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P2.T7.813. Managing money laundering and financing of terrorism (ML/FT) risks when outsourcing or engaging in correspondent banking

Nicole Seaman

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Learning objectives: Explain practices for managing ML/FT risks in a group-wide and cross-border context, and describe the roles and responsibilities of supervisors in managing these risks. Explain policies and procedures a bank should use to manage ML/FT risks in situations where it uses a third party to perform customer due diligence and when engaging in correspondent banking.

Questions:

813.1. Greenholding International Bank locates its headquarters in the United States (i.e., this is home jurisdiction of the head office and parent bank) but has branches and subsidiaries all over the world, including several branches in a Scandinavian country (i.e., this is the local or host country). The Scandinavian country's privacy and data protection laws are different than those applicable in the United States. The local branch wants to share critical customer information with the head office. According to the Basel Committee, which of the following is TRUE?

a. Where regulatory or legal requirements are different, with respect to privacy laws and/or data protection, the local (aka, host) standards should apply
b. The local branch probably should not share the customer information because in most jurisdictions the home office is technically considered a "third party"
c. The local branch should not the share customer information with headquarters because this is a transfer of customer information across international borders
d. The local branch should share the customer information subject to adequate safeguards and confidentiality, and possibly subject to privacy laws in the home country; but if robust information-sharing between the home and host cannot be achieved, the bank should consider closing its operations in the host country


813.2. In regard to the policies and procedures a bank should use to manage money laundering and financial terrorism (ML/FT) risks in situations where it uses a third party to perform customer due diligence, which of the following statements is TRUE?

a. The bank cannot use third parties to perform customer due diligence
b. The bank can rely (aka, reliance) on third parties, but cannot outsource to an agent
c. The bank can either rely (aka, reliance) on third parties or outsource to an agent on a contractual basis
d. The bank can outsource to an agent on a contractual basis, but cannot rely (aka, reliance) on third parties


813.3. In regard to correspondent banking, according to the Basel Committee's Guidelines, each of the following statements is true EXCEPT which is false?

a. Correspondent banks should refuse to enter into (or continue) correspondent banking relationships with so-called "shell banks"
b. Correspondent banks should refuse to enter into (or continue) so-called nested (aka, downstream) correspondent banking relationships
c. Correspondent banking (as a definition) is the provision of ongoing, repetitive banking services by the "correspondent bank" to the "respondent bank" but excludes one-off transactions or the mere exchange of messaging capabilities
d. Risk indicators that the correspondent bank should consider in their risk assessment includes (i) the inherent risk resulting from the nature of the services provided, (ii) the characteristics of the respondent bank, and (iii) the environment in which the respondent bank operates

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