How does a payment move through a correspondent bank?
According to the CPMI, correspondent banking relationships fell by about 25 percent between 2011 and 2020, while cross border payment value rose 7 percent in 2020 alone (BIS, 13 December 2021). The guide to AML transaction monitoring calls correspondent banking the hard case for a monitoring team.
Bank R is a respondent bank (illustrative). It has no US dollar clearing, so it pays 40,000 dollars for a customer to a supplier abroad through its account at Bank C in New York:
- Bank R debits its customer and instructs Bank C. Bank R calls its account at Bank C its nostro; Bank C calls the same account a vostro, or loro, account (ECB glossary).
- Bank C debits that account and sends the payment through one intermediary, which takes a 15 dollar fee.
- The supplier receives 39,985 dollars. The customer's name, account and address travel with it under the travel rule, and the message names each bank by its BIC.
What does correspondent banking mean, and what is it not?
Table 1. Correspondent banking terms side by side.
| Term | What it is | Source | Rule that applies |
|---|---|---|---|
| Correspondent and respondent bank | One bank provides banking services to another | FATF glossary, p. 128 | Due diligence on the respondent (R.13) |
| Correspondent account | An account for a foreign institution to receive deposits or make payments on its behalf | 31 CFR 1010.605(c) | US due diligence program (1010.610) |
| Intermediary institution | Receives and transmits a payment for the ordering and beneficiary banks | FATF glossary, p. 87 | Keeps the payment data with it (INR.16 paragraph 24) |
| Nested (downstream) relationship | Other banks use the relationship through the direct respondent | FATF guidance 2016, quoting the Basel Committee | Detect undisclosed nesting |
| Payable through account | Third parties use the correspondent account directly | INR.13, p. 76 | Respondent has done due diligence on them (R.13(e)) |
| Shell bank | A foreign bank without a physical presence in any country | 31 CFR 1010.605(g) | No account for it (R.13; 1010.630) |
Correspondent banks hold a standing relationship with each respondent, while an intermediary is a role in one payment chain; a correspondent often acts as the intermediary.
What is a payable through account?
FATF defines payable through accounts as "correspondent accounts that are used directly by third parties to transact business on their own behalf" (INR.13), for example by the respondent's own customers. The correspondent must be satisfied that the respondent has done due diligence on those users and can share it on request (R.13(e)). US enhanced due diligence also asks who can direct transactions through it.
Why is correspondent banking high risk for money laundering?
The correspondent carries the respondent's money laundering risks without seeing its customers. FATF does not require customer due diligence (KYC) on "the customers of their customer"; the correspondent watches the respondent's transactions for changes in its risk profile or unusual activity and asks for information when something stands out (FATF guidance on correspondent banking services, October 2016, p. 4). US rules aim at money laundering through correspondent accounts directly: the due diligence program starts with an assessment of each account's money laundering risk (31 CFR 1010.610(a)(2)).
Nesting adds banks the correspondent never assessed. Jurisdiction matters too: US enhanced due diligence applies to banks with an offshore license, a license from a country designated non cooperative or one under special measures (31 CFR 1010.610(c)), and high risk countries and FATF lists covers the public lists. Cover payments split the message from the funds. Ending or restricting relationships with whole countries or classes of customer "to avoid, rather than manage, risks" is the opposite mistake, which FATF calls de risking; it may push payments into less regulated channels (p. 4).
What are the AML red flags in a correspondent relationship?
- Unknown banks in the chain. FATF expects correspondents to "detect potential, undisclosed nested relationships" (p. 12).
- Respondent customers using the account directly. That is a payable through account (R.13(e)).
- High risk country flows beyond the stated business. US reviews test activity against the account's "anticipated activity" (1010.610(a)(3)).
- Cover payments with no underlying detail. R.16 covers them too (INR.16 paragraph 3).
- No answer on nesting. FATF expects follow up when a respondent does not disclose it (p. 12).
- Volumes far above the stated activity. Expected volume belongs in the due diligence file (p. 11).
- Signs of a shell. No physical presence in any country means no account (1010.630).
From Ufuk Gürdaş, reviewer of this entry: "Nested relationships show up in the ordering institution field before they show up in the questionnaire: when a bank other than the respondent keeps appearing there, the respondent may be serving another bank through your account, and that is the question to ask it."
What due diligence do FATF, US, EU and UK rules require?
Before Bank C opens the account, it gathers information on Bank R's business, reputation and supervision, assesses its AML and CFT controls, gets senior management approval and understands each bank's responsibilities. Those steps come from R.13 of the FATF Recommendations, and the rules below build on them.
Table 2. Correspondent banking rules (read 22 October 2026).
| Rule | Applies to | Requires | In force |
|---|---|---|---|
| FATF R.13 | Cross border correspondent banking and similar relationships | Five measures (a) to (e); no shell banks | Standard |
| US 31 CFR 1010.610 and 1010.630 | Covered institutions with accounts for foreign institutions | Risk based due diligence; enhanced for offshore, non cooperative or special measures banks; no shell bank accounts | In force |
| EU Directive (EU) 2015/849, Articles 19 and 24 | Payment relationships with a third country respondent | The same five measures; no shell banks | In force |
| EU Regulation (EU) 2024/1624, Articles 36 and 39 | The same, including securities and fund transfers | Five measures, a documented decision to exit, no shell institutions | From 10 July 2027 |
| UK MLR 2017 regulation 34 | Payment relationships with a third country respondent | Measures (a) to (f); no shell banks | In force |
| Wolfsberg CBDDQ | Banks that choose to use it | A due diligence questionnaire, not law; versions before v1.4 retired | Since October 2017; amended 10 February 2023 |
Who monitors correspondent banking transactions, and how?
Correspondent banking transaction monitoring is the correspondent's job, and it tests the respondent's flows against the activity the due diligence file expects. For banks under enhanced due diligence, US rules require monitoring transactions "to, from, or through" the account in a way "reasonably designed to detect money laundering and suspicious activity" (1010.610(b)(1)(ii)).
Screening is the other half. Payment instructions should name all involved parties "for monitoring and screening purposes" (2016 guidance, p. 11). complead, formerly Sanction Scanner, screens the sender and the receiver named in each payment through the API while the transfer is processed, with its payment screening product.
Suppose Bank R's next payments through Bank C show a third bank as ordering institution. Bank C asks Bank R whether it serves that bank through the account, records the answer and tests next month's flows against it.
Related terms
- SWIFT or BIC code. The code that names a bank in a payment message.
- gpi tracker. Following a SWIFT payment from bank to bank.
- Travel rule. The data that travels with a transfer.
- Mirror trading. Matched trades that move value abroad.
- Wire fraud. Using a wire transfer to carry out a scheme to defraud.
