Correspondent Banking

A bank cannot be present in every country. It opens an account with a bank that is, and uses it to clear payments, hold foreign currency, finance trade and manage cash. The account is called a nostro when seen from the holder's side (our account with you) and a vostro from the host bank's side (your account with us). The correspondent usually has no direct relationship with the respondent's customers, so it sees payments but not the people behind them, which is the main money laundering and sanctions risk. A respondent that itself serves other banks creates a nested chain of exposure. Because of this, correspondent banks apply enhanced due diligence to respondents, check their controls and ownership, monitor payment flows, and sometimes close accounts when risk looks too high. For a small respondent, losing one such account can end its access to dollar or euro payments.

A small bank in a developing country holds a US dollar account with a large international bank. When one of its customers pays a supplier abroad, the respondent sends the instruction through the account, and the large bank settles it. The large bank screens the payment details against sanctions lists, monitors volumes by the respondent and reviews its controls every year.