Why cutting financial connections may sometimes create more risk than it removes

A bank in West Africa wants to send a payment in US dollars.

A business needs to pay an international supplier.

A family needs to receive money from relatives abroad.

A local bank needs access to international currencies and payment networks.

In many cases, none of these activities can happen without a correspondent banking relationship.

Correspondent banking is one of the less visible parts of the global financial system, but it is fundamental to international payments. It allows banks to access services in foreign currencies and jurisdictions and supports international trade, remittances and other cross-border activity.

But correspondent banking has faced another challenge in recent years:

de-risking.

Instead of identifying and managing specific financial-crime risks, some financial institutions have chosen to reduce or terminate relationships with entire categories of customers, regions or markets.

For African financial institutions, the consequences can be significant.

And there is an uncomfortable AML question at the centre of the debate:

Can removing a bank from the formal financial system actually increase financial-crime risk?

What is correspondent banking?

A correspondent banking relationship exists when one financial institution provides services to another financial institution.

The correspondent bank may provide access to:

Foreign currencies
International payment networks
Clearing and settlement
Trade-related payments
Remittance flows
Liquidity and other banking services

A bank in an African market, for example, may need a relationship with a larger international bank to facilitate transactions denominated in USD, EUR or GBP.

The local bank remains responsible for its own customers, while the correspondent bank has its own regulatory and AML/CFT obligations.

This creates a chain of financial relationships.

A simple international transaction may therefore involve:

Customer → African Bank → Correspondent Bank → Foreign Bank → Beneficiary

Each institution has a role in maintaining the integrity of the payment.

The problem arises when one part of that chain becomes unavailable.

What exactly is de-risking?

De-risking is often confused with legitimate risk management.

They are not the same.

A bank should absolutely identify, assess and manage money laundering, terrorist financing, sanctions and other risks associated with correspondent relationships.

The FATF’s risk-based approach requires financial institutions to understand their risks and apply appropriate measures according to those risks.

The problem occurs when an institution decides:

“This entire market is too risky, so we will simply stop providing the service.”

Rather than:

“Which specific risks exist, and how can we manage them?”

FATF has repeatedly warned against this type of wholesale de-risking. Its correspondent-banking guidance states that de-risking can lead to financial exclusion, reduced transparency and potentially greater exposure to money laundering and terrorist-financing risks.

This distinction is particularly important for emerging markets.

Why Africa can be particularly exposed

African financial institutions can face a combination of factors that international banks may perceive as higher risk.

These can include:

Cross-border transactions
Cash-intensive economies
Informal businesses
Limited financial infrastructure
Different levels of AML/CFT supervisory capacity
Sanctions exposure in certain jurisdictions
Higher perceived corruption risk
Complex ownership structures
Limited availability of corporate information
Remittance activity
Rapid growth of mobile and digital payments

None of these factors automatically means that a particular bank or customer is involved in financial crime.

But they can influence the risk appetite of international correspondent banks.

And this is where the problem begins.

A correspondent bank may conclude that maintaining a relationship requires too much:

Compliance cost + operational effort + regulatory uncertainty + reputational exposure.

The relationship may therefore become commercially unattractive.

The result can be withdrawal rather than risk management.

The cost of losing correspondent banking access

The consequences extend well beyond the banks involved.

Imagine a small African bank loses an important correspondent relationship.

It may suddenly have more difficulty processing:

International trade payments
Remittances
Foreign currency transactions
International supplier payments
Payments from diaspora communities
Cross-border business transactions

Customers may experience higher costs and slower transactions.

Businesses may need to find alternative payment channels.

Remittance providers may face difficulties accessing banking services.

And smaller financial institutions can become increasingly dependent on a smaller number of remaining correspondent relationships.

The World Bank has documented the existence of de-risking in correspondent banking and highlighted its uneven impact, including particular vulnerabilities among smaller financial markets.

This is not simply a commercial problem.

It can become an AML problem.

The paradox: less formal finance can mean less visibility

This is perhaps the most important point.

Suppose a legitimate African business needs to pay an international supplier.

If the formal banking channel is available, the transaction can potentially be subjected to:

KYC
Transaction monitoring
Sanctions screening
Payment screening
Record keeping
Regulatory reporting

There is visibility.

Now imagine the legitimate banking channel becomes increasingly difficult or expensive to access.

Customers may search for alternatives.

Some may move toward:

Informal remittance networks
Cash
Unregulated intermediaries
Alternative payment channels
Peer-to-peer mechanisms
Less transparent cross-border arrangements

The transaction has not necessarily disappeared.

The visibility has.

FATF has specifically warned that inappropriate de-risking can push transactions toward less regulated or unregulated channels, potentially increasing ML/TF risks and reducing transparency.

This creates a paradox:

A financial institution may reduce its own perceived exposure while increasing opacity elsewhere in the financial system.

Remittances are particularly important

Africa has large and economically important remittance corridors.

For many families, international transfers are not unusual financial behaviour.

They may represent:

Family support
Education expenses
Medical expenses
Housing
Small-business funding
Household expenses

A customer receiving money from relatives abroad should not automatically be treated as high risk simply because the transaction crosses borders.

But if access to formal remittance channels becomes more difficult, customers may look for alternatives.

This is one reason correspondent banking and financial inclusion are closely connected.

The FATF’s updated 2025 guidance on financial inclusion specifically recognises that de-risking can increase financial exclusion and exacerbate ML/TF risks. It recommends proportionate, risk-based approaches rather than large-scale termination or restriction of financial services.

De-risking can also affect AML intelligence

There is another less obvious consequence.

Formal financial institutions generate data.

Every payment can create information about:

Sender
Recipient
Account
Country
Amount
Transaction date
Payment purpose
Counterparty
Transaction history

This information can help investigators identify suspicious activity.

If financial activity moves outside regulated channels, investigators may lose access to some of those signals.

For example, an informal transfer network may provide significantly less information than a regulated payment.

This matters because modern AML is increasingly dependent on connecting information across transactions.

Less formal activity can mean fewer data points.

And fewer data points can make financial-crime investigations harder.

But correspondent banks also have legitimate concerns

It would be wrong to present de-risking as simply the result of international banks misunderstanding Africa.

Correspondent banks face real risks.

They may need to manage exposure to:

Money laundering
Terrorist financing
Sanctions violations
Fraud
Corruption
Weak customer due diligence
Poor transaction monitoring
Inadequate regulatory supervision

They also face substantial compliance costs.

A correspondent bank may therefore ask:

How effective is the respondent bank’s AML framework?

Can it identify its customers?

Does it understand its higher-risk relationships?

Can it explain unusual transactions?

Does it screen effectively for sanctions and PEP exposure?

Does it submit appropriate suspicious transaction reports?

These are reasonable questions.

The solution is not to ignore them.

The solution is to manage them proportionately.

The respondent bank has responsibilities too

African financial institutions also have an important role.

If a bank wants to maintain strong correspondent relationships, it needs to demonstrate that its AML framework is credible.

That includes:

Strong customer due diligence

The institution should understand who its customers are and the nature of their activities.

Effective transaction monitoring

The bank needs to identify unusual activity and investigate it appropriately.

Clear governance

Senior management should understand the institution’s AML risks and risk appetite.

Quality suspicious transaction reporting

Suspicious activity should be escalated and reported in accordance with applicable requirements.

Sanctions and screening controls

The institution needs appropriate controls to identify relevant sanctions and other financial-crime risks.

Strong documentation

A correspondent bank should be able to understand how risks are identified, assessed and mitigated.

In other words:

Trust has to work in both directions.

Regulators also have a role

De-risking cannot be solved by banks alone.

Regulators and policymakers need to create an environment where financial institutions understand what is expected of them.

The FATF’s recent financial-inclusion guidance highlights the importance of regulators understanding why financial institutions refuse, restrict or terminate relationships and identifying patterns of de-risking. It also notes that weaknesses in national AML/CFT regimes can contribute to decisions by banks to withdraw correspondent relationships.

That creates an important policy objective:

Improve AML/CFT effectiveness without making formal financial access unnecessarily difficult.

This can involve:

Stronger supervision
Better regulatory guidance
Improved information sharing
Greater consistency between regulators
Better-quality financial intelligence
Technical assistance
Public-private cooperation
Regional cooperation

The objective should be to reduce genuine risk rather than simply reduce exposure.

A risk-based approach is the middle ground

There are two extremes.

Extreme 1: Ignore risk

This creates opportunities for criminals to exploit correspondent relationships.

Extreme 2: Avoid the market

This may create financial exclusion and push activity toward less transparent channels.

The better approach is:

Identify → Assess → Mitigate → Monitor → Review

A bank should ask:

What exactly makes this relationship risky?

Rather than:

Why is this entire country or region risky?

That difference is fundamental.

The FATF has explicitly stated that its standards do not require wholesale de-risking and that relationships should generally be assessed on a case-by-case basis, with termination considered where risks cannot be adequately mitigated.

Could technology help?

Technology can play an important role.

Correspondent banks and African financial institutions can increasingly use:

Automated transaction monitoring
Network analytics
Behavioural analytics
Sanctions screening
Customer-risk scoring
Payment intelligence
Automated case management
Data-sharing mechanisms

But technology should not replace judgement.

An algorithm may identify:

“High-risk country + cross-border payment + unusual amount.”

An experienced investigator may identify:

“A legitimate exporter receiving payment from a long-standing international customer in line with its normal business activity.”

The difference is context.

And context remains one of the most important elements of effective AML.

The future of correspondent banking in Africa

Africa’s financial system is changing rapidly.

Mobile money, fintech, digital banking, instant payments and cryptocurrency are creating more alternatives to traditional banking.

But correspondent banking remains an important part of the international financial infrastructure.

The question is therefore not whether risk should be tolerated.

It should not.

The question is whether risk can be managed without unnecessarily disconnecting financial institutions from the global financial system.

That requires greater cooperation between:

African banks
International correspondent banks
Regulators
Financial intelligence units
Payment providers
Fintechs
Remittance companies

The objective should be simple:

Make legitimate financial activity easier to identify, while making illicit activity harder to move.

Final Thoughts

Correspondent banking sits at an important intersection between AML, financial inclusion and international commerce.

For African financial institutions, losing correspondent relationships can have consequences far beyond the bank itself.

Businesses may face more difficult payment channels.

Families may face greater remittance costs.

Smaller banks may become more isolated.

And some financial activity may migrate toward channels where regulators have less visibility.

That does not mean correspondent banks should accept unacceptable risk.

Quite the opposite.

It means the answer should be better risk management.

The most effective AML framework is not necessarily the one that eliminates the most relationships.

It is the one that can distinguish between:

high-risk activity that needs intervention

and

legitimate activity that simply looks unfamiliar.

For Africa, that distinction is particularly important.

Because if financial institutions respond to risk by disconnecting entire markets rather than understanding them, they may achieve one objective:

less exposure.

But they may also create another:

less transparency.

And from an AML perspective, less transparency is rarely the outcome we want.

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Correspondent Banking and Africa: When De-Risking Becomes a Financial Crime Risk