Financial criminals rely on advancing technologies such as Artificial Intelligence (AI) to hide their illicit actions. They abuse correspondent banks that serve as the intermediaries for both internal and foreign payments. While they sign legal agreements, their vulnerability to fraud risks persists. As a result, correspondent banks are gradually becoming a go-between for financial criminals despite holding a legitimate status.

The growth of digital banking systems has seen manifolds till 2022 and topped $345 billion in market worth. However, with more automation, illicit action risks are increasingly surfacing in financial institutions leading them to AML compliance risks. Considering this, regulatory watchdogs are toughening legal requirements like risk assessment, income authentication, and others. This article discusses how AML security solutions help overcome weaknesses in correspondent banks.

Table of Contents

Correspondent Banks and the Spike in Money Laundering Cases

Correspondent banks are the liaisons that facilitate domestic and cross-border payments. They are liable to adhere with the AML security frameworks while performing financial actions on behalf of centrally regulated institutions. Correspondent banks offer transactional settlements, treasury management, wire transfers, loan handling, and check cashing.

Despite the potencies, correspondent banks also suffer from illicit actions, including money laundering. As a result, they barricade their AML compliance by increasing vulnerability through the following factors:

Decentralized Nature

Financial institutions are centralized systems that are directly supervised by regulatory bodies. However, in recent times, a huge number of third-party payment providers with decentralized structures are taking over. They offer accounts that handle investments, savings, and other monetary matters.

Decentralized Finance (DeFi) service providers are a prominent example of these popularity-gaining entities. However, these structures are harder to regulate and are forcing anti-money laundering bodies ramp up strict monitoring.

Insufficient Customer Information

Know Your Customer (KYC) is a crucial component of anti-money laundering defenses along with risk profiling and due diligence. Inefficient client verification can increase compliance risks for correspondent banks. Considering this, the Financial Action Task Force (FATF) labeled customer risk assessment as a mandate in 2015.

Shell Companies

Corporations with counterfeit details, existence limited to papers, and no significant assets are commonly referred to as shell companies. High-profile criminals create them to exploit financial services for start-up efforts, hostile takeovers, and tax benefits. Shell companies further provide ways to hide illicit funds. Later, criminals easily escape AML compliance. They also disguise shady intentions and make it challenging for AML monitoring bodies to deter them.

The concept of shell companies also applies to legitimate-looking correspondent banks. Offshore financial accounts and the use of decentralized structures for hefty money movement help fraudsters hide their proceeds of crimes.

Correspondent Banks and Reasons for AML Regulatory Compliance Risks

Correspondent banks strive to stay put with changing AML compliance while making efforts to thrive in the competitive marketplaces. Their fear of ending up on sanctions, watchlists, or other restrictions is forcing them to incorporate robust digital onboarding measures. They later address the following barriers that hinder legal responsibility-fulfilling process.

Diverse Legal Requirements

The anti-money laundering requirements vary in different regions, such as countries with high financial crime risk or ones a part of watchlists have tough regulations than others. The distinction in obligations hinders correspondent banks’ efforts in meeting compliance. Considering this, criminals move their money to countries with flexible AML compliance programs and escape both scrutinies as well as suspiciousness detection.

Incompatible Fraud Prevention Systems

Correspondent banks are decentralized in nature which is the prime reason for their AML systems’ inefficiency. Furthermore, they experience inadequate due diligence, risk profiling, and activity monitoring.

Excessive Operational Costs

Additional operational costs for performing Customer Due Diligence (CDD) often drive financial instability for small correspondent banks. It further holds suspicious activity detection back in case of foreign transactions.

AML Screening Solutions – Helping Correspondent Banks Meet Compliance

Integrating AML solutions lowers the compliance risks of correspondent banks by creating strong fraud prevention controls. They can ramp up their defenses against criminals by placing additional protection and automating customer onboarding. Robust anti-money laundering services further employ the following checks:

Risk Scoring and Profiling
Customer Due Diligence (CDD)
Financial background cross-validation
Authentication of income sources through detailed transaction history analyses
AML Screening against PEPs, sanctions, adverse media, and global watchlists
Ongoing payment monitoring and suspicious activity detection
Real-time tracking

Key Takeaways

Criminals seek loopholes in AML compliance controls and exploit them to sweep through correspondent banking systems. Being a go-between option, they lack strict regulatory scrutiny, which leaves enough space for criminals. Hence, building effective AML security defenses has become an obligation for correspondent banks more than a choice. AI-powered anti-money laundering tools provide risk assessment, sanctions screening, ongoing transaction monitoring, and suspicious activity tracking, which later paves the way to compliance.