Correspondent banking arrangements can be manipulated to disguise the movement of funds for terrorist financing purposes according to the International Monetary Fund’s (IMF’s) recently published book on counter terrorism financing frameworks (Trade-based Financial Crime, 15 May 2023).
But Countering the Financing of Terrorism: Good Practices to Enhance Effectiveness also suggests that financial service providers de-risking by closing down correspondent banking arrangements heightens the risk of terrorist financing, and that banks could be incentivised to maintain such arrangements.
Vulnerability to terrorism
The book presents the case for measures that need to be taken to prevent correspondent banking relationships from being abused and to ensure that information on multi-actor transactions is available along the entire transaction chain.
But as banks continue to sever correspondent banking links in certain markets as they seek to de-risk their operations, so the vulnerability of these markets to terrorism increases according to the book.
Detrimental consequences
While compliance with international sanctions is needed, the closing of correspondent banking relationships has extended much more broadly than is warranted according to the authors.
They say this has had wide-reaching detrimental consequences for jurisdictions and their financial systems while services to individuals and locations at high risk of exposure to terrorist financing or targeted financial sanctions have been terminated.
Cutting services is more likely to divert funds to channels less open to detection rather than limit terrorist financing according to the book.
Bank incentives
It concludes that this is counterproductive to effective counter financing of terrorism measures.
Financial service providers, therefore, should be incentivised to manage risks through improved controls rather than seeking to eliminate all risks by indiscriminate cessation of services.
Countering the Financing of Terrorism: Good Practices to Enhance Effectiveness can be downloaded from here.
Categories: Trade Based Financial crimes News
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