Nested Relationships and Types of Financial Institutions
Question
Which step should be taken to understand the types of financial institutions to whom the services are being offered when a correspondent bank permits 'nested' relationships according to the Wolfsberg Group?
Answers
Explanations
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A. B. C. D.C
http://www.qfcra.com/en-us/whatwedo/AntiMoneyLaundering/Documents/Guidance%20on%20Correspondent%20Banking%20May%202018.pdf(7)
When a correspondent bank permits "nested" relationships, it means that they allow their respondent bank clients to provide correspondent banking services to other financial institutions. In this case, it is important for the correspondent bank to understand the types of financial institutions to whom their services are being offered. This is because the correspondent bank is ultimately responsible for ensuring that their respondent bank clients are not facilitating money laundering or terrorist financing through these relationships.
To understand the types of financial institutions to whom the services are being offered, the correspondent bank should take the following step:
C. Evaluate the distribution of downstream correspondents and identify any direct or indirect issues
This means that the correspondent bank should review the respondent bank's downstream correspondents, i.e., the financial institutions to whom the respondent bank is providing correspondent banking services. The correspondent bank should identify any direct or indirect issues that may arise from these relationships. For example, the correspondent bank should ensure that the downstream correspondents are not located in high-risk jurisdictions or are not involved in suspicious activities.
The Wolfsberg Group, which is a group of international banks that aims to develop financial services industry standards and related products, recommends that correspondent banks should conduct a risk-based analysis of their respondent bank clients and their downstream correspondents. This includes understanding the type and volume of accounts serviced and reviewing peer-group clients by risk category.
However, obtaining independent audits or examination reports for "nested" relationships to determine risk levels, as mentioned in option D, may not be feasible or practical for all correspondent banks. Instead, the correspondent bank should conduct their own due diligence on the respondent bank's downstream correspondents and identify any potential risks associated with these relationships.
