Correspondent Banking
What correspondent banking is, its AML risks, and due diligence requirements for correspondent relationships.
Correspondent banking is a relationship where one bank (the correspondent) provides banking services on behalf of another bank (the respondent), enabling the respondent’s customers to access services the respondent cannot provide directly.
How It Works
Customer → Respondent Bank → Correspondent Bank → Global Financial SystemCommon services:
- Cross-border payments
- Foreign currency transactions
- Check clearing
- Trade finance
Key Terminology
| Term | Meaning |
|---|---|
| Correspondent bank | The bank providing services |
| Respondent bank | The bank receiving services |
| Nostro account | ”Our account at your bank” |
| Vostro account | ”Your account at our bank” |
| Payable-through account | Direct access to correspondent’s payment system |
AML Risks
Correspondent banking creates layered relationships that can obscure:
- True originators: Who initiated the transaction?
- Beneficial owners: Who controls the respondent bank’s customers?
- Jurisdiction risk: Weak AML regimes in respondent’s location
Nested Accounts Risk
When a respondent bank allows its customers (including other banks) to transact through the correspondent relationship, creating multiple layers of opacity.
Due Diligence Requirements
BSA and international standards require correspondent banks to:
| Requirement | Purpose |
|---|---|
| Understand respondent’s business | Know customer base and risk profile |
| Assess AML program | Verify adequate controls |
| Identify beneficial owners | Know who controls respondent |
| Ongoing monitoring | Detect unusual activity |
The CBDDQ standardizes this due diligence.
De-Risking
Concerns about correspondent banking risk have led to “de-risking”—correspondents exiting relationships with entire regions or categories of banks, reducing financial access.