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.
Customer → Respondent Bank → Correspondent Bank → Global Financial System
Common services:
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
Correspondent banking creates layered relationships that can obscure:
When a respondent bank allows its customers (including other banks) to transact through the correspondent relationship, creating multiple layers of opacity.
BSA and international standards require correspondent banks to:
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.
Concerns about correspondent banking risk have led to "de-risking"—correspondents exiting relationships with entire regions or categories of banks, reducing financial access.