Simple Overview of Correspondent Banking
- Meaning: A correspondent banking relationship is where one financial institution provides banking services to another financial institution in a different country.
- Why it matters: It is recognised as vulnerable to exploitation because the correspondent often processes transactions for the respondent’s customers with limited visibility of the end parties.
- Key obligations: AUSTRAC requires due diligence before entering the relationship and ongoing due diligence throughout the relationship.
- Important FATF clarification: FATF does not require correspondents to perform customer due diligence on each customer of the respondent’s customers.
What is a correspondent banking relationship
AUSTRAC defines a correspondent banking relationship as one financial institution, the correspondent, providing banking services to another financial institution, the respondent, where both institutions are based in different countries. Services can include cash management, wire transfers, cheque clearing, payable through accounts, and foreign exchange services.
This term is mainly relevant to banks and certain financial institutions, rather than most Tranche 2 professional service firms. However, it is still useful for Tranche 2 compliance teams to understand it because it shapes how cross border payments work and why payment transparency rules exist.
Why correspondent banking is high risk
AUSTRAC explains that correspondent banking relationships are recognised globally as vulnerable to exploitation for money laundering and terrorism financing. They involve a financial institution carrying out transactions on behalf of another institution’s customers, often with limited information about those underlying customers and transactions.
FATF guidance echoes the same theme. The correspondent is expected to understand the respondent institution’s business, reputation, and quality of supervision, and to assess the respondent’s AML and CTF controls.
Risks increase where the respondent institution is located in a jurisdiction with weak AML and CTF laws or limited supervision. AUSTRAC explicitly links this to FATF mutual evaluation outcomes.
Core due diligence expectations
AUSTRAC states that you must undertake a due diligence assessment prior to entering into a correspondent banking relationship and conduct ongoing due diligence throughout the relationship.
FATF guidance clarifies the practical boundary. The correspondent does due diligence on the respondent institution. FATF does not require the correspondent to conduct customer due diligence on each individual customer of the respondent’s customers. This point is critical because it reduces confusion around the incorrect concept of knowing your customer’s customer as a blanket requirement.
AUSTRAC also released reform era guidance that includes changes intended to strengthen protections for correspondent banking relationships.
Practical Examples of CBR
Example 1: Australian bank provides clearing services to an overseas bank
An Australian bank allows an overseas bank to access payment services and settlement in Australian dollars. This is a correspondent banking relationship if the institutions operate through permanent establishments in different countries.
Example 2: Foreign exchange settlement support
A respondent bank uses a correspondent bank to facilitate foreign exchange payments for its customers. The correspondent processes payments, often without full visibility of the underlying customer context, which is why this area is risk sensitive.
Best practice controls
Clear onboarding checklist for respondent banks, including ownership, management, regulatory status, and supervision quality. This aligns with FATF expectations to understand the respondent’s business and controls.
Senior management sign off for higher risk correspondent banking relationships, and documented responsibilities between the parties.
Ongoing monitoring that focuses on changes in respondent risk profile, unusual activity, and deviations from agreed terms, consistent with risk based approach principles.
Strong targeted financial sanctions awareness within correspondent banking monitoring, because cross border payment networks are a key pathway for sanctions evasion risk.
Key Challenges
De risking behaviour that avoids risk rather than managing it. International bodies have highlighted that de risking can reduce transparency and increase exposure to illicit finance.
Data limitations and inconsistent payment messages.
Over application of the incorrect belief that the correspondent must do customer due diligence on each end customer.
How Tranche 2 Consultants can help
Where Tranche 2 clients interact with banks, payment providers, or cross border funding, Tranche 2 Consultants can help you understand what information is realistically available, how to interpret payment evidence, and how to document funding narratives in a way that aligns with AUSTRAC expectations and FATF standards.
Closing Summary
Correspondent banking relationships are one of the most important mechanisms in global payments and one of the most sensitive from an AML and CTF perspective. The core message is straightforward. Know the institution you are dealing with, monitor the relationship, and apply enhanced steps where the risk is higher.
“Bookmakers sit at a natural convergence point for cash, speed and anonymity. AUSTRAC’s focus reflects the reality that wagering platforms can be misused as value transfer mechanisms if risk controls are not actively applied.”
