A Correspondent Account Request with Nested Respondents
Andes Commercial Bank (ACB), a mid-sized bank in a jurisdiction with weak AML supervision, applies to Hudson Correspondent Bank in New York for a USD nostro and a USD 20,000,000 trade-finance line. ACB has 1,100 respondent banks in its home country and two offshore subsidiaries. Its application says it will offer payable-through accounts to 40 fintech clients and will use the USD account for its own trade finance and for downstream banks. Due diligence finds that 22% of ACB's downstream banks are shell companies, ACB's chairman is a PEP, a 2022 regulator inspection found that 17% of wire transfers lacked originator information, and ACB has no automated sanctions screening. Hudson's risk appetite prohibits shell banks and payable-through accounts for non-bank fintechs. The line would be secured by a standby letter of credit issued by ACB itself. ACB is profitable, has a 14% capital ratio and has never been subject to a US enforcement action.
1. Should Hudson open the account and extend the line as requested? Justify your decision.
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Hudson should reject the application as submitted. The proposal is outside its risk appetite because ACB plans to offer payable-through accounts to non-bank fintechs, which Hudson prohibits. A payable-through account allows ACB's customers to conduct business directly through Hudson. Hudson cannot safely monitor those customers and is exposed to shell-company and nested-account risk.
The due diligence findings compound the problem: 22% of ACB's downstream banks are shell companies, the chairman is a PEP, 17% of wires lacked originator information and ACB has no automated sanctions screening. Under US law, Hudson must apply enhanced due diligence to a foreign correspondent account under section 312 of the USA PATRIOT Act and must not permit the account to be used by shell banks. A conditional approval with transaction caps would still leave Hudson with monitoring obligations it could not discharge on these facts.
ACB's profitability and 14% capital ratio do not cure the AML defects. The absence of a US enforcement action is not evidence of adequate controls, because the home regulator's inspection already found a significant wire-transfer deficiency.
2. If Hudson decides to keep a limited relationship, what conditions should it impose?
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Hudson could offer a limited-purpose nostro for ACB's own trade-finance settlements only. The conditions should include: no nested respondents, no payable-through accounts, no offshore subsidiaries and no shell banks; a daily USD cap and a per-transaction cap; 100% cash collateral or a highly rated guarantee; and a right to suspend or close the account immediately.
Before opening, ACB should complete the Wolfsberg CBDDQ, provide a full respondent list with UBOs, implement automated sanctions screening and originator/beneficiary controls, and remediate the 17% wire defect. The PEP chairman must be resolved and any adverse media cleared. Hudson should obtain audit rights, annual on-site or virtual inspections and transaction-monitoring reports. A six-month pilot with a formal review would be appropriate.
This is enhanced due diligence, not de-risking by default. If ACB cannot meet the conditions, Hudson should decline. The decision and the reasons should be documented for the regulator and the board.
3. Assess the credit risk of the proposed standby letter of credit and any wrong-way risk.
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The credit line is the weaker part of the proposal. A standby letter of credit issued by ACB to secure ACB's own obligations is self-referential. If ACB defaults, the standby is a claim on the same defaulting entity. That is wrong-way risk: the value of the credit support falls precisely when it is needed. The standby adds little recovery value unless it is confirmed by a highly rated bank or collateralised by cash or high-quality securities.
Hudson should size the line to the underlying trade cycle, keep it uncommitted and short-tenor, and require cash collateral or a confirmed standby from a strong bank. If Hudson relies on the standby, it should apply a haircut and monitor ACB's capital, liquidity and sovereign exposure. The 14% capital ratio is not sufficient comfort given the AML weaknesses and the concentration of respondent banks.
The bank should also consider country risk, transfer risk and the possibility that the home regulator could impose capital controls or resolution measures. The credit decision should be separated from the AML approval, and both should be documented.