Wolfsberg Financial Crime

Principles for Correspondent

Banking

07/10/2023

Bank of Georgia

Luka-david Gaprindashvili
 Introduction:
Dear colleagues, today we have a very interesting topic to discuss- “Wolfsberg Financial Crime
Principles for Correspondent Banking”. “The Wolfsberg Group” believes that adherence to these
Principles which we will cover below will promote effective risk management and enable
Institutions to exercise sound business judgment concerning their correspondent banking
customers.
Furthermore, adherence to these Principles will support the aim of Group members and the wider
industry to prevent the use of global networks for criminal purposes.

The document also touches on the following aspects that we will go through below;
• Correspondent Banking and the Nature of it;
• Respondent Banking and the Nature of it;
• Responsibility and Risk-Based Due Diligence;
• Monitoring and Reviewing for Correspondent Banking;
• Summarize;

Correspondent Banking and the Nature of it:

A Correspondent Relationship is a business relationship provided by a financial institution (FI) for
another Bank for the provision of commercial or business products or services. The degree of risk
in a Correspondent Relationship is dependent on the risks posed by the nature of the relationship.
For example, the risk is generally higher where the bank receiving the services (Respondent) uses
its Correspondent Relationship to provide banking services to its customers. This is because the
FI providing the services (Correspondent) is acting as an intermediary for underlying customers of
another Bank.
For these Principles, Correspondent Banking activity (and by extension a Correspondent Banking
Relationship) is defined specifically as the provision of banking-related services by one Bank to
another Bank, for the execution of third-party payments, trade transactions and processing of
paper clearing needs in a particular currency. A Correspondent Banking Relationship and its
nature is characterized by its ongoing, repetitive nature and does not generally, exist in the context
of one-off transactions.

Respondent Banking and the Nature of it:

A respondent bank is a financial institution that establishes a relationship with another financial
institution (the “correspondent bank”) in order to access a wider range of financial products and
services. The respondent bank relies on the correspondent bank to provide these services on its
behalf.
The respondent bank is typically a smaller institution that lacks the resources or expertise to offer
certain financial products and services on its own. By establishing a correspondent banking
relationship with a larger, more established institution, the respondent bank can offer its customers
access to a wider range of financial products and services
 Responsibility and Risk-Based Due Diligence:

Institutions shall define policies and procedures that require specified personnel to be
responsible for ensuring compliance with their Correspondent Banking activities, and ensure such
personnel have relevant experience and have undergone training on the risks involved in
Correspondent Banking. The policies and procedures also shall provide for independent review by
appropriate personnel to ensure continued compliance.
An Institution shall define an acceptable risk appetite that has been approved by its Board or
other similar senior stakeholders. The risk appetite of the Correspondent Bank should set out the
different types of parties and transactional activity the Correspondent prohibits or limits from being
processed through its Respondents’ account(s).
The Institution’s policies and procedures shall require that the Respondent’s
information be reviewed and updated on a defined risk-based, periodic basis. In addition, given
trigger events shall prompt a re-evaluation of the relationship. In conducting Due Diligence, the
following risk indicators shall be considered:

 The Respondent's Geographic Risk

Certain jurisdictions are recognized internationally as having inadequate financial crime
standards or insufficient regulatory supervision.

 Providing Correspondent Banking Relationships to your Branches, Subsidiaries and

Affiliates
The level and scope of due diligence on such a Respondent shall be dependent upon the level
of control exercised by its parent institution.

 Providing Correspondent Banking Relationships to Branches, Subsidiaries, and

Affiliates of other FIs
In instances when the Respondent Bank is a branch, Subsidiary, or affiliate, certain facts
unique to the branch, subsidiary, or affiliate may dictate the level of EDD to be performed on
that subject.

 The respondent Bank Ownership and Management Structures

The ownership and management structure of the Respondent may present increased risks.
The presence of any PEPs in the Executive Management structure is also an important
consideration.

 Products and Services Offered by the Respondent

The types of financial products and services the Respondent offers to its customers, as well as
the type of markets the Respondent serves, may present greater risks

 The Respondent bank's Customer base

The types of customers serviced by the Respondent may be relevant to the risk it poses to the
Correspondent Bank.

 Products and Services Offered to the Respondent Bank

The nature of the products and services offered to the Respondent can impact the risk
associated with the relationship.

 Regulatory Status and History

 Reasonable measures shall be taken to verify that the Respondent is subject to regulatory
oversight and is duly licensed in the jurisdiction where it operates.

 Financial Crime Controls

Using the risk-based approach, the institution shall evaluate the quality of the Respondent's
FCC program, including how it meets internationally recognized standards and how sufficiently
it mitigates the risk presented based on its products, customer base, and jurisdiction.

 No Business Arrangements with Shell Banks

The institution shall confirm that the Respondent is not a "Shell bank" and does not provide
products or services to shell banks.

 Customer Visit
Unless other measures suffice, a representative of the Institution should visit the Respondent
Bank at their premises, before or within a reasonable period after establishing a relationship
with a Respondent, to support the customer due diligence process.

Enhanced Due Diligence (EDD):

In addition to due diligence, each institution shall also apply enhanced Due Diligence (EDD) to
those Respondents who present greater risks. The EED process shall involve further
consideration of the following elements:

 PEP Involvement
If a PEP appears to have involvement in the Respondent, the Institution shall ensure it has an
understanding of the person, their role, and their ability to influence the customer and the risk
they may present to the relationship

 Downstream FIs
When a Respondent offers downstream services to a downstream FI, the Correspondent shall
take reasonable steps to understand the types of FIs to whom the Respondent offers these
services. These steps may include consideration of the types, scale of services, and geographic
location of downstream FI(s) and their customers, and any identified issues with either the
Respondent or its downstream FI’s customers.

Monitoring and Reviewing for Correspondent

Banking:
The Institution shall implement policies and procedures to detect and investigate unusual or
suspicious activity and report any such activity as required by applicable law. Such policies and
procedures should include guidance on what is considered unusual or suspicious and give
examples. The policies and procedures shall require appropriate monitoring of the Respondent’s
activity.
Institutions shall review the relationship with the Respondent on an ongoing basis to assess
whether the relationship remains within the risk appetite or not. This review should include
measuring the effectiveness of the Respondent’s FCC program on a risk-based approach. The
risk-based review to determine the effectiveness of the Respondent’s FCC program should include
assessing the Respondent’s ability to manage and detect financial crime risks within the
transactional activity of its underlying customers. This review should leverage all information
available at the time to assess whether the relationship should be maintained or not.

To sum up:
These Principles shall form an integral component of the institution’s wider FCC program,
including controls against bribery and corruption, fraud, and evasion of sanctions. Corruption and
financial crime are not new; they have been a feature of society for millennia since the concept of
money first developed. What is new is the sophistication of financial criminals and their ability to
use technology to facilitate money laundering. We are witnessing the rise of ‘crime tech’ as
criminals harness the latest technologies to beat the system and power international criminal
networks.