Nested correspondent banking is the arrangement in which a bank uses a nested account, meaning that it gains access to a correspondent bank's services not through its own account but through the account of another bank that does have one. The main entry explains how such accounts work and how they are controlled.
The phrase describes the practice as a whole. A respondent bank holding an account with a large international correspondent lets smaller banks, often in its own region, route their payments through it. For those smaller banks this may be the only affordable route to clearing in a major currency, especially where global banks have withdrawn direct relationships. The practice is also called downstream correspondent banking, and it is legitimate when disclosed.
The concern is transparency. The correspondent processes payments for customers of banks it has never assessed, so it depends on the controls of its direct respondent. Standards from the Financial Action Task Force and the Wolfsberg Group expect the correspondent to know whether its respondents offer nested services, to whom, and with what controls, as part of correspondent banking due diligence. Undisclosed nesting is a recognised warning sign, and it has featured in enforcement cases over correspondent banking failures, in the same way as payable-through accounts.