By M. Ferracci, Head of AML at Bank Sepah – University Professor of International Finance

Intermediaries must apply enhanced customer due diligence measures with respect to credit and financial institutions established in non-EU countries other than equivalent third countries, when the latter establish ongoing relationships consisting of correspondent current accounts or payable-through accounts.

The legislation defines:

• Correspondent Current Accounts are accounts held by banks, traditionally on a bilateral basis, for the settlement of interbank services (remittances of bills, bank drafts and bank checks, payment orders, transfers of funds, documented remittances and other transactions);
• Pass-through accounts are cross-border correspondent banking relationships held between financial intermediaries, used to carry out transactions in their own name and on behalf of their customers.
• the acquisition of information suitable for identifying the ownership structures of the Foreign Correspondent and the quality of the supervisory regime and controls regarding the fight against money laundering and terrorism to which the Foreign Correspondent is subject;
• the acquisition from the Foreign Correspondent of sufficient information to fully understand the nature of the activities carried out, also with reference to the services provided to its customers in relation to which the account or accounts opened at the Bank are used;
• the collection of information to determine, on the basis of public registers, lists, deeds and documents accessible to anyone, its reputation and the quality of the supervision to which it is subject;
• ensuring, including through random checks, that the Foreign Correspondent has verified the identity of customers with direct access to the payable accounts, has consistently fulfilled customer due diligence obligations, and can, upon request, provide the Bank with the customer and beneficial owner data obtained as a result of fulfilling these obligations; an express declaration must be obtained stating that there are no regulatory or contractual impediments to the timely transmission of the requested information;
• the authorization of the Management for the opening of each current account;
• the written definition of the terms of the agreement with the Foreign Correspondent and the respective obligations.

The strengthened measures indicated above must be applied to relationships similar to correspondent current accounts or payable-through accounts.

It is prohibited to open or maintain correspondent accounts, even indirectly, with a shell bank (a shell bank is a bank or entity that carries out equivalent activities, established in a country in which it has no physical presence, which allows it to exercise effective direction and management and which is not connected to any regulated financial group). Furthermore, it is necessary to ensure that the Foreign Correspondent is an entity supervised by its own Central Bank, as relationships opened with members of the so-called "shadow banking system" are subject to particular caution.

In the event that a non-EU Correspondent submits a request to the Bank to convert banknotes denominated in one or more currencies whose legal tender status has ceased, the Bank must acquire information on the person on whose behalf the Correspondent submitted the request.

In order to provide ongoing support for controls on money laundering activities in relation to correspondent banking, Italian banks must implement a series of systemic analyses and best practices, summarized as follows:

a) The characteristics and activities of correspondent banking.

Correspondent banking is a high-volume, extremely time-consuming activity that involves significant cash flows between a large number of financial institutions. In many cases, no single party involved has a complete overview of the entire transaction flow.
The Bank carries out transactions initiated by its correspondent on behalf of counterparties with whom the Bank itself does not have direct relationships, who are not its customers and for whom it has consequently not conducted due diligence.
These features can make correspondent bank accounts vulnerable to potential illicit activities by money launderers, making it significantly difficult for the Bank to prevent and detect such illegal activities.
In its dealings with Iranian correspondents, the Bank effectively acts as an agent for its correspondent bank, executing and/or carrying out payments and other transactions on behalf of the correspondent bank at the direction of its clients. These clients may be natural persons, legal entities, or even other financial institutions, while the beneficiaries of the transactions are clients of Italian banks.
The Bank does not have direct relationships with the parties underlying the transactions that pass through it and, in such cases, may not be in a position to verify the identity or fully understand the nature of a specific transaction, especially in the context of the processing of electronic payments (money transfers).

In order for the Bank to adequately mitigate money laundering risks, each correspondent bank must be able to conduct adequate due diligence on its customers and their transactions in compliance with applicable laws and regulations, taking into account all relevant international standards where appropriate.

This due diligence must be carried out by correspondents who have a direct relationship with clients, as they are in the best position to know their clients and are required to operate an adequate internal control system aimed at mitigating potential money laundering risks.

The Bank is required to adopt a risk-based approach, conducting in-depth due diligence on correspondents considered to be at higher risk.

In some cases, even without starting any direct relationship with the customers, it may still be necessary for the Bank to request or receive from the correspondent bank information regarding one or more customers of the correspondent itself, including other financial institutions that are its customers (even if the transfer of information may be subject to laws or regulatory provisions that prevent
to the correspondent bank to provide information to the institution).

The Bank applies the following binding prohibitions on entertaining:

• relationships with shell banks The Bank is required to take all measures to ensure that it does not knowingly and deliberately collaborate with financial institutions which in turn operate with shell banks;
• relationships with unlicensed and/or unregulated non-bank financial institutions such as remittance services, exchange houses, casas de cambio, bureaus de change and money transfer agents, or natural or legal persons actually operating in this capacity;
• relationships with correspondent banks for which the conduct of due diligence has highlighted significant uncertainties that cannot be resolved;
• relationships in which the correspondent bank's anti-money laundering controls are found to be inadequate and/or insufficient, without the correspondent reassuring the institution that the necessary remedial measures will be adopted.

b) The risk-based approach methodology.

Each correspondent banking relationship must be reviewed on its own merits, and institutions can generally expect that countries implement the necessary anti-money laundering laws and that correspondents are therefore subject to adequate regulation and supervision (in the absence of information to the contrary from credible funds).

When analyzing correspondent banking relationships, it is necessary to consider factors that pose high risks of money laundering, either individually, in combination, or more generally as a whole. These factors have been identified with reference to: Country Risk and  Counterparty Risk, the two criteria that represent the cornerstone around which the money laundering risks for the Bank are hinged.

Correspondent bank country risk must be assessed to determine whether a country poses a money laundering risk. Factors that may lead to a country's higher risk of money laundering include:

• the fact that the country is subject to sanctions, embargoes or similar measures decreed for example by the United Nations, or in any case where national laws are applied;
• the fact that the country has a high level of corruption or other criminal activity or is politically unstable as determined by reliable sources;
• The country does not have adequate anti-money laundering laws and regulations, or existing laws and regulations are insufficiently or inappropriately implemented, as determined by reliable sources. Counterparty risk factors are related either to the correspondent bank's organization and structure, or to the nature and purpose of its business activities. Considerable factors that may lead to a higher risk of money laundering include whether the correspondent bank is:
  • an offshore correspondent;
  • a correspondent characterized by material involvement with PEPs subjects;
  • a correspondent bank that is not state-owned or publicly held (or part of a group of state-owned or publicly held companies), although the nature and extent of the state ownership or the terms under which the correspondent bank is listed and traded on a regulated stock exchange may be considered equally relevant;
  • an entity that offers its customers higher-risk correspondent banking services;
  • a central bank or a supranational organization that operates in products and services other than those provided for in the scope of its core activities;
  • regulated and licensed non-bank financial institutions such as remittance services, exchange houses, casas de cambio, bureaus de change, and money transfer agents.

The Bank uses the above criteria (which, however, are not intended to be exhaustive) to develop its model for identifying higher-risk correspondents, thus applying appropriate due diligence, approval, monitoring, and verification solutions. The Bank adequately documents the methodologies adopted and the controls implemented.

For the exchange of a SWIFT key, it is specified that the Bank performs an adequate level of due diligence whenever payment information is exchanged or is intended to be exchanged.

However, when only an exchange of information not related to payments is envisaged, due diligence on the foreign bank is essentially superfluous.

c) The KYC process for money laundering risk

The Bank adopts a set of policies and procedures designed to facilitate the identification of unusual or suspicious activity, reporting it to the competent authorities as required by applicable laws. The Bank also implements appropriate processes to enable the identification of unusual activity and anomalous patterns of activity or transactions. Since unusual transactions or anomalous patterns of activity are not always actually suspicious, the Bank must carefully evaluate the opening of correspondent accounts and determine whether the activities, patterns, and transactions are suspicious in terms of potential money laundering.
Suspicious activities, patterns, and transactions are reported to the competent authorities in accordance with applicable laws and regulatory provisions.

The enhanced verification measures adopted by the Bank as part of the KYC process:

 Conducting due diligence: gathering sufficient information on a correspondent bank to understand the nature of its activities, determining its reputation, and the quality of its supervisory activities based on publicly available and readily available information. To the extent such information is available, the information gathering activity must specifically determine whether the correspondent bank has been subject to investigations into money laundering or terrorist financing, or whether it has been subjected to disciplinary action. The information thus gathered should allow the bank to periodically "monitor" the identified owners and senior management of the correspondent bank via the internet and/or, where appropriate, through more specialized research sources, for negative news/information published in the media regarding the risks posed by the correspondent, including new or previously unknown connections to PEPs, sanctioned natural or legal persons.

The following outlines the information and documentation acquisition process required before establishing an ongoing relationship with a foreign correspondent:

Due diligence for establishing relationships with foreign correspondents:

1. Letter in English explaining the Bank's AML process.
2. Anti-money laundering questionnaire (drafted according to the “Wolfsberg Group” standard) duly completed and signed by the correspondent who also indicates the name of the Anti-Money Laundering Officer.
   The signature must be confirmed via Swift message.
3. Anti-money laundering liability declaration to be drawn up on the company's headed paper
   corresponding.
4. Copy with date and signature of the company policies and/or procedures regarding
   anti-money laundering of the correspondent.
5. Copies of the correspondent's corporate governance documents, such as:
   • Company statute;
   • Articles of Association;
   • Minutes of the meeting for the appointment of directors.
6. Copy of the banking license or credit authorization of the
   corresponding.
7. List of the correspondent's social structure.
8. List of directors accompanied (where possible) by the professional profile of the
   same and list of the correspondent's top management.
9. Photocopy of identification document(s) of the legal representative(s) of the
   corresponding.
10. Latest financial statements (consolidated where applicable) of the corresponding company, complete with certification by external auditing firms (where possible).
11. List of persons (and other information suitable for their identification) who directly or indirectly own, control or have the power to vote over at least 10% of any class of voting securities.
    For listed banks, it is necessary to identify the stock exchange on which they are listed.
12. Updated extract from the correspondent's commercial register.
13. Note drawn up by the Head of the Bank Service in which the
    purpose of the ongoing relationship and the reputational level of the correspondent where known directly or indirectly.
14. Approval by the Bank's Anti-Money Laundering Officer.
15. Final authorization from the Bank's General Management.

– Request and review of correspondent bank KYC and anti-money laundering activities: obtaining sufficient information regarding the correspondent bank's anti-money laundering program in order to assess whether the measures it has adopted in this area are adequate and appropriate.

The Bank opens correspondent relationships only with correspondents who have their own anti-money laundering policy in line with the international standards currently in use and who are fully SWIFT-enabled (please remember that SWIFT carries out a strict KYC check on the bank before being granted full functionality).

A useful tool in this regard is the Anti-Money Laundering Questionnaire, drawn up based on the principles established by the Wolfsberg Group (www.wolfsberg-principles.com). The latest revised edition of the Questionnaire to be submitted to correspondent banks is dated February 22, 2018 (see attachment).
The Wolfsberg Group, founded in 2000 by 13 international banks, has established a series of voluntary, coordinated measures to combat money laundering. These principles, in fact, constitute international best practices.

It is therefore appropriate for banks to adopt the “Wolfsberg Group” principles.

The principles address relationships between banks and high-net-worth individuals and include guidelines on accepting clients, situations requiring special attention, and ways to identify unusual or suspicious activity.

It is also advisable for banks to have the correspondent bank sign a declaration of responsibility, which accepts and recognizes the Bank's right to verify the identity of the correspondent bank's customers and to perform adequate and ongoing due diligence on their activities. The Bank reserves the right to unilaterally terminate the ongoing relationship if information and documentation are deemed inconsistent or lacking.

– Periodic review and updating of correspondent banks as follows:

√ Review: annual

Without prejudice to the right to repeat the due diligence process at any time following a change in the money laundering risk.

Review means the due diligence process from the beginning, with the presentation of each document and the signing of the forms as if dealing with the correspondent for the first time. The performance analysis of previous relationships will be considered a critical success factor for the review process.

– Visits and personal meetings with the subjects identified as owners of the correspondent bank and/or with its senior management.
– Risk-based engagement of senior management and an independent and autonomous control unit, separate from operational activity, identified in the Anti-Money Laundering Service, both for the purpose of approving new ongoing relationships with foreign correspondents and subjecting existing relationships to periodic reviews.

In all cases where it is not possible to ensure the adoption of the enhanced measures specified above (or during the annual review), the transaction must not be carried out or the ongoing relationship must be opened, or the existing relationship must be terminated and a suspicious transaction report must be considered.