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.

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 an account provided by the correspondent financial institution to be held by a respondent financial institution under a correspondent banking relationship. The term should be understood to have its ordinary meaning, including by reference to the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking. In determining whether an account is a Vostro account, AUSTRAC cautions financial institutions against taking an overly narrow or technical approach - even if an account is not described as a ‘vostro account’ by the correspondent or respondent institution, if it fulfils such a purpose in practice it is a vostro account.

A nostro (Latin for ‘ours’) account refers to an account that a bank holds in a foreign currency in another bank.

Geographical links

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.