Nested Account

A nested account, also called nested correspondent banking or a downstream correspondent relationship, arises when a respondent bank that holds an account with a correspondent bank allows other banks or financial institutions to send and receive payments through that account. The correspondent ends up processing transactions for institutions it never onboarded, never assessed and may not even know about.

Nesting is not illegal in itself, and many smaller banks reach international payment systems through a larger regional bank in exactly this way. But because it adds layers between the correspondent and the true originator or beneficiary of a payment, it is treated by regulators as a high-risk feature of correspondent banking relationships.

In a typical case, a US or European correspondent maintains a vostro account for Bank A, a respondent in another country. Bank A, in turn, provides correspondent services to Banks B, C and D, which have no direct relationship with the correspondent. When Bank B's customer sends a dollar payment, the instruction passes from Bank B to Bank A, and Bank A sends it to the correspondent from its own account. On the correspondent's books, the payment appears as Bank A's transaction unless the payment message identifies Bank B.

Nested activity can also involve money services businesses, payment firms or exchange houses that use a respondent bank's account, or a respondent offering payable-through accounts to its own customers. In payment messages such as the SWIFT MT103 and its ISO 20022 equivalents, the presence of a different ordering or beneficiary institution can reveal nesting to an alert correspondent.

The correspondent's anti-money laundering controls rely on knowing its respondent. With nesting, the correspondent's view of who is actually using its services becomes indirect. Risks include:

• Downstream institutions with weak controls, or in high-risk jurisdictions, gaining access to major currencies through a better-regarded respondent.
• Payments involving sanctioned parties passing through without being identified, creating exposure under rules administered by OFAC and other sanctions authorities.
• Access by shell banks or unlicensed operators that the correspondent would have refused directly.
• Use of the arrangement for the layering stage described in the model of money laundering stages.

The Financial Action Task Force (FATF) addresses correspondent banking in its Recommendation 13, which calls for enhanced measures on cross-border correspondent relationships, including understanding the respondent's business and controls. FATF guidance published in 2016 discusses nested relationships specifically and says correspondents should understand whether their respondent offers services to other institutions.

In the United States, section 312 of the USA PATRIOT Act requires due diligence, and in some cases enhanced due diligence, for correspondent accounts held for foreign financial institutions, including taking steps to identify the respondent's own correspondents where risk requires it. Section 313 prohibits correspondent accounts for foreign shell banks and requires that accounts not be used indirectly to serve them. Supervisors have cited inadequate monitoring of nested activity in enforcement actions against banks.

Correspondents typically ask respondents, through questionnaires such as the Wolfsberg Group's correspondent banking due diligence questionnaire, whether they provide services to other banks and, if so, to whom and under what controls. They monitor payment messages for unfamiliar ordering and beneficiary institutions, apply sanctions screening to every party named, and set contractual limits or prohibitions on downstream clearing. A risk-based approach means some nesting is accepted with controls while other arrangements are refused.

The difficulty and cost of overseeing nested relationships has been one of the drivers of de-risking, in which global banks cut correspondent ties with whole regions or categories of respondents. Critics note that this can push payments into less transparent channels, while supervisors stress that the response should be risk management, not wholesale exit.