Correspondent Banking Relationship under IFSCA AML/CFT Guidelines 2022

Nikhil Mogha

22 May, 2024

The International Financial services centres authority through IFSCA (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022, mandated that the regulated entry must frame policies and measures for correspondent banking relationship. The correspondent banking relationship means the regulated entity must obtain information about the respondent banks to fully understand its business activities. The present article will discuss in detail the provisions relating to the meaning and conditions of correspondent banking relationships.

What is a Correspondent Banking Relationship?

The regulated entity must maintain a correspondent banking relationship to receive funds from or send funds to any person. This course of transactions implies that there shall be a banking relationship with the regulated entity for undertaking transaction functions. Henceforth, to regulate and lays down the parameters, the IFSCA^[1] guidelines on AML/CFT have mandated that the regulated entity shall put in place a policy for correspondent banking relationship which shall state the parameters for  approving banking relationships and it shall be approved by:

• A Governing body, or
• A committee headed by Chairman or CEO or MD

What are the Conditions for Approving Correspondent Banking Relationships?

The regulated entity shall, before approving the policy for correspondent banking relationship to maintain banking relationships, shall subject to the following conditions:

1. The regulated entity shall assess the suitability of the respondent bank by undertaking the following steps:

• The entity shall gather all the information and make appropriate inquiries about the respondent bank’s business, management, business activities and the countries or jurisdictions in which it operates.
• The entity shall determine the reputation of the bank and the quality of supervision. It shall also ascertain whether the bank is subject to any Money laundering (ML) or Terrorist Financing (TF) investigation or any regulatory action.
• The entity shall assess the bank’s AML or CFT controls and determine their adequacy with regard to the AML or CFT measures of the country.

2. The entity shall document the responsibilities of each bank with whom it has to maintain a banking relationship.

3. The entity shall take approval from the senior management before giving correspondent banking services to a respondent bank.

4. The Correspondent Bank shall be satisfied that the respondent bank has verified the customers identity and is undertaking due diligence on them in the case of payable-through accounts.

5. The correspondent bank shall ensure that the respondent bank can promptly provide customer identification data upon request.

6. There shall be no correspondent relationship with a Shell Financial Institution bank.

7. The correspondent bank shall not permit their accounts to be used by the bank, which is a shell financial institution.

8. There shall be a caution maintained with respondent banks located in a jurisdiction with deficiencies or failed to implement the FATF recommendations.

9. The respondent banks should have implemented AML or CFT policies and procedures.

10. The respondent banks shall apply enhanced due diligence measures for transactions carried out through the correspondent banks. 

Conclusion 

The Regulated Entity is required to frame policies, procedures and parameters for approving correspondent banking relationships. It is required that the policy be made, which shall lay down the parameters to be fulfilled by the respondent bank for getting approval for undertaking transactions by the bank on behalf of the regulated entity. It shall be further required that the governing body or a committee shall approve the policy for banking relationships. The policy will bind the bank and regulated entity and helps in gathering information about the course of transactions.  The respondent bank is required to develop and implement AML or CFT policies which shall prevent the bank from engaging in any ML or TF activities.

Read Our Article: IFSCA guidelines on Anti-Money Laundering or Counter-Terrorist Financing