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While reliant on institutional controls rather than individual customer checks, the integrity of correspondent banking hinges on rigorous assessment of respondent institutions, with recent regulatory actions highlighting risks from weak oversight.<\/p>\n<\/div>\n
Correspondent banking sits in a different compliance category from ordinary customer due diligence. The bank at the far end of the chain is not assessing the person whose money is moving; it is assessing the institution that was supposed to have already identified that customer and understood the risk. That distinction matters because the controls are built around a respondent bank\u2019s systems, governance and oversight, rather than the natural person on the other side of the payment.<\/p>\n
FATF has made that point clearly in its correspondent banking guidance, saying institutions do not need to carry out due diligence on every individual customer of a respondent bank. The risk-based approach, the standard also reflected in FSB commentary, is meant to recognise that correspondent relationships vary widely in exposure and should be assessed accordingly. In other words, the task is to judge the counterparty and its controls, not to recreate retail onboarding one layer further downstream.<\/p>\n
That is why the payable-through account exception matters so much. It is the narrow point at which the correspondent must satisfy itself that the respondent has done proper due diligence on the underlying customers. Outside that exception, the regime does not expect know-your-customer\u2019s-customer controls. Instead, it requires a structured review of the respondent\u2019s business, supervision and anti-money laundering framework, with enhanced scrutiny where the relationship presents higher risk.<\/p>\n
The industry has built its main tool around that logic. The Wolfsberg Correspondent Banking Due Diligence Questionnaire is designed to surface ownership, licensing, sanctions screening, transaction monitoring and other elements of the respondent\u2019s control environment. But the questionnaire is only as strong as the challenge applied to it. Where answers are refreshed on a cycle and compared mainly with the previous form, rather than with live behaviour, the process can become administrative rather than analytical.<\/p>\n
Regulators have already shown what that failure looks like. The FCA\u2019s action against Deutsche Bank exposed the danger of weak control over suspicious activity patterns, while its Standard Chartered final notice pointed to serious and systemic shortcomings in correspondent banking due diligence. FATF has also warned against de-risking, arguing that simply abandoning relationships is inconsistent with a risk-based framework and can push activity into weaker, less transparent channels. The message from the rulebooks is consistent: correspondent banking is not ordinary CDD, but it still demands judgement, escalation and genuine understanding of the respondent\u2019s risk.<\/p>\n
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