Middle Eastern M&A heightens payment fraud and laundering risk

The correspondent banking network in the Middle East has been complicated recently by the flurry of consolidation. Around 20 institutions in the Gulf, responsible for assets of more than $1 trillion, are in merger talks or have recently agreed to a deal.

Compliance with anti-money-laundering and counterterrorism financing (AML/CFT) legislation is a priority for banks, payment service providers and other NFIs (non-financial institutions) in the Middle East, not least because banks’ desire to minimize AML risk has had a significant impact on correspondent banking relationships (CBRs).

Derisking by many global banks has led to a marked decline in CBRs in any jurisdiction that is perceived as high risk, irrespective of the reason. Accuity research found a 25% reduction in CBRs between 2009 and 2016, partly driven by regulatory demands and enforcement actions against institutions that breach AML laws.

The Middle East has been hit particularly hard; a joint survey by the Arab Monetary Fund, World Bank and International Monetary Fund found that about 40% of respondents in 17 Arab countries had experienced a significant decline in CBRs.

The implementation of effective, efficient AML and sanctions screening across the region would send a clear message that the Middle East has arrived on the global financial stage.

Financial institutions across the Middle East have recognized this, which is why we have seen a trend for institutions to screen domestic transactions as well as international payments—which isn’t yet required by law.

A recent report by Deloitte highlighted that financial institutions and companies in the Middle East are "becoming increasingly proactive about financial crime compliance." But if the region is to avoid the many consequences of de-risking, it added, "countries will need to demonstrate that a sound AML/CFT framework is in place, and will need to coordinate on a cross-border compliance level."

The potential hurdles to effective screening in the Middle East can be overcome with the right mindset, knowledge, regional focus and resources. Financial crime screening solutions that are fueled by high quality sanctions, PEP and screening data will be a crucial component to achieving success in this complex compliance environment.

A reduction in choice of correspondent banks in the Middle East does not negate the need for strong payments risk compliance—in fact, it reinforces it.