Correspondent banking relationships
A correspondent banking relationship involves one financial institution (the correspondent) providing banking services to another financial institution (the respondent), where the financial institutions carry on activities or business at or through permanent establishments in different countries.
This page details your obligations in relation to correspondent banking relationships.
Changes have been made to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) which include amendments to Part 8 (Correspondent banking) of the AML/CTF Act that:
- require banks to undertake initial and ongoing due diligence assessments for all correspondent banking relationships
- extend the existing prohibitions in relation to correspondent banking relationships to prohibit financial institutions from entering into correspondent banking relationships with financial institutions that allow their accounts to be used by shell banks.
These reforms came into effect on 17 June 2021.
Policy principles period
To assist reporting entities with the transition process under this revised obligation, the Minister for Home Affairs has approved a 12-month policy principles period to enable you to effectively implement the new correspondent banking obligations.
This policy principles period will be in effect from 17 June 2021 (the date on which the amendments relating to correspondent banking commence) and will cease on 16 June 2022.
During the policy principles period, enforcement action will only be taken if the AUSTRAC CEO is satisfied that you have failed to take reasonable steps to comply with the amended Part 8 of the AML/CTF Act. These policy principles do not prevent AUSTRAC from taking enforcement action for contraventions of provisions in Part 8 that occurred before 17 June 2021, or for contraventions of other provisions of the AML/CTF Act.
What is a correspondent banking relationship?
‘Correspondent banking relationship’ is defined in section 5 of the AML/CTF Act, and involves a financial institution (the correspondent) providing banking services to another financial institution (the respondent) in another country.
The second institution (respondent) may be a subsidiary or related company of the first institution (correspondent).
- A company is taken to be related to another company as described in section 50 of the Corporations Act 2001 (Corporations Act), where a company is a holding company, subsidiary, or holding company subsidiary, of another company. The term ‘subsidiary’ is defined in section 46 of the Corporations Act.
Correspondent banking relationships enable the respondent to provide its own customers with cross-border products and services that it cannot provide itself, typically in a jurisdiction that it does not have a presence in.
Due to the high money laundering and terrorism financing (ML/TF) risks of these relationships, appropriate due diligence of the relationship is essential to ensure compliance with your obligations under the AML/CTF Act.
Services can include providing a current or other liability account and related services such as cash management, international funds transfers, cheque clearing, trade finance arrangements, foreign exchange services, and providing customers of the respondent with direct access to accounts with the correspondent (and vice versa).
The scope of a relationship and extent of products and services supplied will vary according to the needs of the respondent, and the correspondent’s ability and willingness to supply them.
In the context of a correspondent banking relationship, the correspondent broadly acts on behalf of or as an intermediary for the respondent and executes and processes payments or other transactions for customers of the respondent.
The underlying customers of the respondent bank may be individuals, corporates or even other financial services firms.
Correspondent banking relationships may be used in various ways and you should be aware of and assess the ML/TF risks arising from these arrangements. For example:
- Traditional correspondent banking: the correspondent bank opens and maintains an account for a respondent bank and handles its payments. This allows the respondent bank to provide equivalent services to its own customers. However, the customers of the respondent bank do not have direct access to the correspondent banking account.
- Nested correspondent banking: a bank’s correspondent relationship is used by a number of indirect respondent banks (i.e. nested banks) through their relationships with the bank’s direct respondent bank to conduct transactions and obtain access to other financial services. Nested banks do not have the direct relationship with the correspondent bank and they indirectly access financial services in the target jurisdiction through their direct respondent’s account with the ultimate correspondent. The arrangement differs from the traditional one in that there is an additional bank mediating between the nested banks and the correspondent bank. While an Australian correspondent bank is not required to conduct due diligence assessments on indirect respondent banks, you should assess the higher ML/TF risks associated with nested correspondent banking.
- Payable-through or pass-through accounts: the correspondent banking account of the respondent bank is accessible to its customers and they can directly conduct their transactions through this account by making deposits and writing cheques on the account.
Source: Closing the loop: AML/CFT supervision of correspondent banking, Rodrigo Coelho, Jonathan Fishman, Amer Hassan and Rastko Vrbaski, Bank for International Settlements, September 2020.
Requirements for correspondent banking relationships
There are specific requirements for financial institutions currently in, or entering into a correspondent banking relationship with another financial institution. These are detailed in Part 8 (Correspondent banking) of the AML/CTF Act and Chapter 3 of the AML/CTF Rules.
Financial institutions proposing to enter into, or that are involved in correspondent banking relationships must carry out additional due diligence on the respondent financial institution, in addition to normal customer due diligence (CDD) obligations.
A correspondent bank typically has limited information about the respondent bank’s customers and the nature of their transactions. They rely on their understanding of the respondent bank’s AML/CTF program to satisfy themselves of the levels of ML/TF risk. This may expose the correspondent bank to weaknesses in the respondent bank’s AML/CTF risk program, increasing the associated risks.
For more information about these requirements, see Due diligence of correspondent banking relationships.
Entering into correspondent banking relationships
Prior to entering into a correspondent banking relationship involving a vostro account (refer to the definition below) you must:
- carry out a mandatory due diligence assessment (in accordance with Chapter 3 of the AML/CTF Rules)
- prepare a written record of that assessment
- obtain the approval of a senior officer within your financial institution.
When a financial institution ‘enters into’ a correspondent banking relationship
AUSTRAC considers that a financial institution has entered into a correspondent banking relationship at the earlier of:
- the agreement establishing the relationship coming into effect, regardless of whether that is by a legally binding arrangement or some other mechanism, or
- upon the opening of a vostro or nostro account by one of the parties.
What is a vostro account?
A vostro (Latin for ‘yours’) account is any account provided by the correspondent financial institution to be held by a respondent financial institution under a correspondent banking relationship.
A nostro (Latin for ‘ours’) account refers to an account that a bank holds in a foreign currency in another bank.
A financial institution is only subject to the correspondent banking provisions of the AML/CTF Act if it:
- carries on an activity or business at or through a permanent establishment in Australia (for example, an entity situated in Australia or an Australian branch of a overseas entity), or
- is a resident of Australia and carries on an activity or business at or through a permanent establishment in a foreign country (for example, a foreign branch of an Australian entity), or
- is a subsidiary of a company that is a resident of Australia and the financial institution carries on an activity or business at or through a permanent establishment in a foreign country (for example, an overseas subsidiary of an Australian entity).
Permanent establishment is defined in section 21 of the AML/CTF Act, and includes provision for agents, mobile services and electronic communications.
Prohibition on entering into a correspondent banking relationship with a shell bank
Financial institutions are prohibited from entering into a correspondent banking relationship with a shell bank, or a financial institution that deals with shell banks in the ways set out in section 95 of the AML/CTF Act.
You must not enter into correspondent banking relationships with:
- shell banks
- financial institutions that have correspondent banking relationships with shell banks
- financial institutions that allow their accounts to be used by shell banks.
This prohibition is an absolute prohibition against any form of correspondent banking relationship and is not limited to the provision of a vostro account. For example, holding a nostro account with a shell bank is prohibited regardless of whether the shell bank holds a vostro account.
When you must terminate a correspondent banking relationship
You must terminate a correspondent banking relationship within 20 days (unless the AUSTRAC CEO has determined a longer period than 20 days) of becoming aware that the other financial institution:
- is a shell bank
- has a correspondent banking relationship with a shell bank and has not terminated that relationship within 20 business days on request
- permits its accounts to be used by a shell bank.
Alternatively, you may ask the other financial institution to terminate its correspondent banking relationship with the shell bank. If the second institution has not complied with the request after 20 days, you must terminate this relationship within a further 20 business days.
The content on this website is general and is not legal advice. Before you make a decision or take a particular action based on the content on this website, you should check its accuracy, completeness, currency and relevance for your purposes. You may wish to seek independent professional advice.