Correspondent Banking and Interbank Relationships
Correspondent banking tests how banks hold accounts for each other, how flows route across the network, and what due diligence attaches to a respondent. Expect nostro/vostro direction, RMA and BIC mechanics, nested relationships and de-risking.
Accounts and identifiers
A nostro is our account held with you in a foreign currency; the same account is a vostro on the other bank's books. A loro account belongs to a third party. An account held outside the currency's home clearing system is an offshore currency account. The BIC is eight or eleven characters. An RMA is the SWIFT permission that must exist before two banks exchange FIN messages - it is not a credit line.
Risk and rules
FATF Recommendation 13 and the Wolfsberg CBDDQ set the due diligence expectation: understand the respondent's business, AML controls, ownership and the purpose of the accounts. A nested correspondent is a respondent's respondent using the account directly; it raises risk and usually triggers know-your-customer's-customer work. Payable-through accounts let a respondent's customers transact directly. De-risking - exiting a whole corridor - is a recognised but discouraged response to unmanageable risk.
Worked example
Bank A in Lagos holds a USD account with Bank B in New York: on A's books it is a nostro, on B's it is a vostro. A allows smaller bank C to receive USD through that account, making C a nested correspondent. B's periodic review must look through to C's ownership and controls. If two individuals on the SDN list each hold 25% of C, the 50% rule makes C blocked even though A's own file is clean.
Traps
- Reversing nostro and vostro.
- Treating an RMA as approval to lend or to settle.
- Assuming the underlying beneficiary is outside the correspondent's sanctions exposure - exposure attaches to the flow.
- Ignoring intraday liquidity and credit lines the correspondent must hold for its respondents.