5 Reasons to Make Your Respondent Bank Risk Assessment More Dynamic

Correspondent banking poses multiple risks due to third-party involvement in transactions. Many banks focus their detection effort on individual transactions to identify the risk associated with underlying parties. However, assessing the change in profile of the respondent bank itself is often overlooked within existing financial crime control frameworks, which can expose banks to significant risks.

The evolution of respondent banks

The changes that can occur in a respondent bank's risk profile between onboarding and the next scheduled Know Your Customer (KYC) review can be substantial and may critically increase the correspondent bank's risk exposure. A respondent bank initially onboarded with a low-risk profile may experience significant growth, evolve its market offerings, and expand its business lines over time. These developments directly affect its transactional behavior, potentially introducing greater risk and altering previously identified nesting patterns.

Despite these evolving risks, the correspondent bank often has limited visibility available through current controls implemented. While alerts may be triggered at the end-party level, the absence of a robust, automated system to monitor the overall risk evolution means the correspondent bank might overlook critical risk indicators. Though manual checks at the respondent level are possible, the sheer volume of reviews required across multiple respondent banks increases the likelihood that significant changes may go unnoticed, leaving the institution exposed to unforeseen risks.

The importance of dynamic, multilevel monitoring

The challenges arising from these types of risks highlight the need for ongoing, dynamic, and multilevel monitoring. Existing controls such as Respondent bank KYC and transactional behavior monitoring must be integrated into a broader and dynamically updated Respondent Bank risk assessment model. This model should not rely solely on internal data and visible transactions but also assess connections within and outside the institution's data.

A comprehensive understanding of the underlying client risk is essential. This can be achieved by profiling non-customer entities transacting through the respondent bank. For example, connecting transactional data with external data sources to automatically profile the risk of the non-customer entity. An example of this can help to understand risks such as how many entities transacting through a respondent are linked to high-risk sources like the Paradise Papers or other tax havens. With this information, the correspondent bank can act promptly, incorporating it into their customer risk scoring model to adjust the respondent bank’s risk rating accordingly. This allows a more agile and comprehensive approach to risk management of respondents within a fast-moving environment.

Aligning with FATF recommendations

Implementing such practices aligns with the FATF (Financial Action Task Force) recommendations:

"In a correspondent banking relationship, the correspondent institution will monitor the respondent institution’s transactions with a view to detecting any changes in the respondent institution’s risk profile or implementation of risk mitigation measures (i.e., compliance with AML/CFT measures and applicable targeted financial sanctions), any unusual activity or transaction on the part of the respondent, or any potential deviations from the agreed terms of the arrangements governing the correspondent relationship."

Gaining operational efficiencies

When changes in behavior or risk deviation are detected, an RFI (Request for Information) is often triggered. Without a comprehensive risk view, the correspondent bank may review only certain parts of the respondent bank's behavior, leading to excessive RFIs. This results in higher costs and an overburden on investigative teams. However, with a proper understanding of the respondent bank’s history and network features, the correspondent bank can better assess nesting activities, such as whether downstream financial institutions are linked to external watchlists. This allows for more informed decisions based on a full understanding of transaction-related risks.

Managing risk without conducting CDD on the underlying entities

As the FATF emphasizes:

“There is no expectation, intention, or requirement for the correspondent institution to conduct customer due diligence on its respondent institution’s customers.” However, there is a requirement to understand overall risk changes and the relationship, not only on the transactional level but also on the KYC risk level. For instance, if a new director is linked to a watchlist, banks must evaluate how this impacts risk in correlation with transactional changes.

A dynamic respondent risk assessment model allows institutions to monitor changes in their respondent bank's risk profile, across multiple levels, such as geographical profile, transactional-related risks, higher risk transacting parties, etc., thereby ensuring prompt actions and the implementation of effective risk mitigation controls.

The benefits of dynamic risk assessment

1. Evolving Regulatory Requirements

   AML regulations are constantly changing. Ongoing risk assessments help ensure compliance with the latest standards and guidelines, reducing the risk of penalties or sanctions.

2. Dynamic Risk Profiles

   A respondent bank's risk profile can shift due to changes in geopolitical situations, economic conditions, or operational practices. Regular automated assessments provide a current understanding of these risks, enabling banks to adapt their strategies accordingly.

3. Detection of Emerging Threats

   New money laundering techniques frequently emerge. Continuous risk assessments enable the identification and mitigation of these evolving threats, ensuring that AML controls remain effective.

4. Strengthened Relationships and Trust

   Up-to-date risk assessments foster stronger relationships with respondent banks by demonstrating a commitment to rigorous risk management. This enhances trust and cooperation between correspondent and respondent banks.

5. Prevention of Financial Losses

   Dynamic risk assessments help identify and mitigate potential financial risks before they escalate. By proactively addressing vulnerabilities, banks can prevent significant financial losses and safeguard their assets.

Dynamic respondent risk assessment is essential for modern AML programs. By continuously monitoring changes in both KYC and transactional behavior, banks can stay ahead of emerging threats, remain compliant with evolving regulations, and build stronger relationships with their respondent banks.

Key technology considerations

Here are key steps in leveraging Quantexa’s capabilities to execute a dynamic risk assessment focused specifically on respondent banks:

Build a 360 respondent bank view:

• Leverage Quantexa’s entity resolution to consolidate and unify data related to the respondent bank (e.g., correspondent relationships, accounts, CDD, transactions, internal and external watchlists, alerts) from disparate sources across the institution.

• Enrich respondent bank profile by incorporating external data sources (e.g., public records, correspondent banking registries, adverse media, international sanctions lists) to enhance accuracy and detect potential risks, such as indirect exposure to sanctioned entities.

• Identify and assess any data gaps or inconsistencies in respondent bank records that may affect the accuracy of risk assessments, and formalize a strategy for addressing these gaps to ensure a thorough risk evaluation.

Identify network and underlying entities risk:

• Utilize Quantexa’s network generation capabilities to map and analyze the respondent bank’s relationships with downstream banks, underlaying customers, nested relationships, and other entities within its network.

• Detect indirect exposures, such as transactions linked to high-risk geographies, politically exposed persons (PEPs), or sanctioned entities, by analyzing the respondent bank’s broader correspondent banking network at a macro level.

Aggregate risk and scoring covering AML and KYC:

• Aggregate risks across the respondent bank’s transactions, underlaying customers, and network to develop a holistic view of the risk profile. This approach accounts for indirect risks stemming from downstream banks and third-party relationships.

• Apply a dynamic risk scoring methodology tailored to the FI's specific risk appetite and in alignment with local and international regulatory expectations (e.g., FATF, OFAC). Ensure the risk scores reflect the respondent bank’s full exposure and influence the overall risk rating (including the KYC changes and the transactions behavioral risk.

Continuously monitor and dynamically adjust risk:

• Establish event-based triggers to continuously monitor material changes in the respondent bank’s behavior, CDD or network, such as a shift in transaction patterns, new downstream relationships, high risk changes in CDD or involvement in suspicious activity.

• Implement continuous risk monitoring using Quantexa to flag significant changes in the respondent bank’s profile or network (e.g., the introduction of high-risk nested relationships or new high-risk geographies).

• Dynamically adjust the respondent bank’s risk rating based on the materiality of these changes, ensuring ongoing accuracy in the institution’s risk profile and compliance with internal policies.

Conduct ongoing model governance:

• Develop a robust governance framework to ensure that the risk models used for assessing respondent bank risk remain compliant with regulatory requirements and internal standards.

• Conduct periodic performance reviews and model recalibrations to ensure the dynamic risk assessment framework accurately reflects the evolving risk landscape of respondent banks.

• Utilize insights from Quantexa’s platform to track key risk metrics related to correspondent banking, identify emerging risks, and support decision-making around mitigating respondent bank exposures.

Implementing a Dynamic Respondent Risk Assesement framework with solutions like Quantexa is essential for FIs engaged in correspondent banking relationships. By leveraging Quantexa’s advanced technologies, FIs can enhance the precision of respondent bank risk assessments, ensure ongoing compliance with regulations, and strengthen their ability to manage both direct and indirect risks posed by their respondent bank relationships. This approach not only mitigates risk but also supports the institution’s long-term growth and operational resilience.

Anti-Money Laundering

Advancing Correspondent Banking Insights: Managing Respondent Banks Risk