Correspondent Banking

  • This is where one bank (the correspondent) provides services to another bank (the respondent). Banks set up these correspondent relationships across the globe to provide services in jurisdictions where they have no physical presence. Large international banks have many thousands of correspondent banking relationships. The respondents obtain services such as: cash management (e.g. interest bearing accounts in a range of currencies), international wires, cheque clearing, payable through accounts, foreign exchange. Credit worthy banks can be offered credit products such as letters of credit or credit card account services.

  • Correspondent banking is vulnerable for two reasons:

    • The financial institution carries out transactions for the customers of another institution. This indirect relationship means the customers identity hasn’t been verified by first hand knowledge

    • The volumes of transactions mean that its not possible to know which transactions represent legitimate business and which are suspicious

  • Additional risks:

    • Although the regulatory regime may be understood, the effectiveness over a specific respondent bank may be difficult to ascertain

    • The level of AML controls at the respondent can be assessed using standard questionnaires, however the effectiveness of the due diligence may be difficult to ascertain

    • Nesting of respondent banks means that the correspondent is further away from the actual customer

  • Note that the USA Patriot Act enforced a number of provisions against correspondent banking – see separate section for details.

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