Correspondent Institution

A correspondent institution is a bank, or sometimes another regulated financial institution, that provides accounts and services to a different institution so that the second can make and receive payments where it lacks its own presence. The institution receiving the services is called the respondent. A typical example is a large bank in New York holding US dollar accounts for smaller banks around the world, allowing them to pay and be paid in dollars without joining US payment systems themselves.

The term is broader than correspondent bank because the provider or the respondent may be a non-bank, such as a payment institution, broker or money transfer business. The arrangement between the two is a correspondent banking relationship, and in payment messages the correspondent often appears as an intermediary institution or as the account-holding bank for the sender or receiver.

Correspondent institutions offer a range of services to respondents:

• Account holding. The correspondent keeps a vostro account for the respondent, which the respondent records as its nostro account.
• Payment processing. It sends and receives payments for the respondent and its customers, usually through domestic clearing systems and the SWIFT network.
• Foreign exchange. It converts currencies for the respondent and settles FX trades.
• Liquidity and credit. It may provide intraday or overnight credit so that payments can be made before funds arrive.
• Trade services. It can confirm or advise letters of credit and handle documentary collections.
• Cash and cheque services. In some markets it handles cash supply and cheque clearing for smaller institutions.

A cross-border payment may pass through several correspondents. The sender's bank pays its correspondent, which may pay another correspondent, until the funds reach the beneficiary's bank. Each link can deduct charges, apply its own checks and add time. The payment may be sent as a single serial message that moves from bank to bank, or the instruction may go directly to the beneficiary's bank while a separate cover payment moves the funds between correspondents. Improvements such as SWIFT gpi tracking and the move to ISO 20022 messages aim to make these chains faster and more transparent.

Because a correspondent processes payments for customers it does not know directly, international standards treat the relationship as higher risk. The FATF recommendations require correspondents to gather information about the respondent's business, reputation, ownership and supervision; to assess its anti-money laundering and sanctions controls; to obtain senior management approval before opening the relationship; and to understand each side's responsibilities. Correspondents must not deal with shell banks, meaning banks with no physical presence and no affiliation with a regulated group. Extra measures apply where respondents allow their own customers to use the correspondent account directly, known as payable-through accounts.

In the United States, the Bank Secrecy Act as amended by the USA PATRIOT Act sets specific due diligence requirements for correspondent accounts held for foreign banks. Many correspondents use standard questionnaires, such as the Wolfsberg Group's due diligence questionnaire, to collect information consistently. Ongoing transaction monitoring and sanctions screening of payments passing through the account are central to managing the risk.

Correspondent services are a fee and balance business. Correspondents earn transaction charges, account maintenance fees, foreign exchange margins and the benefit of the balances respondents leave with them. Large global banks offer correspondent services in many currencies, while regional banks often specialise in a few currencies or corridors, acting as a bridge between smaller local banks and the global network. Respondents usually keep several correspondents for each major currency, so that payments can continue if one relationship ends, and they compare providers on price, cut-off times, reach and the quality of compliance support. For the correspondent, the profitability of a relationship has to cover the considerable cost of due diligence and monitoring, which is one reason small respondents with low volumes can find it hard to obtain accounts.

Since the early 2010s many large correspondents have closed relationships with respondents in smaller or higher-risk countries, citing compliance costs, low profits and the risk of large penalties. Studies by international bodies have linked this de-risking to higher costs and longer chains for payments to and from affected regions, and to pressure on remittance businesses and charities. Responses include clearer regulatory guidance on risk-based approaches, shared know-your-customer utilities and the growth of alternative routes, such as regional payment systems and direct participation in clearing systems.

• Financial Action Task Force
• Committee on Payments and Market Infrastructures