The Correspondent Bank's Unusual Payment Pattern
A small licensed commercial bank in a developing market, Meridian Trust Bank (MTB), has a long-standing correspondent relationship (nostro account) with a larger regional bank, Coastal Union Bank (CUB). MTB's compliance officer notices that over the past 60 days, 34 inbound wires totalling USD 4.1 million have arrived from CUB on behalf of a single MTB corporate client, Kestrel Trading Ltd. The wires are all just under USD 125,000, a figure the compliance officer recalls is a common reporting threshold in the region. Kestrel's stated business is importing agricultural machinery, but its declared turnover is USD 2 million per year. CUB has not flagged any of the payments. MTB's relationship manager argues the client is a valued, long-standing customer and that refusing or delaying the wires will damage the relationship. The compliance officer must decide what to do before the next batch of wires arrives tomorrow.
1. Identify the key red flags in this scenario and explain why they matter for MTB's own AML obligations, distinguishing MTB's position from CUB's.
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Red flags:
- Structuring pattern: 34 wires all just under USD 125,000 strongly suggests deliberate structuring to avoid a reporting threshold. The consistency of the amount is itself the signal - legitimate trade payments vary with invoice values.
- Volume vs. declared business: USD 4.1m in 60 days against a declared annual turnover of USD 2m is inconsistent by an order of magnitude. Either the declared business profile is wrong or the flows are not trade-related.
- Single client concentration through a correspondent: All the activity funnels through one relationship and one client, which concentrates risk and suggests the client may have chosen MTB (or CUB) precisely because controls are perceived as weaker.
- Nature of goods: Agricultural machinery is a plausible cover because it is bulky, hard to value, and commonly used in trade-based money laundering schemes (over/under-invoicing).
Why MTB's position differs from CUB's: MTB has the customer relationship and the CDD file, so it owns the obligation to understand and explain the activity. CUB's failure to flag does not transfer responsibility - correspondent banks are expected to apply their own risk-based monitoring, and MTB cannot rely on a respondent bank's silence as evidence of legitimacy. MTB must act on what it knows.
2. What should the compliance officer recommend, and what is the appropriate sequence of actions? Justify each step.
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Recommended sequence:
- Do not simply block and move on. The next batch arrives tomorrow, so there is an immediate operational decision. The compliance officer should escalate to the MLRO (or equivalent) today and recommend holding the incoming wires pending review rather than processing them automatically.
- Trigger an enhanced due diligence review of Kestrel. Request the underlying commercial documentation - invoices, bills of lading, customs declarations, counterparty details - and reconcile them against the wire amounts. The objective is to test the trade story, not to accept it.
- Refresh the client risk rating. A client whose flows are 2x annual turnover in two months should be re-rated upward, which changes the monitoring threshold and review frequency going forward.
- Consider a suspicious transaction report. If the documentation does not explain the pattern, file an STR with the FIU. Filing does not require certainty - reasonable suspicion is the standard. Do not tip off the client.
- Engage CUB formally. Send a written query through the correspondent relationship asking CUB to confirm its own CDD on the originating side. This protects MTB's position and may surface information MTB lacks.
Justification: Holding first preserves optionality and avoids compounding exposure; EDD tests the hypothesis; re-rating fixes the control gap; the STR discharges the legal duty; the CUB query is cooperative and evidentiary. The relationship manager's commercial concern is legitimate but cannot override a legal obligation - the correct response is to explain the process to the client without disclosing the STR.
3. The relationship manager proposes simply asking Kestrel to split future payments across two banks to reduce 'visibility'. Evaluate this proposal from a compliance and reputational standpoint.
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This proposal is unacceptable and should be rejected outright.
- It facilitates structuring. Advising a client to spread payments to reduce visibility is, in substance, helping them evade monitoring and reporting - the very conduct the AML regime exists to detect. Even if the underlying funds were clean, the advice itself creates an intent to avoid controls.
- It creates direct liability for MTB and the individual. Knowingly assisting evasion can expose the bank and the relationship manager to criminal liability (aiding/abetting money laundering) and to regulatory sanction for inadequate systems and controls.
- It is documentable. Any written or recorded instruction becomes evidence. The relationship manager should be instructed in writing not to communicate this to the client.
- Reputational risk is asymmetric. The upside is retaining one client; the downside is a regulatory finding, loss of the correspondent relationship with CUB, and reputational damage across the market.
Correct handling: The relationship manager's commercial concern should be acknowledged and redirected - the bank can retain the client by running proper EDD quickly and communicating professionally, not by hiding flows. The compliance officer should document the rejection and, if the proposal was made in seriousness, escalate it as a conduct issue.