Page 580 - IOM Law Society Rules Book

Correspondent banking

Correspondent bank accounts are accounts that financial institutions maintain with
each other on their own behalf and in their own names. International correspondent
banking relationships have a variety of legitimate business purposes. However, these
relationships are vulnerable to misuse for money laundering. Shell banks, certain
offshore financial institutions and banks from non-cooperative countries and
territories (NCCTs) are of particular risk to legitimate correspondent banking
relationships.

Correspondent banking is the provision of banking services by one bank (the
“correspondent bank”) to another bank (the “respondent bank”). By establishing
multiple correspondent relationships globally, banks can undertake international
financial transactions for themselves and for their customers in jurisdictions where
they have no physical presence. Large international banks typically act as
correspondents for thousands of other banks around the world. Respondent banks
obtain a wide range of service through the correspondent relationship, including cash
management (for example, interest bearing accounts in a variety of currencies),
international wire transfers of funds, cheque clearing, payable-through accounts and
foreign exchange services. The services offered by a correspondent bank to smaller,
less well-known banks may be restricted to non-credit, cash management services.
Those respondent banks judged to be sound credit risks, however, may be offered a
number of credit related products (for example, letters of credit and business accounts
for credit card transactions).

TYPOLOGIES

Typology 1: Laundering facilitated through lack of direct contact

By their nature, correspondent banking relationships create a situation in which a
credit institution carries out financial transactions on behalf of customers from
another institution. This indirect relationship means that the correspondent bank
provides services for individuals or entities for which it has neither verified the
identities nor obtained first-hand knowledge of the respondent’s customers. In
correspondent banking therefore, the correspondent institution must rely on the
respondent bank’s having performed all of the necessary due diligence and continuous
monitoring of its own customers’ account activity. Some additional risks incurred by
the correspondent bank include in particular:

• Αssessing the quality of anti-money laundering mechanisms in place at the
respondent bank. For example, a foreign respondent bank may apply less
stringent anti-money laundering standards due to weaker laws and regulations,
inadequate regulatory supervision, or failures in applying standards or internal
controls. While the correspondent bank may be able to determine the
legislation in effect for the respondent bank, it is much more difficult to know
the degree and effectiveness of the supervisory regime to which the
respondent is subject;
• Existence of sub-respondents through which a respondent bank may itself be
offering correspondent banking facilities to other credit institutions. An
oversight in not establishing the extent to which this occurs can mean that the