Anti-Money-Laundering (AML) & Countering Financing of Terrorism (CFT) Risk Management in Emerging Market Banks Good Practice Note 1 © International Finance Corporation 2019. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The contents of this document are made available solely for general information purposes pertaining to AML/CFT compliance and risk management by emerging markets banks. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. 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Anti-Money-Laundering (AML) & Countering Financing of Terrorism (CFT) Risk Management in Emerging Market Banks Good Practice Note Table of Contents FOREWORD V ACKNOWLEDGMENTS & ABBREVIATIONS OF COMMON TERMS VI CHAPTER 1: INTRODUCTION 1 CHAPTER 2: ESTABLISHING A SOUND FINANCIAL INSTITUTION RISK MANAGEMENT FRAMEWORK, GOVERNANCE STRUCTURE, AND CULTURE 7 CHAPTER 3: ESSENTIAL ELEMENTS OF A SOUND AML/CFT PROGRAM 15 3.1 Introduction 15 3.2 Governance 16 3.3 Risk Identification, Assessment, and Mitigation 19 3.4 Policies and Procedures 24 3.5 Customer Identification and Due Diligence 27 3.6 Transaction Monitoring 37 3.7 Reporting 42 3.8 Communication and Training 43 3.9 Continuous Improvement and Testing 45 3.10 Internal and External Audit 45 CHAPTER 4: DEALING WITH YOUR CORRESPONDENT BANK AND OTHER STAKEHOLDERS 47 CHAPTER 5: AML/CFT PROGRAM MATURITY FRAMEWORK SELF-ASSESSMENT 53 CHAPTER 6: CONCLUSION 65 ANNEX 1: INITIATIVES UNDERTAKEN BY INTERNATIONAL INSTITUTIONS AND SYSTEMIC BANKS TO ADDRESS DE-RISKING 69 ANNEX 2: RECENT DEVELOPMENTS IN CORRESPONDENT BANKING 71 ANNEX 3: LIST OF MOST RELEVANT FINANCIAL ACTION TASK FORCE RECOMMENDATIONS AND BASEL PUBLICATIONS 73 ANNEX 4: GENERAL GUIDE TO ACCOUNT OPENING 74 ANNEX 5: WOLFSBERG GUIDELINES 77 Foreword In recent years, simultaneous increases in reserve capital requirements, Anti-Money Laundering and Countering the Finance of Terrorism (AML/CFT) compliance requirements have created a marked increase in cost and complexity to banks globally. While many of these regulatory changes have increased financial system resilience and helped battle financial crime, they have also put increased pressure on correspondent banking relationships and cross border financial networks. These networks make trade possible, support remittances, and facilitate foreign currency settlements. Faced with orders for corrective action, deferred prosecution agreements, and punitive financial fines issued by regulators, correspondent banks have responded by limiting their activities to markets with more acceptable regulatory risk-reward economic benefits. The regulatory challenges and commercial economic factors in many of the emerging markets, particularly the smaller economies, have resulted in a disproportionate increase in costs and implementation challenges, exacerbated by the impact of withdrawal of the corresponding banking relationships. There has been a notable concentration of flows within trade lines and remittance channels, undermining smaller local banks which can be critical to financial sector stability and the growth and prosperity of emerging market countries. IFC’s study and publication, “De-Risking and Other Challenges in the Emerging Market Financial Sector,”1 highlighted that over 25 percent of 300-plus banks in over 90 emerging markets reported correspondent bank relationship losses. Seventy- two percent of the banks covered by the study reported that they face exogenous challenges – primarily correspondent banking stress and related compliance challenges – that have touched every surveyed market irrespective of size or risk. There is a compelling business case to be made for upgrading a bank’s AML/CFT capabilities. Banks that lead the way in emerging markets are in stronger positions to maintain and/or grow their cross-border correspondent banking networks, putting them in a position to better serve customers and their respective connections to the global economy. This provides unique growth opportunities for their business, strengthening their market presence and stability. It opens doors to deeper data – driven innovation for viewing their markets, customers and product potential, which shifts their own individual growth curve. As expectations for continuous improvement in AML/CFT compliance pervades the global financial system, it is important that EM financial institutions: (i) understand the business implications of ML/FT along with implications for security and criminality; (ii) identify additional compliance requirements for participating in the global financial system and (iii) find their own path to excellence in this area. We recognize that each country and each institution is different – each will need different levels of support or clarity as they work to achieve these goals. However, in many cases, the request is for guidance across several fronts: basic AML/CFT concepts, interpreting and implementing regulatory guidance, correspondent bank reporting and systems alignment, interpreting US/EU regulatory requirements, and technology-based solutions. It is our belief that this publication can provide a measure of guidance, and that it can spur additional solutions opportunities to address the challenges currently faced by cross border financial networks. It is my hope that, as each financial institution stretches to address this issue, the attention to quality and excellence as well as the opportunity for innovation embedded in the collective effort will provide for an even stronger EM global financial system. Paulo de Bolle, Senior Director Global Financial Institutions Group 1 http://documents.worldbank.org/curated/en/895821510730571841/pdf/121275-WP-IFC-2017-Survey-on-Correspondent-Banking-in-EMs-PUBLIC.pdf v Acknowledgments Under the supervision of Manuela Adl and Cameron Evans, this Good Practice Note was prepared with contributions from Ebrahim Farouk, Annetta Cortez, Yannick Stephant, Susan Starnes, Robert Heffernan, Brian Robert Sokoliuk, Margarete O. Biallas, Mariyam Zhumadil, William C. Hayworth, Matthew Huggins, Sokhareth Kim, Elizabeth Gibbens, Andrew Berghauser, Lauren Kaley Johnson, and Rob Wright. IFC would like to thank our colleagues and partners who reviewed and provided the insightful comments for the document including Yan Liu, IMF Assistant General Counsel, Emile J. M. Van Der Does De Willebois, World Bank Lead Financial Sector Specialist, John T. Murray, BONY-Mellan, Ayo Omoogun, Standard Chartered Bank,William L. Burmeister, Citibank, Lisan Hannah, The Bank of Nova Scotia, Lauren Girard and Jeff Gontero, JP Morgan Chase, Steven Puig, Banco BHD Leone, and Miriam Ratkovicova, Deloitte Transactions and Business Analytics LLP, without their input, this publication would not have been materialized. Abbreviations of Common Terms FT Financing of terrorism AM L Anti-money laundering GPN Good Practice Note BCBS Basel Committee on Banking Supervision IFC International Finance Corporation BIS Bank