The Wild West of Banking

Brian_Ferro

The world as we know it certainly feels as if it’s gotten smaller – from everything from sporting events like the World Cup, to historical events and human relief efforts. Arguably, there is no segment where this is more evident than the world of business and economics. Instead of micro and regional markets, companies big and small can build in one country with the potential to market, sell and ship globally. With the expanded reach to meet business demands, the use of correspondent bank networks and payments has also increased in tandem.  

What is Correspondent Banking (Corre)? 

While many people have heard of Corre they may not understand its true meaning. Simply put, correspondent banking is where one financial institution provides services in a particular region to another institution that may not have a physical presence within that area. Some of the services that the correspondent bank (local institution) would provide to the respondent bank (foreign institution) include money transfers, currency exchanges, trade finance and other business transactions.  

Included in the Corre framework is the concept of intermediary banks. These institutions play an important role by acting as a connector between one institution and another that may not interact directly. How this might work in real world terms: a retail store in Ireland may wish to send money through their Irish- based institution to a manufacturer’s account located in China. Whilst the retailer may not realize what takes place behind the scenes, the Irish institution may need to send the funds through an institution in England, which in turn may need to send the funds through an institution in Japan before finally landing in the manufacturer’s account in China. The institutions in England and Japan are intermediary banks that are facilitating the completion of the payment.  

Three Areas of Increasing Risk 

For financial institutions that want to provide these services, there are considerable benefits derived from conducting cross-border payments - there is also a lot of risk. The scrutiny required to monitor for matches of sanctioned entities, attempts to avoid these matches, wire stripping (the deliberate act of removing information making screening more difficult to identify and restrict payments on sanctioned entities), u-turn payments and other suspicious movements of funds has increased exponentially over the past few years. As these risks grow, the role of the Corre relationship is becoming more important in the global banking ecosystem. But for those institutions who are interested or eager to stay in the game, they must be willing to invest in more efficient regulatory risk controls in their correspondent banking operations. These investments will allow institutions to leverage more of the data that is available while still generating fewer false positive alerts, increasing the volume of enriched, productive alerts and automating operational processes that will allow their end users to make more intelligent decisions faster.  

The most challenging risks and top priorities for institutions are the multitude of ways people attempt to circumvent global sanctions regulations. With each new rule or algorithm to match identifying information to the names on sanctions lists, there seems to be no limit to the creativity applied to avoid these same methods. Each Institution is also limited to the information provided by other institutions, directly or indirectly. This information is critical to identify the entities more accurately in the payment string. Was there an address, date of birth, or other identifiable information included? Each of these data points are key to reducing the number of false matches. Adding to the complexities are legal entities that could have multi-layered hierarchies with sanctioned entities as partial or hidden owners or controllers. Not to mention that the sanctions lists are updated seemingly daily, requiring institutions to update whom they monitor frequently.    

The effort to stay on top of their monitoring efforts is daunting. How can institutions keep pace and ensure that no sanctioned transactions are slipping through? The potential regulatory and reputational damage is a constant threat. One only needs to look at the headlines to see what could happen to an institution. An insightful break down and summary of recent AML fines by regulators can be found here.  

Sanctioned entities aren’t the only concern for institutions when it comes to Corre. Institutions also need to keep a keen eye on their own banking peers as well. Before entering into a correspondent banking agreement, institutions are required to review and ensure their partner bank has a robust AML program with the proper controls and procedures in place. While this facilitates  a business agreement, each institution must ensure the partner institution is delivering on their promises by monitoring the other’s activity at an aggregate level as well – which could mean monitoring millions more transactions daily. Even if the institution is acting as an intermediary bank, meaning that neither the sender nor receiver is their direct customer, they must still monitor activities to ensure no restricted party is passing money through their institution. In other words, the institutions are not only concerned with their customers, but also non-customers that may move money through them. Overwhelming to say the least.  

The Transformation of Corre Monitoring 

Given these distinct challenges, institutions must deploy solutions that provide comprehensive insights to their risk exposure. Quantexa is positioned in a unique way to help overcome these problems through data convergence, entity resolution and risk awareness.  

The Quantexa platform stitches together internal data that includes transactions, accounts and entities from both current and historical data sets, along with external enrichment data, such as corporate registrations, news feeds and watchlists. Being able to combine this data has historically been a pain point for institutions as it means putting the data into specific schemas or formats for it to be useful.  Because Quantexa requires no pre-defined tables and can seamlessly integrate data sources into the platform, the data challenge has been significantly reduced.  

Once this data is joined, entity resolution begins by connecting disparate data into meaningful results. Different customers, non-customers and counter party profiles are connected to build a more holistic view of the profile and the exposure the institution has to that entity. Quantexa automates this process and eliminates the need for manual overhead in searching for and combining records.  

From an operations perspective, this means that instead of looking at an individual transaction, an institution can combine information embedded in historical transactions with different third-party data. They can even use KYC documentation to more effectively determine if an entity within that transaction is a true match to a sanctioned entity.  

With Quantexa Contextual Monitoring providing an enriched, holistic view of parties, counterparties, non-customers and potential related risk, institutions can determine if the new transaction is of significant exposure through hidden connections to other high-risk parties. For example, connections can be automatically expanded from (non) customers or counter parties through ownership and directors to find hidden sanctions and PEP/RCA risk. Clear visualizations then indicate that either the (non) customers or counter parties are linked to a sanctioned entity via two or three hops with related connections to shell companies or addresses. This saves immense time for investigators by reducing manual information gathering and creating enriched alerts which ultimately enable them to make accurate risk- based decisions.  

Conquer the Wild West 

The ability to combine multiple data sources, automate historically manual processes and reduce the amount of risk faced by institutions in the Corre market can be realized today. Leveraging Quantexa’s capabilities can improve operational overhead and provide institutions with more confidence and security in an area viewed by many as the great frontier of the financial ecosystem ready for expansion, but fraught with risk, not unlike the Wild West of old.  

Don't miss our short Fireside Chat Session discussing the evolution of transaction monitoring landscape and how contextual monitoring and advanced technologies can help organizations in enhancing their capital markets AML controls.