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Correspondent Banking

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Correspondent Banking – At a Glance

  • Correspondent banking occurs when one bank provides services to another bank to send or receive funds. 
  • It is considered inherently high-risk under UK AML rules because a correspondent bank does not see the end customers and transactions, making it harder to detect the origin. 
  • The UK AML rules require the implementation of enhanced due diligence on the respondent bank. 
  • The FCA closely supervises correspondent banking relationships, and failure to comply with AML rules leads to fines, penalties, and enforcement actions.  

What Is Correspondent Banking Under UK AML Law?

Under UK AML law, correspondent banking refers to an arrangement where a UK bank provides services to another bank in a foreign country, so that the foreign bank can get access to the UK financial system.  The correspondent bank operated in one country to provide the services for the respondent bank, which is located in another country.
 

A UK bank helps other banks by handling money, payments, or accounts for them, and the respondent banks get access to the UK payment system, making them high-risk for money laundering. 

Correspondent banking often works with nostro (our money is with you) and vostro (your money is with us) account arrangements, which means one bank is holding and managing the funds on behalf of another. 

Correspondent banking doesn’t deal directly with the respondent bank’s customers, and these services often work across borders, making them highly vulnerable to ML/TF risks.  

Practical UK AML Risk Scenarios in Correspondent Banking

The common examples of correspondent banking are as follows: 

  • Transactions processing for a foreign respondent bank: a UK bank processes payments for a bank in another country, the transaction could come from illegal activity, but because the UK bank does not know the end customers, it’s hard to detect the origin. 
  • Weaker AML laws: some of the foreign banks located in jurisdictions where AML laws are weaker result in illegal money passing and going unnoticed. 
  • Nested relationships: the foreign banks allow other banks to use accounts or move money, the UK banks cannot see the smaller banks or their customers, making it easy to hide the money.  
  • Sanction breaches via indirect payment flows: In correspondent banking, the money is sent indirectly to the sanctioned individuals or countries through a respondent bank, enabling UK banks to break the law unknowingly, resulting in fines, penalties, and reputational damage.  

UK Laws and Regulatory Framework for Correspondent Banking

The UK laws and regulatory framework for correspondent banking include:

  • Under the Money Laundering Regulations 2017 (regulations 34), the financial institution is expected to implement enhanced due diligence to cross-border correspondent banking, and prevent the risk linked with it.
  • Under the Proceeds of Crime Act 2002, dealing with shell banks that act as correspondent banks comes under criminal liability, and institutions might face criminal offence.
  • The Financial Conduct Authority (FCA) supervises institutions to comply with AML laws and regulations to mitigate the high-risk evolving from cross-border relationships.
  • The Joint Money Laundering Steering Group (JMLSG) provides guidance to implement a risk-based approach and enhance due diligence for correspondent banking relationships.

Key AML Risks Specific to Correspondent Banking

The key AML risks specific to correspondent banking are as follows: 

  • Lack of transparency over underlying customers, as the correspondent bank does not know the respondent bank’s customers, making it harder to detect the origin of funds.   
  • Over-reliance on the respondent bank’s AML controls, if the AML controls of the respondent bank are weak, will result in illegal money passing through the gaps. 
  • Due to high transaction volumes and speed, the transactions move across borders quickly, making it hard to detect suspicious activities.   
  • Respondent banks may be located in high-risk or sanctioned jurisdictions where AML laws are weaker, allowing them to easily bypass controls, hide the origin of funds, and often increase ML/TF risks. 

Common Compliance Failures in Correspondent Banking  

Some of the common compliance failures in correspondent banking: 

  • Not implementing due diligence on the respondent banks, allowing risks to go unnoticed and dealing with banks involved in ML/TF. 
  • Failure to assess the AML framework quality of the respondent bank and weaker monitoring of the nested relationships (other banks) result in illegal money passing through easily. 
  • Insufficient oversight and supervision of senior management leads to risky transactions going unnoticed and increases the money laundering and terrorist financing risks.  

Best-Practice AML Controls for Correspondent Banking

The best-practice AML controls for correspondent banking are: 

  • Financial institutions must assess the risk before establishing or being involved in any relationship, helping them to implement extra checks on high-risk or to avoid them. 
  • The correspondent bank should review the respondent’s AML system to ensure that it has strong and effective AML controls. 
  • The correspondent bank should implement ongoing monitoring and continuously watch the transactions to detect unusual activity and periodic reviews to ensure that the foreign banks are still meeting the AML regulations. 
  • If the risk is too high, then the financial institutions must terminate the relationship with them and escalate the issues to senior management.  

Supervisory Expectations, Risk, and Enforcement

The supervisory expectations, risk, and enforcement include:

  • The FCA expects financial institutions to implement enhanced due diligence for high-risk correspondent banking relationships.
  • The senior management and MLROs are accountable and responsible for approving, overseeing, and managing corresponding banking relationships.
  • If financial institutions failed to comply with AML obligations, it would result in fines, restrictions, penalties or other enforcement actions.
  • The supervisors expect to maintain proper documentation and audit trails to support regulatory review and investigations.

How AML Consultants UK Supports Correspondent Banking Compliance

AML Consultants UK supports the correspondent banking compliance through its firm-wide risk assessment ,  which helps in assessing risk linked with correspondent banking.  AML Consultants UK helps in designing policies and procedures to manage high-risk customers and transactions associated with correspondent banking. It provides control testing and remediation support to identify compliance gaps and provide recommendations to fix those gaps.  

AML Consultants UK also offers ongoing advisory services for UK-regulated banks, including policy updates, AML training, and regulatory reporting, help banks remain compliant and regulatory-ready.  

Correspondent Banking and UK AML - FAQs

Correspondent banking is considered high-risk for money laundering because it does not deal directly with the respondent bank’s customers, reducing transparency and hiding the true origin.  

Banks should assess respondent bank AML controls by reviewing policy procedures, customer due diligence, and transaction monitoring to ensure the effectiveness of AML controls. 

Yes, UK banks can be held liable for overseas AML failures if they fail to monitor and manage risk properly. 

If the correspondent banking AML controls are inadequate, it will result in illegal money passing through, and banks may face penalties, fines, and reputational damage.  

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