AML in Correspondent Banking Flashcards

What is a 'respondent bank' in a correspondent banking relationship?

Answer: The foreign or smaller bank that receives correspondent banking services from the correspondent bank

In a correspondent banking relationship, the respondent bank is the foreign or smaller institution that gains access to financial services — such as U.S. dollar clearing or trade finance — through the correspondent bank.

What is 'nested correspondent banking' and why does it increase AML risk?

Answer: When a respondent bank provides its own correspondent services to other banks using the first correspondent bank's infrastructure, creating additional layers of unknown customers

Nested correspondent banking occurs when a respondent bank offers correspondent services to other financial institutions (sub-respondents), causing the original correspondent bank to unwittingly provide services to banks it has never vetted, dramatically increasing exposure to unknown ML/TF risks.

Under FATF Recommendation 13, what specific AML measures must correspondent banks apply?

Answer: Gather sufficient information about respondent banks, assess their AML controls, obtain senior management approval, and document respective AML/CFT responsibilities

FATF Recommendation 13 requires correspondent banks to: assess the respondent's AML/CFT controls; document respective responsibilities; obtain senior management approval for new relationships; and be satisfied the respondent is not a shell bank.

What is a 'payable through account' (PTA) and what AML risk does it present?

Answer: An account a foreign bank maintains at a U.S. bank that allows the foreign bank's customers to conduct transactions directly, potentially giving unknown third parties access to U.S. financial systems

Payable-through accounts allow customers of a foreign respondent bank to directly access the U.S. correspondent bank's services, potentially giving unknown foreign individuals direct access to the U.S. financial system without adequate AML screening.

Which regulatory action best illustrates the consequences of inadequate correspondent banking AML controls?

Answer: The $1.9 billion FinCEN/DOJ settlement with HSBC in 2012 for AML failures including correspondent banking violations

The 2012 HSBC settlement — then the largest AML penalty in U.S. history — resulted from HSBC's failure to maintain adequate AML programs, including processing transactions for drug cartels through its U.S. operations and providing correspondent banking services to banks with ties to sanctioned countries.

What does it mean for a correspondent bank to conduct 'due diligence on the due diligence' of a respondent bank?

Answer: Assessing the quality and robustness of the respondent bank's own AML/KYC program, rather than simply accepting certifications at face value

Due diligence on due diligence means the correspondent bank evaluates how well the respondent bank actually knows its own customers — assessing the quality of the respondent's AML program, not just confirming it exists.