Challenges Facing Correspondent Banking with Sudan1
Two decades of economic sanctions led to the exit of most Correspondent Banking Relationships (CBRs) from Sudan, and weighed heavily on trade, investment, growth, and humanitarian relief. In 2017, the United States revoked trade and financial sanctions, while sanctions imposed by the UN, and other countries, including the EU, remain applicable.
CBRs are likely to be gradually reestablished. Larger domestic banks are likely to attract most CBRs, which may further accentuate concentration.
Despite the lifting of U.S. sanctions, establishing a new CBR may continue to pose challenges to correspondent banks, including continued U.S. enforcement actions against violations of remaining sanctions.
Policy efforts should pursue the removal of Sudan from the U.S. state sponsors of terrorism list (SSTL), remaining U.S. sanctions (related to the Darfur region and the measures on trade administered by the Department of Commerce), and sanctions by the UN and other countries.
The authorities should focus on strengthening the AML/CFT framework, the compliance by respondent banks, communication with correspondents, and facilitate a balanced return of CBRs to preserve competition.
A. The Roll Back of Economic Sanctions against Sudan
1. Since 1997, economic sanctions (see box 1) weighed heavily on CBRs2 with Sudanese banks. The U.S. imposed sanctions on Sudan that include arms and trade embargoes, a prohibition on the provision of financial services and of transactions related to the oil industry, and the freezing of assets of designated persons. The European Union (EU), the United Nations (UN), and others followed, mostly by imposing an arms embargo and targeting the assets of designated persons. The cost of compliance with these sanctions led U. S. and global financial institutions to stop dealing with Sudanese banks. Central Bank of Sudan (CBOS) data for the period 2012–2015 indicates that 168 correspondent banking relationships have been restricted (e.g., limitation of account activity; exclusion of categories of customers), and 248 have been terminated. A 2012–2016 Financial Stability Board3 survey covering 150 correspondent banks (See Figure 1) revealed that Sudan is one of the world’s 10 most affected jurisdictions, in terms of the absolute number of complete exits and the number of restrictions
Figure 1.Sudan: Surveys in CBRS
2. The enforcement of U.S. sanctions in the private sector affected significantly global transactions in U.S. dollars (USD) with Sudan. Starting 2009, forfeitures and fines imposed on financial institutions operating in the United States for breaching the economic sanctions regime against Sudan multiplied and amounted in hundreds of millions of USD, and continued to increase significantly as with the 2012 HSBC case. However, it was not until the 2014 settlement with BNP Paribas4 that Sudan began to lose most of its CBRs. Since then, correspondents have generally refused transactions involving Sudan or Sudanese entities or individuals, including those covered by licenses issued by the Office of Foreign Assets Control (OFAC), to avoid potential sanctions. The impact of such decisions on Sudanese economy has been significant (see Figure 2).
Figure 2.Sudan: LCs Positions in Foreign Currency
Source: Central Bank of Sudan.
3. Sudan was also subject to enhanced monitoring by the Financial Action Task Force (FATF), but managed to address its AML/CFT concerns by October 2015. In February 2010, the FATF identified Sudan as a jurisdiction with strategic AML/CFT deficiencies. Two years later, Sudan was placed under monitoring due to remaining deficiencies, and agreed with the FATF on an action plan with a timetable to address these deficiencies. IMF technical assistance to Sudan on AML/CFT started in December 2013, and helped in reforming the legal, regulatory, and institutional frameworks. Consequently, Sudan met its commitments to the FATF by end 2015 and is no longer subject to enhanced monitoring. This development prompted foreign governments to encourage Sudan to pursue reforms that can help reconnect its economy with the rest of the world.
Box. 1.Economic Sanctions Against Sudan
The European Union: adopted in 2004 a regulation prohibiting military support. In 2007, a regulation imposed measures against designated persons impeding the peace process and breaking international law in the conflict in the Darfur region (travel ban and freeze of funds and economic resources). In 2011, a regulation prohibited any financing connected to military activities.
The United Nations Security Council (UNSC): In March 2005, the UNSC resolution 1591 imposed travel restrictions, with exemptions, and an asset freeze on designated individuals impeding the peace process in Darfur. A Committee was established to designate targets of the travel restrictions and assets freeze.
The United States: In 1993, Sudan was designated by the U.S. as a state sponsor of terrorism. In November 1997, presidential Executive Order (E.O.) 13067 established a trade embargo and blocked the Government of Sudan’s assets. In 2006, E.O. 13400 imposed further sanctions related to persons in connection with the conflict in Sudan’s Darfur Region. and E.O. 13412 blocked property of and prohibited transactions with the Government of Sudan. Prohibited transactions generally included the import and export of goods, technology, and services, the extension of credit or loans, and all transactions related to the petroleum and oil industries in Sudan. Anyone who willfully violates, attempts to violate, conspires to violate, or causes a violation of the E.O.s faces criminal fines of up to $1 million and imprisonment of up to 20 years. In conjunction with the E.O.s, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) monitors and enforces the economic sanctions against those who are targeted in the E.O.s. In 1998, OFAC issued the Sudanese Sanctions Regulations (SSR) to implement E.O. 13067. The SSR were amended to reflect changes to E.O.s. OFAC publishes a list of individuals and companies called “Specially Designated Nationals” or “SDN”. The assets of SDN are blocked and U.S. persons1/ are generally prohibited from dealing with them. U.S. financial institutions do not process financial transactions related to the trade of non-U.S. persons with SDN.
Other countries: (e.g.: Australia, Canada, the United Kingdom) adopted similar measures, generally including a prohibition on the export of arms, a travel ban and an asset freeze against those designated persons.1/ Any U.S. citizen, permanent resident alien, entity organized under the laws of the United States. or any jurisdiction within the United States. (including foreign branches), or any person in the United States.
4. In October 2017, the U.S. revoked its sanctions on trade and financial flows against Sudan following their suspension in early 2017. The suspension of sanctions in January 2017 generally authorized U.S. persons to transact with individuals and entities in Sudan, and unblocked the property of the Government of Sudan subject to U.S. jurisdiction. U.S. banks were authorized to process transactions in relation to Sudan and finance trade in USD. In October 2017, following a review period, the U.S. revoked E.O.s 13607 and 13412, having assessed continued positive cooperation with Sudan on internal conflicts, regional stability and humanitarian issues.5 Therefore, SDN list related to these E.O.s is now revoked, which allows U.S. persons to deal with those designated persons and entities.
5. Other sanctions imposed by the U.S., the UN, and other countries are still applicable. Sudan remains on the U.S. SSTL, and subject to the Darfur related sanctions and SDN list under the E.O. 13400. The property and interests in property of persons designated pursuant to E.O. 13400 remain blocked. Moreover, the October revocation does not have effect on other measures6 against Sudan administered by the Commerce Department’s Bureau of Industry and Security. Similarly, sanctions adopted by the UN and other countries remain in effect.
6. Data are scarce but suggest the existence of a number of CBRs, albeit limited and fragile. CBOS and commercial banks do not publish information on CBRs, but the Bankers’ Almanac provides some data on CBRs reported by Sudanese banks. As of October 2017, 17 out of the 37 Sudanese commercial banks reported having CBRs. A total of 155 CBRs are reported in 15 different currencies (See Figures 3 and 4). More than half of the CBRs are in currencies of GCC countries. Four banks report CBRs in USD however, it is not clear to what extent these are active. None of these USD CBRs are with U.S., EU, or global banks, but involve instead MENA banks and one Ethiopian bank, which is a factor of vulnerability and cost. 11 banks report CBRs in EUR, and some of these with banks headquartered in the Euro area (e.g., France, Italy, Germany, Austria).
Figure 3.Sudan: CBRS by Country
Source: Bankers’ Almanac
CBRs as reported by banks as of October 2017
Figure 4.Sudan: CBRS per Currency
Source: Bankers’ Almanac
CBRs as reported by banks as of October 2017
B. Prospects for Re-connecting Sudanese Banks with the International Financial System
7. Banking relationships between Sudanese banks and foreign correspondents are likely to be gradually reestablished. CBOS officials and commercial banks interviewed by the mission reported that negotiations with correspondent banks started since early 2017; however, they did not report material change to CBRs yet. CBOS officials also indicated that foreign banks have expressed interest for dealing with Sudan again. European and Middle-East banks are reportedly waiting for U.S. banks to begin operating in Sudan before taking action, and expect delays in resuming transactions between 6 to 12 months, despite the lifting of US sanctions, due to the need for compliance reports from the requesting bank.
8. Due to challenges of compliance with regulatory requirements, larger domestic banks are likely to attract new CBRs, which may further accentuate the banking concentration in Sudan. In May 2011, OFAC removed two designated entities from the Sudan SDN list, one of which was the largest bank in Sudan. Since then, this bank has reportedly developed its access to Euro-denominated transactions through relationships with banks in Sweden, Switzerland, Belgium, Turkey, and France, but not yet to USD denominated ones. CBOS officials consider that the near-exclusive access to CBRs by this bank contributed significantly to further enhance its growth and market dominance (In Figure 1, the decreasing number of CBRs coupled with an increasing average value could be interpreted as increasing concentration). From a correspondent banks’ perspective, dealing with a large bank would probably be more substantial and lucrative, less costly, and supported by a better risk management and compliance with the AML/CFT requirements. A large domestic bank with a satisfactory ability to understand prevailing risks and identify and review transactions and individuals represents, obviously, a good entry point for foreign correspondents.
9. Even with the lifting of sanctions, establishing a new CBR with a Sudanese bank may continue to pose challenges to a potential correspondent bank. Due to remaining sanctions by the U.S., UN, and other countries, banks engaging in trade with Sudan should still exercise necessary due diligence to ensure that no transactions are connected to the SDN list under the Darfur related sanctions, and comply with other applicable measures outside the scope of the SSR. It was observed that even for transactions where sanctions have been revoked, U.S. financial institutions conducted enhanced and lengthy due diligence, to ensure compliance with the remaining sanctions. Although Sudan is no longer under the FATF’s enhanced monitoring, it has been called to improve the effectiveness of its AML/CFT regime, including in the implementation of its mechanism for targeted financial sanctions. Addressing these challenges would mean, for a correspondent bank, enhancing due diligence on CBRs thus increasing the budget for compliance, and expecting no compliance failures from respondent banks.
10. Continued U.S. enforcement actions against banks breaching the remaining sanctions regimes or AML/CFT requirements may discourage some correspondent banks. The risk of civil and criminal sanctions remains significant, discouraging banks from potential exposure to sanctions. Due to compliance costs and challenges, correspondent banks may perceive a low profitability of CBRs in Sudan and have less appetite for them.
C. Possible Remedial Measures for a Balanced Recovery of CBRS in Sudan
11. Efforts that lead to the removal of Sudan from the SSTL, remaining U.S. sanctions, and sanctions by the UN and other countries should be pursued. Banks intending to process transactions in relation to Sudan would incur less compliance costs, time, and risks when no specific or enhanced due diligence is necessary to avoid violations of the various sanctions regimes.
12. The effectiveness of Sudan’s AML/CFT framework should be further strengthened to improve compliance with international standards and comfort correspondent banks. Efforts to develop and share the understanding of ML/TF risks by authorities and the private sector should be continued, especially considering the sanctions that are still in place. Using the improved understanding of risks, supervisors should establish a strong regulation and oversight that is supported by effective sanctioning regime, and sharing risk and compliance related information with domestic and foreign stakeholders. The availability of information on beneficial ownership, through a national registry or other mechanisms covered by FATF standards, would assist domestic and correspondent banks in identifying transactions connected to designated persons and in managing risks more generally.
13. Sudanese banks should further develop their AML/CFT compliance programs. Improved understanding of risks and beneficial ownership should be used in managing business relationships with customers. Investment in monitoring systems, especially solutions to filter transactions for SDN, are of primary importance. These investments are to be coupled with the updating of customer due diligence information and the training of staff. When a respondent bank hosts nested relationships benefiting other domestic banks, enhanced due diligence measures are required.
14. Domestic stakeholders should maintain an ongoing communication with correspondent banks. The availability of information on risk to correspondent banks can help them taking informed decisions in relation to the initiation, management or continuation of CBRs with Sudanese banks. Sudanese banks should consider seeking feedback from correspondent banks regarding the sufficiency of compliance measures, and technical assistance if available.
15. Finally, CBOS should continue to monitor the development of CBRs, and help facilitate a balanced return of CBRs to Sudanese banks to maintain competition in the processing of international transactions. Having a concentration of CBRs in Sudan in one or two banks could undermine competition, raise the cost of international financial services, and possibly encourage moving some international transactions to less transparent channels. Supervisors should pay special attention to nested correspondent relationships and expect heightened due diligence measures by respondent banks. Moreover, promoting the implementation of effective AML/CFT programs at smaller scale banks could assist them in obtaining, individually or collectively, direct access to relationships with a foreign correspondent. CBOS can benefit from the IMF’s monitoring framework7 for a practical and ready to implement approach to monitor the development of CBRs in Sudan.
Basel Committee on Banking Supervision2016 “Revised on Correspondent Banking” Consultative Reporthttp://www.bis.org/bcbs/publ/d389.htm
Committee on Payments and Market Infrastructures (CPMI)2016 “Correspondent Banking” (Bank for International SettlementsBasel) http://www.bis.org/cpmi/publ/d147.pdf
Dirk JanGrolleman and DavidJutrsa2017 “Understanding Correspondent Banking Trends: A Monitoring Framework” “IMF Working Paper WP/17/216” (International Monetary Fund: Washington): https://www.imf.org/~/media/Files/Publications/WP/2017/wp17216.ashx
ErbenováMichaelaYan LiuNadimKyriakos-SaadAlejandroLópez-MejíaGiancarloGashaEmmanuelMathiasMohamedNoratFranciscaFernando and YasminAlmeida2016 “The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action” IMF Staff Discussion Note 16/06 (International Monetary Fund: Washington) https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf
International Monetary Fund2017 “Recent trends in correspondent banking relationships-Further Considerations”: https://www.imf.org/~/media/Files/Publications/PP/031617.ashx
Financial Action Task Force (FATF)2016 “Guidance on Correspondent Banking” (Financial Action Task Force: Paris) http://www.fatfgafi.org/publications/fatfrecommendations/documents/correspondent-banking-services.html
MohamedElgily2017 “The Implications of Money Laundering on the Performance of the Sudanese Banking System”: http://www.andariya.com/the-implications-of-money-laundering-on-the-performance-of-the-sudanese-banking-system/
OFAC Department of the Treasury2013 “Sudan sanctions program”: https://www.treasury.gov/resource-center/sanctions/Programs/Documents/sudan.pdf
Security Council Report2013 “UN Sanctions” Special Research Report 3 (United Nations: New York) http://www.securitycouncilreport.org/special-research-report/un-sanctions.php
U.S. Department of State2017 “Sanctions Revoked Following Sustained Positive Action by the Government of Sudan”: https://www.state.gov/r/pa/prs/ps/2017/10/274659.htm
Prepared by Arz El Murr (LEG).
Correspondent banking is a bilateral arrangement, often involving a reciprocal cross-border relationship in multiple currencies. A correspondent banking arrangement involves one bank (the correspondent) providing a deposit account or other liability accounts, and related services, to another bank (the respondent), often including its affiliates. The arrangement requires the exchange of messages to settle transactions by crediting and debiting those accounts.
($8.833 billion in forfeiture & $140 million in fines).
Main prohibitions apply on the export or reexport to Sudan of items destined to military end users or for military end use and certain specified items destined to any end-user.