How correspondent banking relationships are used to launder funds
My favorite resource for correspond banking is the US Senate Report on Correspondent Banking published several years ago. Despite its age, it remains timely because it deals specifically with how the US financial system is used by correspondent banks in, mainly offshore tax havens to, inter alia, launder funds. Interestingly, the Senate Report notes that only one bank operating in the US refused to respond to questions posed of it by the Senate as part of its investigation – a Canadian bank.
Correspondent banking defined
Correspondent banking is the provision of banking services by one bank to another. It allows foreign banks to conduct business and provide services where they have no physical presence. For example, a bank licensed in Switzerland with no US office may want to provide services in the US for its customers. Instead of the Swiss bank bearing the cost of setting up a US branch office, it can open a correspondent account with an existing US bank. The Swiss bank, called the respondent bank, can thereby offer services and products through the US bank, called the correspondent. Large international banks in financial centres of the world serve as correspondents for thousands of smaller foreign banks.
Services provided by correspondent banks
Correspondent banks provide cash management and investment services to respondent banks. The cash management services include deposit accounts, international wire transfers, cheques clearing, payable through accounts and foreign exchange services. Investment services include money market accounts, investment accounts, certificates of deposit and securities trading accounts. By far, the most important service is providing access to international funds transfer systems. International wire transfers are complex in that they involve multiple electronic communications that trigger a series of debits and credits recorded on the ledgers of financial institutions that identify the sender and receiver of the wires. Multiple banks are involved in payment transfers and correspondent banking acts as the gateway, or the electronic pathway, to allow funds to move from one jurisdiction to another.
For many foreign banks, especially in offshore tax havens, if access to correspondent banks were severed, they would be unable to operate. Another went so far as to say that without correspondent accounts, offshore banks would close.
Correspondent banks are susceptible to money laundering
US correspondent banks are susceptible to money laundering due to: (a) culture of lax due diligence at US correspondent banks; (b) nested correspondents; (c) bank secrecy laws; (d) difficulty seizing funds in US correspondent accounts; (and e) weak compliance at foreign banks. In the Report, offshore bankers informed Senate investigators that offshore bank accounts are held mostly by Americans and Canadians and named several major banks in both countries that provide correspondent relationships to it that, whether they were aware of it or not, provided money laundering services to that bank’s clients.
What bankers say about correspondent banking
One US correspondent banker told the Senate that there is no reason for offshore banking to exist if not for tax evasion or other financial crimes.
Another US correspondent banker informed the Senate that 100% of its clients were engaged in tax evasion and sought bank secrecy for that precise reason and were willing to pay higher offshore fees.
According to a third US correspondent banker, the way the offshore correspondent banking scheme works is as follows:
- Lawyers from anywhere arrange for a corporation to be established in an offshore tax haven or buy, in that jurisdiction, a shelf corporation (which most law firms already have);
- The bank in the tax haven sets up a bank account for the client in the name of the new corporation;
- Shares are held in the name of another shelf corporation;
- Lawyers act as the sole director of the corporate entity or another corporation fulfills that function as a nominee director;
- In order to secure the client’s interest as the actual shareholder (the beneficial as opposed to the legal owner), assignment agreements are entered into evidencing the arrangement whereby the real shareholder assigns its shares to the nominee shareholder. Such assignments are not part of corporate records; and
- In order to spend the funds (indirectly repatriating them), clients are issued credit cards in the name of the corporate entity and advised to use those cards as a way of removing funds indirectly from offshore accounts to the US. Alternatively, the offshore bank will pay for goods and services on behalf of the clients, for example, paying for home deposits or luxury vehicles.
By entering into the above type of arrangement, the client has complete anonymity for corporate, banking and anti-money laundering purposes.