Key Risk Associated with Correspondent Accounts

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According to the Basel Customer Due Diligence paper, a key risk associated with Correspondent Accounts is that "the volume and value of transactions passing through the account may not be in line with the original correspondent agreement." This means that the actual activity conducted through the account may not match the expected level of activity that was agreed upon when the correspondent relationship was established.

Correspondent accounts are established between two banks where one bank (the correspondent bank) provides services to another bank (the respondent bank) to facilitate transactions for the respondent bank's customers. These accounts are often used to facilitate cross-border transactions, and they can be an important tool for banks to expand their customer base and provide more services to their clients.

However, correspondent accounts can also be used for illicit purposes, such as money laundering or terrorist financing. One way that this can happen is if the respondent bank's customer acceptance and know your customer (KYC) policies are ineffective, which is another potential risk associated with correspondent accounts. If the respondent bank is not properly identifying and verifying the identities of its customers, it may be unknowingly facilitating illicit activity through the correspondent account.

The risk identified in the Basel Customer Due Diligence paper, however, relates specifically to the volume and value of transactions passing through the account. If the actual level of activity conducted through the account is significantly higher than what was agreed upon in the correspondent relationship, it may indicate that the account is being used for illicit purposes. For example, if the correspondent bank expected the respondent bank to conduct only a few transactions per month, but instead the account is used to facilitate hundreds or thousands of transactions, this may be a red flag for potential money laundering or other illicit activity.

Therefore, correspondent banks should ensure that they have effective controls and monitoring mechanisms in place to identify and mitigate the risks associated with correspondent accounts, including the risk that the volume and value of transactions passing through the account may not be in line with the original correspondent agreement. These controls may include conducting enhanced due diligence on correspondent accounts, monitoring transaction activity for unusual patterns, and requiring regular reporting from the respondent bank on its transaction activity.