OCC issues guidance on foreign correspondent bank de-risking with an eye toward inclusion, analysis

By Brian Monroe
October 27, 2016

The regulator of the nation’s largest and most complex banks is urging financial institutions to be more precise, and less blunderbuss, when it comes to weighing whether to drop foreign correspondent banking connections due to perceived financial crime compliance risks, with an eye toward inclusion and understanding.

The U.S. Treasury’s Office of the Comptroller of the Currency (OCC) issued the “Risk Reevaluation Guidance for Foreign Correspondent Banking” earlier this month in an attempt to get large domestic and international banks to be more analytical and at least consider the potential ramifications to certain banks or regions of the world if they “de-risk” out of the area. To read the guidance in its entirety, please click here.

The move by the OCC is in response to a widening schism between banks and federal regulators that has resulted in some banks becoming so risk averse in certain areas – either fearful of getting penalized for the relationship to a given bank, region or type of business, like a money services business (MSB) – they are dropping whole swaths of customers and cutting ties jurisdictions or even parts of the world.

While the OCC readily admits it can’t dictate what all banks should do in all situations with all customers, the regulator is urging banks to be more analytical and less reactionary, including giving the foreign institution a chance to provide mitigating information on its behalf to keep its relationship alive.

The OCC guidance provides some key best practices for evaluating when to keep or close correspondent accounts, including:

Ensuring that decisions to terminate foreign correspondent accounts resulting from risk reevaluation are based on analysis of the risks presented by individual foreign financial institutions and the bank’s ability to manage those risks.

    • Account termination decisions should be based on the unique facts and circumstances of each bank and foreign financial institution, such as the level of risk that the bank’s systems and controls are designed to manage or mitigate, strength of the bank’s systems and controls, and specific foreign financial institution attributes, including the AML and supervisory regime of the jurisdiction that issued the charter or license to the foreign financial institution.
    • Account termination practices that lack the appropriate risk assessment and consideration include:
      • terminating foreign correspondent account relationships without a careful analysis of the risks presented by the individual foreign financial institution and the bank’s ability to manage those risks.
      • terminating entire categories of foreign correspondent account relationships without regard to the risks presented by individual foreign financial institutions, unless specifically required by law.

Communicating with foreign financial institutions, considering specific mitigating information these institutions may provide, and providing sufficient time to establish alternative banking relationships before terminating accounts, unless doing so would be contrary to law or pose an additional risk to the bank, national security, or reveal law enforcement activity.

    • The communication to foreign financial institutions may articulate the bank’s concerns and reasons for considering account closure, without disclosing the existence of suspicious activity report filings if the concerns are based on potentially suspicious activity.
    • Give foreign financial institutions the opportunity to provide any additional customer-specific information to the bank that might address these concerns before the bank makes a final determination to close the foreign correspondent account.
    • n cases when the bank has decided to terminate the foreign correspondent account, provide sufficient time for the foreign financial institution to establish an alternative banking relationship with other U.S. banks.

Senior management should play role in de-risking decisions, says OCC

 Moreover, banks should consider bringing in the expertise and wisdom of bank senior management to give them an opportunity to argue why the relationship should be kept open or, conversely, to detail the potential aftershocks that could harm the foreign bank, businesses or residents of a given region if the larger bank cuts off its access to the international financial system.    

“Banks may consider establishing governance functions to monitor adherence to policies and procedures when considering whether to retain or terminate foreign correspondent accounts,” according to the OCC.

“Best practices in this area include communicating these decisions to bank senior management with consideration given to potential international financial inclusion impacts,” and ensure there is a clear audit trail of the decision-making process to de-risk away from certain regions.

That is primarily so that regulators can decide if a bank exiting relationship categories due to supposed AML risk management fears is just a cover to drop less profitable businesses without fears of discrimination blowback.