IN a 2015 report on countries affected by a decline in correspondent banking relationships, the World Bank (WB) calls on supervisory institutions at the national level to take on more duties in providing assurances to large banks which are concerned about use of funds for money laundering and other areas of risk.

Such assurances, the WB said, might prevent the withdrawal of correspondent banking services to dependent banks.

The report, titled “Withdrawal from Correspondent Banking; Where, Why, and What to Do About It,” was prepared by the Finance and Markets Global Practice unit of the World Bank Group.

Data gathering for this report took place from April through October 2015 from surveys and high-level fora with top officials.

Published in November 2015, the WB report said that supervisors should ensure banks follow a risk-based approach and “provide an unequivocal statement from national supervisors that there will be a zero tolerance approach for failures to detect money laundering and setting out the tenets for a reasonable risk assessment”.

This, the WB report said, can provide correspondent banks “with the comfort they say they are lacking at this moment”.

“Supervisors and other authorities should ensure the effective implementation of international AML/CFT (anti-money laundering and combating the financing of terrorism) standards,” the report added.

It stated that the Caribbean region is the most affected worldwide by declining correspondent banking relations.

A majority of banking authorities in the Caribbean region similarly reported a significant decline in correspondent banking relations (CBRs) during the survey period.

“In total, 89 per cent of jurisdictions reported experiencing significant to moderate declines in their foreign CBRs. Of the 19 respondent authorities, 15 reported significant declines and two others noted a trend towards decline or a moderate decline with no significant impact on the banking system overall. Only two jurisdictions reported ‘no significant change’ to their foreign CBRs.

“The decline appears to be less pronounced in Latin America,” the report stated.

The international payment system relies heavily on foreign correspondent banking under which they are provided with a current or other liability account… used for the execution of third-party payments and trade finance, as well as its own cash clearing, liquidity management and short-term borrowing or investment needs in a particular currency.

“Smaller banks are particularly dependent on such relationships to be able to offer payment and clearing services in foreign currencies,” the banking report states.

It was noted that small jurisdictions with significant offshore banking activities are particularly affected by the decline of CBRs and that concerns about the effective implementation of AML/CFT obligations by countries and jurisdictions featured prominently among the reasons large banks are withdrawing from correspondent banking relationships.

Among its conclusions, the World Bank said that the concern is that while large banks might be cleaning up their books and terminating relationships with higher-risk customers, the system as a whole ends up, as it were, pushing that risk to channels that are less transparent, or excluding legitimate customers, and thus actually increasing overall risk.