desks).*

### Box 5. Correspondent Banking Relationships in the Middle East and North Africa

### Box 5. Correspondent Banking Relationships in the Middle East and North Africa

### Survey findings on CBR withdrawals in MENA
- A joint IMF-Union of Arab Banks survey conducted in the spring of 2015 covered responses from 17 countries.
- Many banks (40 percent) reported facing higher compliance costs.
- About 10 percent of banks had closed relationships with respondent banks in MENA that were under economic and trade sanctions or where there were material weaknesses in AML/CFT policies.
- Some Money or Value Transfer Services (MVTS) had been cut off (for example in the countries of the Cooperation Council of the Arab Countries of the Gulf), potentially increasing remittance costs and channeling flows through non-regulated entities.
- Many embassies and Non-Profit Organizations operating in MENA were reclassified to a higher risk category.
- Banks reduced foreign currency transaction services to third parties (such as MVTS) because the risks are difficult to manage.

### Impact on costs, operations, and remittances
- Banks reported the need for much closer monitoring of:
  - the nature of the respondent bank’s business activities;
  - markets and customers, including customers’ customers;
  - group, management and shareholder structure;
  - the quality of countries’ regulatory and supervisory frameworks.
- Reported regional effects on remittances and financial inclusion:
  - Officially recorded remittances to developing countries amounted to US$ 431.6 billion in 2015.
  - Global remittance growth was 0.4 percent in 2015 (the slowest since the global financial crisis).
  - Remittances to the Middle East and North Africa (MENA) contracted by 0.9 percent in 2015, compared with 4 percent growth in 2014.
  - Remittance flows to Europe and Central Asia plummeted by 20.3 percent in 2015.
  - In Asia and the Pacific, remittances continued to grow, but account closures have adversely affected remittance costs and flows in rural and remote regions.
  - Example cases:
    - Somalia: 40 percent of households rely on remittances.
    - Samoa: remittance inflows amount to 20 percent of GDP.
    - Philippines: 84 accounts among 32 Philippine remittance providers (including both banks and MVTS) were closed by 33 correspondent banks in 13 major remittance-sending countries.
- MVTS-specific data (Samoa example):
  - Approximately 85 percent of remittances are channeled through MVTS.
  - MVTS handle just over half a million inward money transfers per year, with an average size of just US$ 270.
  - MVTS have a greater geographic reach within the community than banks in Samoa; the largest MVTS has double the number of branches outside Apia than the four banks combined.
  - Bank accounts of Samoan-linked MVTS agents in Australia and New Zealand have been closed; closures were attributed to pressure from global correspondent banks, particularly those in the United States, and increased scrutiny of Australian banks.

### Banks’ responses and adjustments
- To address challenges, banks in the region are:
  - strengthening procedures and processes;
  - investing in infrastructure and staff training;
  - recruiting more compliance staff;
  - enhancing sanctions screening systems to better handle screening of politically exposed persons, sanctions list transactions, and rapid changes to these lists.
- Banks reported increased scrutiny from global correspondent banks and viewed a “risk-based approach” as placing them in a pseudo-regulatory role that is time consuming and costly.

### Drivers of CBR withdrawal (summary of causes)
- Re-evaluation of business models after the global financial crisis:
  - Shift from direct cross-border lending to local lending by foreign banks’ affiliates.
  - High-volume, low-return, balance-sheet-intensive businesses (such as correspondent banking) became less attractive due to higher capital and liquidity requirements.
  - High fixed compliance costs foster economies of scale and concentration; smaller jurisdictions and customers were particularly affected.
- Compliance costs and regulatory drivers:
  - Economic and trade sanctions increase compliance burdens through required customer due diligence processes.
  - AML/CFT: the 2012 revised Financial Action Task Force (FATF) standard places greater emphasis on assessing risks and applying a risk-based approach, potentially increasing costs and leading to overcautious enhanced due diligence.
  - Tax transparency initiatives can raise perceived costs and lead to termination of relationships (for example, effects related to U.S. Foreign Account Tax Compliance Act and related enforcement tools).
  - Surveys and studies:
    - The 2014 KPMG survey reported that compliance costs had risen 53 percent between 2011 and 2014, on average.
    - Thirty-six percent of authorities that responded to the World Bank’s 2015 survey on correspondent banking identified the inability of or cost for correspondent banks to undertake customer due diligence on respondents’ customers as a driver of the loss of CBRs.
- Macroeconomic pressures and profitability:
  - Persistent surplus liquidity and low interest rates since 2009 compressed banks’ margins, making low-margin correspondent banking less profitable.
  - Banks became structurally more risk-averse, weighing jurisdictional risk, customer risk profiles, business-line risk, market size, scale of operations, and connectivity in decisions to maintain or cut CBRs.
- Regulatory obligations and enhanced enforcement:
  - Banks must comply with economic and trade sanctions, AML/CFT, anti-bribery, and tax evasion regulations in jurisdictions where they operate and in their home jurisdictions.
  - Complying with expanding sanctions regimes (UN targeted financial sanctions and increased bilateral sanctions) requires effective internal controls and may prompt termination of CBRs where respondent banks are suspected of involvement in illicit activity or are subject to sanctions.
  - The shift from a rules-based to a risk-based AML/CFT approach under the 2012 FATF standard requires ongoing customer due diligence on respondent banks, including gathering sufficient information on respondents’ business nature, reputation, quality of supervision in respondents’ jurisdiction, and assessing respondents’ AML/CFT controls; enhanced due diligence is required for payable-through accounts or where higher risks are identified.

*Source: IMF and Union of Arab Banks 2015.*

### 22. Proper implementation of the risk-based approach may also lead to instances of

### _sdn1606 - 22. Proper implementation of the risk-based approach may also lead to instances of 

### Drivers of CBR withdrawal: risk-based approach and tax/transparency initiatives
- Proper implementation of the risk-based approach can require termination of correspondent banking relationships (CBRs) where:
  - a correspondent bank is unable to conduct the required level of customer due diligence to mitigate identified risks, or
  - it has reason to believe the respondent bank is involved in money laundering or terrorist financing activity.
- Depending on the correspondent bank’s jurisdictional regulatory requirements, suspicion of fraudulent activity by the respondent bank or its customers (for example, tax evasion, fraud, corruption) may also call for termination of CBRs.
- International and bilateral initiatives on tax transparency and AML/CFT that may affect banks’ risk assessments of CBRs include:
  - FATF public documents identifying jurisdictions with weak AML/CFT measures (issued three times a year).
  - Organisation for Economic Co-operation and Development’s Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum).
  - Bilateral measures such as U.S. Foreign Account Tax Compliance Act, the EU savings tax directive, and France’s blacklist of tax havens.
- Impact noted: “Increasingly, the business model of competition through secrecy and favorable tax regimes is being eroded, pushing banks to exit some jurisdictions (KPMG 2014).”

### Enforcement landscape and its influence on banks’ behavior
- High-profile enforcement actions, especially in the United States and to a lesser extent EU authorities, have raised concerns about the size of potential settlements and fines.
- Customer due diligence-related fines account for approximately 16 percent of total misconduct costs (Figure 4 referenced).
- Analysis of major enforcement actions on customer due diligence-related breaches:
  - Out of 24 fines of more than US$ 100 million, all but one originate in the United States.
  - Most of these large fines involved egregious violations of economic and trade sanctions; AML-CFT related penalties represent less than 20 percent of the total.
- Examples of major enforcement outcomes:
  - BNP Paribas (economic and trade sanctions violations): U.S. court ordered payment of US$ 8.9 billion in forfeitures and fines; five-year probation and enhanced compliance requirements.
  - JP Morgan (anti-money laundering, Madoff-related): deferred prosecution agreement and payment of US$ 2.5 billion in civil forfeitures and penalties.
  - Credit Suisse (tax evasion): pleaded guilty and agreed to pay US$ 2.6 billion in forfeiture amounts and penalties.
- Trends in enforcement resolution:
  - Number of enforcement actions has recently decreased; most violations are being resolved with remedial measures undertaken by banks before escalation to monetary penalties.
  - Increased use of Non-Prosecution Agreements and Deferred Prosecution Agreements by U.S. Department of Justice and consent orders by U.S. supervisors.
  - These agreements often include voluntary remedial measures, including termination of certain “higher-risk” business relationships, such as CBRs.
  - Example: HSBC, in the context of Deferred Prosecution Agreement negotiations, exited 109 correspondent relationships for risk reasons and adopted guidelines limiting business in high financial crime risk countries.

### Regulatory communication, uncertainty, and conflicting legal requirements
- Regulators in key financial centers have increased public disclosure of regulations and enforcement actions and have undertaken outreach and education to foreign jurisdictions.
- Regulators state they do not ask financial institutions to terminate specific relationships or business lines in all cases; focus is on ensuring appropriate systems and risk management processes.
- Persistent uncertainty about regulatory expectations:
  - Lack of clarity on the scope of customer due diligence requirements, notably whether due diligence on a customer’s customer (“Know Your Customer’s Customer”) is required, can drive termination of CBRs.
  - Some global banks (especially European correspondent banks) view U.S. regulations as unclear, inconsistently communicated, unevenly implemented by examiners, or not well understood, contributing to withdrawal decisions.
  - Banks seek regulatory certainty—possibly safe harbors—to avoid overcautious use of enhanced due diligence to shield against supervisory or enforcement actions.
- Conflicting requirements:
  - Data protection and privacy laws can hinder cross-border information sharing and prevent effective customer due diligence on respondent banks.
  - Privacy constraints can impede sharing of suspicious transaction reports within global banking groups, reducing the group’s ability to manage risk.
  - In some instances, impediments to information sharing are constitutional in nature.

### Systemic risks and need for coordinated responses
- Individual bank decisions to exit CBRs may be rational given low profitability, rising costs, strengthened regulatory standards, and enhanced enforcement.
- Simultaneous exits by many banks could concentrate correspondent services among few global banks, potentially disconnecting some jurisdictions from the global financial system and creating systemic impacts.
- Justification for concerted public-private measures due to coordination and collective action problems.

### Policy responses and recommended actions
- Four broad areas for mitigation (as identified in the source):
  - (i) Clarify regulatory expectations and address legal conflicts and impediments.
  - (ii) Strengthen regulation and supervision in line with international standards, including capacity development.
  - (iii) Promote industry initiatives to mitigate compliance costs.
  - (iv) Develop contingency plans to address risk of complete loss of CBRs in certain jurisdictions.
- Specific measures to clarify regulatory expectations:
  - Greater outreach and education by home supervisors of global banks to clarify application of regulations, including:
    - continued dialogue between regulators and global financial institutions;
    - improved information flows from home regulators to financial institutions of affected countries;
    - better communication between home regulators and supervisors and those of affected countries;
    - technical assistance (TA) from home countries of global banks to authorities of affected countries (or by correspondent banks to respondent banks).
  - Greater clarity in international standards and domestic regulations to ensure consistency of regulatory expectations, including for AML/CFT.
  - FATF clarifications to date:
    - “De-risking” defined as wholesale termination of relationships without accounting for risk or mitigation; not in line with effective implementation of a risk-based approach and amounts to risk avoidance.
    - FATF standard does not require a “Know Your Customers’ Customer” approach as a matter of course, though it may be required in certain higher-risk situations.
    - FATF cautioned that “de-risking” could undermine AML/CFT efforts by driving ML/TF risk to less-regulated sectors or underground.
    - FATF is expected to publish guidance on CBRs in October 2016.
- Strengthening and aligning regulatory and supervisory frameworks:
  - When CBR withdrawal is driven by perceptions of unacceptable jurisdictional risks, enhancing compliance with international standards—International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation (FATF Recommendations) and Basel Core Principles for Effective Banking Supervision—should be central to policy response.
  - Political buy-in, supervisory capacity, and resources are necessary.
  - Increase exchange of beneficial ownership information and cooperation among national supervisors, move toward harmonization of regulatory frameworks, and facilitate cross-border information sharing.
  - Offshore financial centers should assess whether to change business models as transparency and harmonization reduce incentives for complex corporate structures and tax avoidance.
  - Effective regulation and supervision aligned with international standards builds trust, reduces risks, and makes markets more attractive to global banks.
  - Regulation and oversight of Money or Value Transfer Services and Non-Profit Organizations regarding AML/CFT can help them obtain and maintain access to banking services.
  - Example of supervisory innovation: central bank of Somalia agreed to delegate temporary supervision of Money or Value Transfer Services to a trusted agent to monitor AML/CFT compliance (with World Bank assistance).
  - Forward-looking risk-based supervision and greater cooperation among supervisors are needed to facilitate cross-border information sharing on customer due diligence.

*Source: THE WITHDRAWAL OF CORRESPONDENT BANKING RELATIONSHIPS, INTERNATIONAL MONETARY FUND (excerpts).*

### Box 8. Moving Towards Greater Entity Transparency: Implications for Offshore Jurisdictions

### Box 8. Moving Towards Greater Entity Transparency: Implications for Offshore Jurisdictions

### Problem and international context
- Opaque corporate structures and arrangements can be misused to conceal beneficial ownership and control for illicit purposes, including tax evasion, money laundering and evasion of sanctions.
- International initiatives emphasizing entity transparency include:
  - the 2016 London Anti-corruption Summit,
  - the 2014 G-20 High Level Principles on Beneficial Ownership,
  - the 2013 G-8 commitments on transparency of companies and legal arrangements.
- These initiatives complement the work of the FATF and the Global Forum.
- The leaked documents from the Panamanian law firm Mossack Fonseca illustrate the continued prevalence of opaque corporate structures and the need for greater implementation of international initiatives.

### Implications for offshore jurisdictions and correspondent banking relationships (CBRs)
- Lack of transparency in a jurisdiction may affect banks’ decisions to withdraw or not enter into CBRs in that jurisdiction.
- Decisions to terminate or not enter into a CBR may be based on:
  - reputation of poor compliance with international standards, in particular the AML/CFT standard and the Global Forum,
  - suspicion of illicit activity, including money laundering, tax evasion and evasion of sanctions.
- Sustainability of business models that rely on opaque or offshore structures may need reassessment:
  - Offshore entities can be used for legitimate purposes, but deficiencies in domestic implementation of international standards can expose them to potential risks of money laundering, tax evasion and evasion of sanctions.
  - Increased scrutiny and media coverage of leaked documents increase reputational risk for offshore jurisdictions.
  - With stronger international standards on AML/CFT and transparency and exchange of tax information, business models relying on lack of transparency may no longer be sustainable.
  - As others adopt increased transparency measures, including public registries of beneficial ownership, offshore jurisdictions face pressure to adopt similar initiatives.

### National authorities’ actions and examples
- Paragraph 35: National authorities are removing impediments to information sharing, strengthening supervisory and regulatory frameworks, and putting in place policy responses to cross-border information and data collection challenges.
- Mexico:
  - Steps taken include (i) strengthen the country’s AML/CFT framework, (ii) develop a domestic credit transfer system in U.S. dollars, and (iii) facilitate cross-border information sharing with foreign correspondent banks.
  - Authorities amended legislation to remove legal barriers to information sharing arising from banking secrecy and data privacy laws.
  - Developing a centralized database requiring banks to report all cross-border transactions while allowing banks to report information on their customers (CPMI 2015a).
- Colombia:
  - Migrating from a strict compliance system to a risk-based supervision scheme and strengthening inter-institutional coordination mechanisms among banks.
  - Comprehensive risk based supervision scheme of AML/CFT; regulatory projects aim to improve compliance and consolidate the legal framework for prevention and control of money laundering and terrorism financing.
  - Commission for the Coordination of Inter-institutional Control of Money Laundering encourages memorandums of understanding to share relevant information among national authorities.
  - Large-scale reduction of CBRs has not occurred for large banks; smaller financial intermediaries have been more affected and faced increased costs in establishing new CBRs.

### Lowering compliance costs through industry initiatives
- Paragraph 36: Proposed industry initiatives to reduce compliance costs and increase CBR efficiency include:
  - (i) using “Know Your Customer” utilities created by private sector entities to store customer due diligence information in a single repository,
  - (ii) promoting the use of the Legal Entity Identifier for all banks involved in correspondent banking,
  - (iii) reviewing the format of payment messages to ensure cost-effective usefulness for clients, industry, and law enforcement,
  - (iv) promoting the use of the Legal Entity Identifier for identifying corporate customers, including provisions on information sharing with correspondent banks and developing centralized databases on identities, business, and transactions of banks’ customers active in cross-border payment services.
- Paragraph 37: Market-based solutions include bundling banking products and risk-based pricing:
  - Bundling other banking services with CBRs to spread fixed compliance costs across a larger scale of banking services.
  - Differentiating and increasing pricing of CBRs across countries and respondent banks (example cited: The Bahamas) to address lack of profitability from low volumes or higher compliance costs.
  - Improving internal systems to pro-rate compliance costs across customers.

### Alternative payment providers, risks, and regulation
- Paragraph 38: Innovative money transfer start-ups offer lower-cost alternatives to traditional Money or Value Transfer Services and may partially address reduction in CBRs, including through virtual currencies and blockchain distributed ledger technology (CPMI 2015b; He et al. 2016).
- Paragraph 39: Market dominance remains with traditional money transfer systems:
  - Largest traditional money transfer company accounted for 13 percent of remittance flows in 2014.
  - Largest money transfer start-up accounted for less than 2 percent of global remittances.
  - Start-up business models require large customer networks to match transactions and will take time to scale.
  - Start-ups need prudential regulations to mitigate operational and market risks.
- Paragraph 40: Effective oversight frameworks for new payment methods should include:
  - (i) a clear legal regime,
  - (ii) proportionate AML/CFT measures,
  - (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 (Bank for International Settlement and World Bank 2015; Khiaonarong 2014).

### The Legal Entity Identifier (LEI) and information-sharing tools
- Paragraph 41: The Legal Entity Identifier approach may help manage ML/TF risks through:
  - enhanced screening, customer due diligence improvements, and implementation of FATF standards.
  - Providing unambiguous identification for “Know Your Customer” utilities and information-sharing mechanisms without a separate standard.
  - Increasing effectiveness of automatic screening packages, particularly for identifying sanctioned entities.
  - Potential support for implementing specific FATF recommendations (for example, on provision of originator and beneficiary information in payment messages).
  - Feasibility of the approach remains to be tested.
- Footnote 17: The Legal Entity Identifier is a 20-character alpha-numeric code used to uniquely identify legally distinct entities that engage in financial transactions and is issued by Local Operating Units of the Global Legal Entity Identifier System (http://www.leiroc.org/lei.htm).

### Contingency planning and role of public support
- Paragraph 42: For countries facing severe loss of correspondent banking services, contingency planning and short-term responses may be needed:
  - Contingency plans should include (i) enhanced communication with home authorities and global banks to understand risk management concerns, (ii) understanding domestic financial systems’ linkages with correspondent banks and alternative payment arrangements (including non-banks), (iii) mapping necessary legal and regulatory changes to facilitate compliance with international standards, (iv) carefully assessing benefits, costs, and risks of developing or using public entities or centralized payment systems to address a complete loss of CBRs.
- Paragraph 43: Role of public entities merits careful consideration:
  - Possible mechanisms can build on experiences in New Zealand, the United Kingdom, and the United States.
  - Some Caribbean jurisdictions consider regional arrangements to process international transactions with shared costs or subsidies (Boyce 2016).
  - Mexico established a domestic payment system for U.S. dollar transfers and uses the central bank’s correspondent banks in the United States to facilitate fund transfers.
  - Some central banks in affected jurisdictions have considered temporary mechanisms with foreign central banks in globally systemic countries to settle low risk transactions.
  - Another alternative under discussion is a publicly-backed vehicle to provide clearing services for banks unable to secure CBRs and willing to improve AML/CFT compliance.

*Source: IMF country desks.*

### 44. The design of any public vehicles requires care in assessing legal and operational

### 44. The design of any public vehicles requires care in assessing legal and operational

### Legal and operational feasibility; AML/CFT and integrity risks
- Potential legal constraints may prevent central banks in some jurisdictions from acting as counterparty in commercial transactions; these constraints need to be addressed before central banks engage.
- Authorities must ensure that any public mechanism meets all relevant regulatory standards and applicable AML/CFT obligations.
- If concerns about the integrity of underlying transactions and compliance with AML/CFT standards remain, a public entity attempting to carry out bundled transactions on behalf of Money or Value Transfer Services may face the same challenges that banks face.
- A central bank could risk its own CBRs if it attempts to carry out transactions that global banks have already categorized as high risk.
- Any public intervention (including use of publicly-backed vehicles or direct involvement of central banks) should be subject to proper risk assessment to ensure that it:
  - (i) is permissible under the central bank’s law or other relevant legislation and regulations;
  - (ii) is operationally feasible; and
  - (iii) avoids creating significant additional market, credit, and other risks to the central bank.
- Where the central bank performs a function regulated by the AML/CFT regime, that function must be conducted in line with applicable AML/CFT obligations.

### Practical examples and precedents (Box 10)
- United States: Federal Reserve of Atlanta (FRBA) enabled transfers through the FedGlobal Automated Clearing House (FedGlobal ACH), channeling international remittances through the U.S. domestic payment system linked to foreign financial institutions and regulated Money or Value Transfer Services. Services include sending and receiving domestic and international Automated Clearing House credit and debit items. The FRBA acts as the U.S. Gateway Operator for FedGlobal ACH payments, monitors payments processed by FedGlobal, and maintains a compliance officer and compliance program. Each FedGlobal agreement must comply with all relevant regulatory requirements and procedures, including AML/CFT.
- New Zealand–Pacific Remittance Project: Launched in 2007 under leadership of the Reserve Bank of New Zealand and Pacific Island authorities. New Zealand-based banks created special remittance card accounts enabling low-cost remittances through the banking system’s international ATM and EFTPOS networks. The facility includes daily monitoring to mitigate financial integrity risks. Enabling the card required changes to AML/CFT legislation in New Zealand and implementation of the Financial Transactions Reporting (Interpretations) Regulation. The initiative helped reduce the cost of sending remittances from 15–25 percent to about 7 percent of the value of the remittance transaction.
- U.K.–Somalia Safer Corridor Pilot: Established after the 2013 shutdown of Somali Money or Value Transfer Services accounts by the sole U.K. bank operating in Somalia. The pilot intended to create a more transparent and safer remittance system by addressing banks’ AML/CFT compliance concerns, providing assurance to banks, and supporting Somali authorities to build a regulated financial sector. The U.K. government funded the project (including technical assessments such as biometrics) and the World Bank was responsible for design and implementation. The pilot was not mobilized because remittances continued to flow, but milestones achieved included commitments to strengthen banking supervision and regulation, issuance of AML/CFT legislation, and establishment of a financial intelligence unit.
- FedGlobal ACH example specifics: unbanked receivers in 11 Central and South American countries and banked receivers in 25 other countries.

### IMF role, activities, and evidence gathering
- IMF staff supports member countries in addressing issues arising from the withdrawal of CBRs to promote financial inclusion and ensure financial stability.
- The issue has been discussed in bilateral surveillance when deemed macro-critical, in Article IV consultations with some countries home to global banks, and in the Financial Sector Assessment Program (FSAP) when relevant for financial stability.
- Between 2012 and mid-2016, 87 FSAPs were completed across all regions among the IMF’s membership; many identified shortcomings in banking supervision and AML/CFT and called for strengthening frameworks.
- IMF coordination and collaboration: IMF has worked with the FSB, World Bank, G20, FATF, Arab Monetary Fund, Union of Arab Banks, CPMI, and Caribbean Task Force to analyze scale, drivers, and impact through surveys and regional roundtables.
- Continued data-gathering efforts are necessary; follow-up analytical work on drivers and impact agreed with authorities of MENA and Sub-Saharan Africa, to be carried out with the Arab Monetary Fund and the Association of African Central Banks, respectively.
- IMF staff continues to gather quantitative and qualitative evidence on instances of CBR withdrawal and magnitude of impact through Article IV consultations and FSAP, where relevant.

### Technical assistance and capacity building
- The IMF TA program helps countries strengthen regulatory and supervisory frameworks, including AML/CFT, building on FSAP and surveillance findings.
- TA is closely coordinated with public and private stakeholders, including the World Bank, multilateral development banks, and donor countries.
- TA priorities include addressing customer due diligence issues and improving effectiveness of AML supervision.
- IMF, together with the World Bank, contributes to the FATF peer evaluation process for assessing and promoting members’ compliance with FATF recommendations.
- From fiscal years 2012–16:
  - TA on banking supervision and regulation (number of missions, fiscal years 2012-16) by region (FY12-16 Total: 2241): WHD 829, AFR 736, APD 271, MCD 270, EUR 135.
  - AML/CFT TA (number of missions, fiscal years 2012-16) by region (FY12-16 Total: 481): WHD 123, AFR 74, APD 136, MCD 99, EUR 49.
- Full engagement by national authorities is a precondition for TA success and helps limit loss of CBRs.

### Policy recommendations and the way forward
- Policy responses should be tailored to country- or region-specific circumstances and account for the complexity of CBR withdrawal.
- Recommended actions include:
  - Continued efforts to build understanding of causes and implications; go beyond surveys and reach out directly to financial services providers to improve data collection.
  - Further clarification of, or outreach on, international standards (including by the FATF) and national regulators’ expectations to reduce precautionary behavior.
  - Facilitating cross-border information sharing and data collection by removing domestic legal barriers from banking secrecy and data privacy laws to allow effective customer due diligence on respondent counterparts; in some cases, improving identity verification systems may be warranted.
  - Continued engagement by public and private TA providers to build capacity and strengthen regulatory and supervisory frameworks in line with international standards, including AML/CFT.
  - Promoting shared industry measures to lower compliance costs; consider accelerating use of the Legal Entity Identifier for all banks involved in correspondent banking and improving payment message formats; support innovative payment approaches and market-based solutions such as bundling banking products and risk-based pricing.
  - Reassessing sustainability of business models that rely on opaque or offshore structures given reputational risks and related costs (including loss of CBRs) that may outweigh the benefits.
  - If complete loss of CBRs is imminent, carefully consider public support beginning with high-level political engagement to establish dialogue between authorities and the private sector on impact and remedial measures; any public intervention must satisfy permissibility, operational feasibility, risk avoidance, and AML/CFT compliance considerations.

*International Monetary Fund*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2016/_sdn1606.pdf_