A correspondent bank is a financial institution that provides services on behalf of another financial institution. They can conduct business transactions, accept deposits and gather documents on behalf of the other financial institution. Correspondent banking relationships are crucial mechanisms that allow for the facilitation of cross-border transactions by allowing domestic banks to utilize foreign banks as agents without the need for establishing a branch in the foreign country. For example, Norvik Banka, one of the largest banks in Latvia, is a correspondent bank to Duetsche Bank AG in the United States and UBS AG in Switzerland. This arrangement is mutually beneficial to all institutions involved by giving access to Duetsche Bank and UBS and their clients to the Latvian market without the need for establishing a branch while simultaneously providing Norvik with access to the markets in those banks respective countries.
As of the recent months, the relationship between correspondent banks in Mexico and the United States have become increasingly tenuous. As regulations and penalties become harsher across the globe, firms are pulling business out of emerging markets in countries like Mexico where money laundering problems run rampant. From a fiscal standpoint, this is a logical approach for many global firms that have correspondent banks dealing with institutions in these countries; the money earned for operating in those countries simply doesn’t outweigh the risk and cost of compliance and penalties when a misstep happens.
U.S. financial regulators have warned about the risks of money laundering in Mexico being tied into the drug trade, and in May of 2014 the Financial Crimes Enforcement Network, a unit of the Treasury Department, issued an advisory to institutions warning of funnel accounts and laundering of illicit proceeds in Mexico.
As U.S. financial institutions continue to cut ties with Mexico, Mexican banks are suffering as they are now unable to meet their client’s needs. This is especially problematic because of the significant amount of money received by Mexican banks from U.S. sources every year; approximately $24.4 billion was received by Mexican banks from U.S. sources in 2014. As Mexican banks are now unable to send U.S. dollars back to the United States, they are stuck with U.S. dollars that they cannot easily use in their operations.
Woes for the correspondent banks are present too, even for prior involvement. HSBC now faces a lawsuit by families of U.S. citizens murdered by the drug cartels in Mexico. The suit alleges that by participating in money laundering schemes with Mexican cartels through Mexican institutions, HSBC knowingly contributed to the cartel’s international drug and trafficking trade and the brutal murders that resulted from those operations.