AML in Correspondent Banking Flashcards

What is a 'shell bank' under U.S. law and why are they prohibited from having correspondent accounts at U.S. financial institutions?

Answer: A foreign bank with no physical presence in any country and unaffiliated with a regulated financial group; they provide no accountability or AML oversight

A shell bank has no physical presence (no office, employees, or records) in the country where it is licensed, and is not affiliated with a regulated financial group. U.S. law (USA PATRIOT Act Section 313) prohibits U.S. banks from opening or maintaining correspondent accounts for shell banks because they offer no accountability or AML compliance.

What is the 'correspondent banking concentration risk' and how should institutions manage it?

Answer: Excessive reliance on a small number of correspondent banks or respondent banks for a significant portion of transaction volume, managed through relationship diversification and enhanced monitoring

Concentration risk in correspondent banking refers to over-reliance on a small number of banking relationships, which can create both operational risk (if a relationship is terminated) and elevated AML risk (if a single relationship channels a disproportionate volume of potentially suspicious activity).

Which information must U.S. banks include in wire transfers under the 'Travel Rule' (31 CFR 103.33)?

Answer: The originator's name, address, and account number, plus the beneficiary's name and account number, for transfers of $3,000 or more

The Travel Rule requires that wire transfers of $3,000 or more include the originator's name, address, and account number, as well as the beneficiary's name and account number, and that this information 'travels' with the payment through the system.

What is 'nostro reconciliation' and why is it important from an AML perspective?

Answer: Reconciling a bank's accounts held at correspondent banks (nostro accounts) to ensure all transactions are accounted for and identify unrecognized entries that may indicate fraud or unauthorized transactions

Nostro reconciliation involves matching a bank's internal records against the statements of its accounts held at correspondent banks. From an AML perspective, unrecognized or unexplained entries may indicate fraudulent transactions, unauthorized access, or money laundering activity.

How has FATF's Recommendation 13 on correspondent banking been strengthened in recent years?

Answer: FATF clarified that enhanced due diligence must be applied to all cross-border correspondent relationships, with greater emphasis on assessing the effectiveness (not just existence) of respondent AML controls

FATF's 2016 clarifications to Recommendation 13 strengthened requirements by emphasizing that correspondent banks must assess the effectiveness of respondent AML controls, not merely confirm that policies exist, and must apply enhanced due diligence to all cross-border correspondent relationships.

What is the significance of 'Know Your Customer's Customer' (KYCC) in correspondent banking?

Answer: Understanding the nature of the respondent bank's customer base to assess whether the correspondent bank's exposure to their risk is acceptable, without necessarily identifying each individual customer

KYCC in correspondent banking means understanding the types of customers served by the respondent bank — their industries, geographies, and risk profiles — to assess whether the indirect risk exposure is acceptable, without requiring identification of every individual customer.