Correspondent Banking

What Is Correspondent Banking?

Correspondent banking is the provision of banking services by one bank, the correspondent, to another bank, the respondent. The respondent uses the relationship to reach currencies, payment systems and markets where it has no direct access of its own. A typical example is a regional bank that holds an account with a large international bank so that it can send and receive payments in a foreign currency on behalf of its own customers.

Services commonly offered through correspondent relationships include:

• cross-border wire transfers and payment clearing
• foreign exchange
• cash management and liquidity services
• trade finance, such as letters of credit and documentary collections
• check clearing in some markets

Correspondent accounts held by one bank with another are often described as nostro accounts (from the respondent's point of view, "our account with you") and vostro accounts (from the correspondent's view, "your account with us").

Why Correspondent Banking Matters

Correspondent banking is the backbone of cross-border transactions. Without it, most banks could not offer international payments at all. The same feature that makes it essential also creates risk: the correspondent processes payments for people it has never met and usually knows nothing about.

The correspondent depends almost entirely on the respondent's own controls. If the respondent has weak customer due diligence, operates in a high-risk jurisdiction, or deliberately looks the other way, illicit funds can move through the correspondent's systems with every appearance of normal interbank traffic. That is why regulators treat cross-border correspondent relationships as higher risk and why many banks have reduced their correspondent networks, a trend often discussed under the heading of de-risking.

Key Risks and Red Flags

Nested Relationships

Nesting, also called downstream correspondent banking, occurs when a respondent allows other banks to access the correspondent's services through the respondent's account. The correspondent then has an indirect relationship with institutions it has never assessed. Firms should consider asking respondents whether they offer such services, to whom, and with what controls.

Payable-Through Accounts

In a payable-through arrangement, the respondent's own customers can operate the correspondent account directly, for example by writing checks or initiating payments. This gives third parties direct access to the correspondent's services and calls for additional due diligence.

Shell Banks

A shell bank has no physical presence in the country where it is incorporated and licensed and is not part of a regulated financial group. Shell banks are a classic vehicle for laundering, and international standards prohibit correspondent relationships with them.

Common Red Flags

• payment volumes or patterns that do not fit the respondent's stated business or customer base
• large flows from jurisdictions with weak AML regimes or under sanctions pressure
• repeated payments with incomplete originator or beneficiary information
• respondent reluctance to answer due diligence questions or to explain unusual activity
• adverse information about the respondent's ownership, management or regulatory history

Regulatory Expectations

FATF Recommendation 13 sets the international standard for cross-border correspondent banking. In general terms, it expects institutions to gather enough information about a respondent to understand its business and reputation, assess its AML and CFT controls, obtain senior management approval before establishing new relationships, understand the respective responsibilities of each institution, and, for payable-through accounts, be satisfied that the respondent has performed due diligence on customers with direct access. It also prohibits relationships with shell banks. FATF has published separate guidance on correspondent banking services that explains how these requirements apply in practice.

• United States: the USA PATRIOT Act added due diligence requirements for correspondent accounts held for foreign financial institutions (Section 312), including enhanced due diligence for certain higher-risk respondents, and prohibited correspondent accounts for foreign shell banks (Section 313). FinCEN rules implement these provisions.
• European Union: the AML Directives, starting with Directive (EU) 2015/849, require enhanced due diligence for cross-border correspondent relationships with respondents from third countries. The EU AML Regulation (EU) 2024/1624 carries these requirements forward.
• United Kingdom: the Money Laundering Regulations 2017 require enhanced due diligence for correspondent relationships with institutions from third countries and prohibit relationships with shell banks.

The Wolfsberg Group publishes a Correspondent Banking Due Diligence Questionnaire (CBDDQ), which is widely used as a common format for collecting respondent information.

Best Practices

• Risk-rate each respondent based on its jurisdiction, ownership, business model, customer base, products and the quality of its AML supervision.
• Collect and verify ownership and management information, and screen the respondent, its beneficial owners and key managers against sanctions, PEP and adverse media sources.
• Document whether the respondent offers nested or payable-through services, and set clear conditions for them.
• Monitor the actual flows through the relationship against the expected activity profile, not only the onboarding questionnaire.
• Refresh due diligence periodically and after trigger events such as enforcement actions or changes in ownership.
• Keep a defined process for requests for information to respondents when transactions raise questions.

How on8.ai Helps

SmartSanction screens respondent banks, their owners and managers, and the parties in their payments against sanctions, PEP and risk data from 520+ list and registry sources. Its entity graph maps ownership and relationships with the OFAC 50 Percent Rule applied, which helps correspondent teams see sanctions exposure that sits behind a respondent's direct shareholders.

Related Terms

• KYCC (Know Your Customer's Customer)
• EDD (Enhanced Due Diligence)
• Cross-Border Transactions
• De-Risking
• Shell Company
• Travel Rule