Regulators worry as banks step back from international money transfers

By Huw Jones

LONDON (Reuters) - Banks are increasingly stepping back from helping one another with international money transfers due to tougher money laundering checks, dealing a blow to countries that rely on remittances and potentially driving some payments underground.

The Financial Stability Board (FSB), which coordinates financial rules across the Group of 20 economies (G20), said on Friday that so-called correspondent banking continued to shrink last year, despite attempts by regulators to halt the decline.

Correspondent banking refers to a bank relying on a bank in another country to carry out checks on customers transferring money, such as remittances.

Banks are being put off from such tasks by the burden of stricter checks on customers, and tougher punishments on money laundering and terrorist financing. This creates a headache for regulators, because banks' checks are a key part of cracking down on such offences.

The FSB said 2017 saw a 4.1 percent decline in correspondent banking, based on the flow of payment messages on the global SWIFT interbank messaging network.

It said the decline remained a source of concern because it could affect the ability in some countries to send and receive payments, or drive some payments underground, hitting economic growth and international trade.

Between January 2011 and the end of 2017, the cumulative drop in correspondent banking totalled 15.5 percent.

Small economies with a gross domestic product of less than $10 billion have seen a much larger decline in the number of foreign counterparties per local bank, compared with bigger economies, the FSB said.

The FSB put forward measures in 2015 aimed at halting the decline, such as more streamlined customer checks, and clarifying to banks what regulators expect of them - lenders had complained of having to check the customers of customers.

"To be effective, these need to be implemented in practice by national authorities and banks," said Alexander Karrer, chair of the FSB's correspondent banking group.

Although payments are still flowing, they have become concentrated at fewer banks.

Remittances from people working abroad to relatives back home rose 7 percent in 2017 to $613 billion, the FSB said.

"Nevertheless, access of remittance service providers to banking services remains a source of concern, which is particularly acute in those developing countries where remittance flows are a key source of funds for households," the FSB said.

If the decline in correspondent banking continues, the FSB said it and other international regulators would consider if further, unspecified, action should be taken.

(Reporting by Huw Jones; Editing by Mark Potter)