What is Correspondent Banking?
Respondent banking partnerships enable the respondent bank to deliver services that it would not be able to give otherwise. Cross-border correspondent banking, including the execution of third-party payments, carries a higher risk, necessitating additional CDD controls. Respondent banks with no international presence or cross-border payment systems can use cross-border correspondent connections to operate in jurisdictions to which they would not otherwise have access.
Because the correspondent bank has insufficient information about the nature and intent of the underlying transactions of the respondent bank’s customers, it may be more vulnerable to ML/FT threats.
Example of Correspondent Banking:
The correspondent bank may be exposed to greater ML/FT risks because of limited information regarding the nature and purpose of the underlying transactions of the respondent bank’s customers. The inherent risks resulting from the nature of the services the correspondent bank provides arise from the purpose of the services provided (e.g., foreign exchange services for proprietary trading, securities trading on exchanges, etc.), which may indicate lower risk.
Why is Correspondent Banking important?
Correspondent banks are critical in facilitating cross-border money laundering transactions. Criminals employ correspondent banks that lack effective anti-money laundering (AML) regulations to transfer their unlawful proceeds to jurisdictions where they can use them without difficulty.