Correspondent Banking and Payable-Through Accounts

1. Why This Topic Matters for the CAMS Exam

Correspondent banking is the plumbing of the global financial system. Almost every cross-border payment, trade finance transaction and foreign exchange settlement moves through a correspondent relationship at some point. Because of this, correspondent banking is also one of the most heavily tested financial crime risk areas in the CAMS curriculum. It appears in questions about risk assessment, customer due diligence, the USA PATRIOT Act, FATF Recommendations, Wolfsberg Group guidance, shell banks, nested relationships and de-risking.

The core reason regulators and examiners care so much is simple: a correspondent bank processes transactions for customers it has never met. The correspondent relies entirely on the respondent bank to have performed proper Know Your Customer (KYC) work. If the respondent is weak, corrupt, poorly supervised or located in a high-risk jurisdiction, illicit funds can enter the international system through the correspondent and acquire the appearance of legitimacy. Historic enforcement cases such as HSBC (2012), Standard Chartered, Danske Bank Estonia and Riggs Bank all involved failures in correspondent banking or related account controls, resulting in billions of dollars in penalties.

Payable-through accounts (PTAs) amplify this problem further, because they allow the respondent bank's customers to transact directly on the correspondent's books, often without the correspondent ever identifying them. Understanding the difference between an ordinary correspondent account and a PTA, and knowing the specific controls that apply to each, is essential for exam success.

2. What Is Correspondent Banking?

Definition: Correspondent banking is the provision of banking services by one bank (the correspondent) to another bank (the respondent). The respondent bank, typically located in another country or without a presence in a particular currency or market, uses the correspondent to access services it cannot provide itself.

Key terms you must know:
- Correspondent bank: the bank providing the services and holding the account.
- Respondent bank: the bank receiving the services; it is the correspondent's customer.
- Nostro account: from the respondent's perspective, 'our account held with you' (its account at the correspondent).
- Vostro account: from the correspondent's perspective, 'your account held with us' (the respondent's account on the correspondent's books). Nostro and vostro describe the same account from opposite sides.
- Nested (downstream) correspondent banking: when a respondent bank allows other banks (its own respondents) to use its correspondent account. The correspondent may unknowingly be providing services to third and fourth-tier banks it has never assessed.
- Shell bank: a bank with no physical presence (no meaningful mind and management) in any jurisdiction and not affiliated with a regulated financial group. Shell banks are prohibited counterparties under FATF Recommendation 13 and Section 313 of the USA PATRIOT Act.
- Offshore bank: a bank licensed to do business only with non-residents of the licensing jurisdiction. Offshore banking licenses trigger enhanced due diligence under Section 312.

Services typically provided: international wire transfers and clearing, cash management, check clearing, foreign exchange, trade finance (letters of credit, documentary collections), liquidity and overnight investment, and custody.

3. Why Correspondent Banking Is High Risk

The CAMS body of knowledge consistently classifies correspondent banking as a high-risk product. Key vulnerabilities include:

- Indirect relationship: the correspondent is one or more steps removed from the underlying originators and beneficiaries. It has no direct knowledge of the respondent's customers.
- Reliance on the respondent's controls: the quality of AML screening depends on the respondent's program and the robustness of regulatory supervision in its home country.
- High volume and velocity: large numbers of transactions in significant amounts make it hard to detect anomalies.
- Nesting: downstream banks can hide behind the respondent, including banks from sanctioned or non-cooperative jurisdictions.
- Jurisdictional risk: respondents may be located in countries with weak AML laws, bank secrecy, high corruption or FATF-identified deficiencies.
- Limited transparency in payment messages: incomplete originator or beneficiary information, use of cover payments (historically MT 202 without MT 202 COV), stripping of sanctioned party names and generic descriptions can obscure the true parties.
- Politically exposed persons (PEPs): respondent banks may be owned or controlled by PEPs or their associates.
- Misuse for sanctions evasion, trade-based money laundering and layering: correspondent channels are ideal for moving funds rapidly through multiple jurisdictions.

4. Payable-Through Accounts (PTAs)

Definition: A payable-through account is a correspondent account through which the respondent bank's customers are allowed to conduct their own transactions directly, as if they were customers of the correspondent. The respondent bank's customers effectively receive sub-accounts or check-writing privileges on the correspondent's master account.

How it works in practice: A foreign bank opens a correspondent account at a bank in a major financial center. Instead of only using the account for interbank settlement, the foreign bank issues its own customers checks drawn on that account, or gives them the ability to make deposits and withdrawals, wire funds or otherwise operate through it. The correspondent sees transactions from dozens or hundreds of individuals and companies, but its only legal customer is the foreign bank.

Why PTAs are especially dangerous:
- The correspondent generally has not performed CDD on the sub-account holders.
- The sub-account holders may be anonymous or screened only by a weak respondent.
- Activity is commingled in a single account, masking individual patterns.
- PTAs can be used by foreign nationals to obtain de facto access to a banking system they could not enter directly, which is attractive for tax evasion, capital flight, drug proceeds and corruption money.
- Nested PTAs can give sub-account holders of third-tier banks direct access to a major financial system.

Required controls for PTAs: Under FATF Recommendation 13 and related interpretive notes, for payable-through accounts the correspondent must be satisfied that the respondent bank has (1) conducted CDD on the customers having direct access to the account, and (2) is able to provide relevant CDD information to the correspondent upon request. Under the USA PATRIOT Act Section 312 regulations, U.S. institutions offering PTAs to certain foreign banks must take reasonable steps to obtain information about the identity of persons with authority to direct transactions through the account and the sources and beneficial ownership of the funds.

5. Key Regulatory and Industry Standards

FATF Recommendation 13 (Correspondent Banking): Requires financial institutions, in addition to normal CDD, to: gather sufficient information about the respondent to understand its business, reputation and quality of supervision, including whether it has been subject to a money laundering or terrorist financing investigation or regulatory action; assess the respondent's AML/CFT controls; obtain approval from senior management before establishing new correspondent relationships; clearly understand the respective responsibilities of each institution; and, for PTAs, satisfy themselves about the respondent's CDD as described above. It also prohibits relationships with shell banks and requires institutions to satisfy themselves that respondents do not permit their accounts to be used by shell banks.

FATF Recommendation 16 (Wire Transfers): Requires accurate originator and beneficiary information to travel with payment messages, which is critical to transparency in correspondent payment chains.

USA PATRIOT Act Section 312: Requires U.S. financial institutions to establish due diligence programs for correspondent accounts of foreign financial institutions and private banking accounts for non-U.S. persons. Enhanced due diligence is required when the foreign bank operates under an offshore banking license, is licensed in a jurisdiction designated as non-cooperative with international AML principles, or is licensed in a jurisdiction designated as a primary money laundering concern under Section 311. EDD includes understanding ownership, conducting enhanced scrutiny of the account, and determining whether the foreign bank itself provides correspondent services to other foreign banks (nesting).

USA PATRIOT Act Section 313: Prohibits U.S. institutions from maintaining correspondent accounts for foreign shell banks and requires reasonable steps to ensure correspondent accounts are not used indirectly to provide services to shell banks.

USA PATRIOT Act Section 319(a): Allows forfeiture of funds deposited in a foreign bank's U.S. interbank (correspondent) account to the same extent as if the funds were deposited in the foreign bank. Section 319(b): Requires foreign banks with U.S. correspondent accounts to designate a U.S. agent for service of process and to provide records; U.S. institutions must respond to regulator requests for certain records within 120 hours, and must terminate the correspondent relationship within 10 business days if the foreign bank fails to comply with a subpoena after notice from the Secretary of the Treasury or Attorney General.

USA PATRIOT Act Section 311: Permits the Treasury to designate jurisdictions, institutions, accounts or transactions as primary money laundering concerns and impose one or more of five special measures, the most severe being a prohibition on opening or maintaining correspondent or payable-through accounts for the designated entity.

Wolfsberg Group Correspondent Banking Principles and the Correspondent Banking Due Diligence Questionnaire (CBDDQ): An industry standard that promotes a risk-based approach, standardizes the information requested from respondents and reduces duplicative requests. It covers ownership, management, products, customer base, AML program, sanctions, PEP policies, and downstream correspondent activity.

Basel Committee guidance on sound management of risks related to money laundering, including its annex on correspondent banking, emphasizes risk assessment, ongoing monitoring and clear allocation of responsibilities.

6. How Due Diligence on a Respondent Bank Works

A sound correspondent banking due diligence program typically evaluates:

- Ownership and management: identity of beneficial owners, whether publicly traded, state-owned, or privately held; involvement of PEPs; experience and integrity of management.
- Regulatory status and history: licensing authority, quality of home country supervision, regulatory sanctions, enforcement actions, and negative news.
- Jurisdiction: FATF status, corruption indices, sanctions programs, tax haven status, bank secrecy laws.
- Business profile: products, customer base, markets served, expected transaction volumes and currencies, and the purpose of the account.
- AML/CFT program: policies, independent testing, training, transaction monitoring, sanctions screening, and the respondent's own CDD standards.
- Downstream correspondents: whether the respondent offers correspondent services to other banks, and if so, which ones and how they are vetted.
- Use of the account: whether it will be a PTA, whether cash-intensive, or whether it will process payments for high-risk sectors such as money services businesses or casinos.
- Senior management approval and periodic review: higher-risk respondents require more frequent refreshes, site visits and enhanced monitoring.

Ongoing monitoring should compare actual activity against the expected profile, detect sudden changes in volume, unusual currency corridors, transactions involving sanctioned or high-risk countries, round-dollar transfers, repeated use of the same third parties, and message fields that are incomplete or appear altered.

7. Red Flags in Correspondent Banking and PTAs

- Respondent bank unable or unwilling to provide information on its AML program or downstream correspondents.
- Respondent operates under an offshore license or in a jurisdiction with weak supervision.
- Payment messages with missing, vague or repetitive originator information, or references to parties in sanctioned countries.
- Evidence of message stripping, such as removal of country names or substitution of the respondent's own name for the originator.
- Transaction volumes far exceeding the respondent's size, customer base or stated business.
- Heavy use of cover payments without the accompanying customer payment details.
- Sub-account holders in a PTA whose activity shows structuring, rapid in-and-out movement or links to shell companies.
- Transactions inconsistent with the respondent's geographic footprint or expected currency flows.
- Respondent appears to be a shell bank or shares an address with multiple unrelated banks.

8. De-Risking

De-risking refers to banks terminating or restricting correspondent relationships with entire categories of customers, regions or respondent banks to avoid rather than manage risk. FATF and the Basel Committee have warned that wholesale de-risking is not consistent with a risk-based approach, can drive transactions into less transparent channels, and can cut off developing economies from the financial system. Exam questions may test that the appropriate response is a case-by-case, risk-based decision, not blanket exit.

9. How to Approach Exam Questions on This Topic

CAMS questions on correspondent banking are usually scenario-based. A typical question describes a bank in one country providing services to a bank in another country, or a foreign bank whose customers appear to be transacting directly through a U.S. or European account. You are then asked to identify the greatest risk, the required control, the type of account, or the correct action.

Step 1 - Identify the roles. Who is the correspondent and who is the respondent? Who are the underlying customers? If the respondent's customers can act directly on the account, you are dealing with a PTA.

Step 2 - Spot the specific risk driver. Look for keywords: 'offshore license', 'no physical presence', 'other banks using the account', 'non-cooperative jurisdiction', 'checks issued to the respondent's customers', 'unable to provide beneficial ownership information'. Each maps to a specific concept: EDD under Section 312, shell bank prohibition, nesting, PTA controls.

Step 3 - Apply the governing rule. Shell bank equals prohibition and closure, not enhanced monitoring. Offshore license or Section 311 jurisdiction equals enhanced due diligence. Nested relationships equal understanding and assessing the downstream banks. PTA equals confirming the respondent performed CDD and can share it on request. New relationship equals senior management approval.

Step 4 - Choose the risk-based, proportionate answer. CAMS answers favor conducting due diligence, obtaining information, documenting risk assessments and escalating, rather than either ignoring risk or immediately exiting all relationships without analysis. The exception is shell banks, where the only correct answer is to refuse or terminate.

Step 5 - Eliminate distractors. Wrong answers often shift responsibility inappropriately, for example suggesting the correspondent must perform full KYC on every underlying customer of the respondent (impractical and not the standard), or that the respondent's regulator is solely responsible, or that a questionnaire alone satisfies all obligations.

10. Exam Tips: Answering Questions on Correspondent Banking and Payable-Through Accounts

Tip 1: Memorize the vocabulary. Correspondent versus respondent, nostro versus vostro, nested or downstream correspondent, shell bank, offshore bank, PTA. Many questions are lost simply by confusing who is providing and who is receiving services.

Tip 2: Remember that the correspondent's customer is the respondent bank, not the respondent's customers. The fundamental weakness tested again and again is that the correspondent cannot directly know the ultimate originators and beneficiaries.

Tip 3: Know the FATF Recommendation 13 list cold: gather information on the respondent, assess its AML controls, obtain senior management approval, document respective responsibilities, and for PTAs ensure the respondent has performed CDD on direct-access customers and can provide it on request.

Tip 4: Shell banks are an absolute prohibition. If a scenario describes a bank with no physical presence and no affiliation with a regulated group, the answer is never 'apply enhanced monitoring'; it is refuse or terminate, and ensure your respondents do not serve shell banks either.

Tip 5: Link Section 312 EDD triggers to the three categories: offshore banking license, jurisdiction designated non-cooperative, and jurisdiction or institution designated a primary money laundering concern under Section 311. Also remember that EDD includes asking about nested correspondents and ownership.

Tip 6: Remember the Section 319 numbers: 120 hours to produce records on request, and termination within 10 business days when directed after a foreign bank fails to comply with a subpoena. Section 319(a) is about forfeiture from the interbank account.

Tip 7: Nesting is a favorite exam theme. If a question mentions that the respondent provides correspondent services to other banks, the correct response involves identifying and assessing those downstream institutions and understanding how the respondent vets them, not merely noting it.

Tip 8: For PTA scenarios, look for language about the foreign bank's customers writing checks, holding sub-accounts or directly initiating transactions. The highest risk is that unidentified third parties have direct access to the financial system; the control is confirming and being able to obtain the respondent's CDD on those parties.

Tip 9: Wolfsberg questions typically test that the CBDDQ is a standardized industry questionnaire that supports a risk-based approach, not a regulatory mandate and not a substitute for the institution's own risk assessment and ongoing monitoring.

Tip 10: On de-risking, the CAMS-preferred answer is that institutions should manage risk through proportionate due diligence and monitoring rather than exiting entire countries or sectors indiscriminately, because blanket exits reduce transparency and push activity into unregulated channels.

Tip 11: Payment transparency questions often hinge on cover payments and message stripping. Know that the MT 202 COV format was introduced to carry originator and beneficiary information with cover payments, and that deliberately removing or altering party information to evade sanctions screening is a serious violation, not an operational formality.

Tip 12: When two answers both seem reasonable, pick the one that is most specific to correspondent banking. For example, 'assess the respondent's AML controls and supervisory environment' beats generic 'conduct customer due diligence'.

11. Practice Scenarios

Scenario A: A European bank is asked to open an account for a bank licensed in a Caribbean jurisdiction that is permitted to serve only non-residents. Analysis: This is an offshore banking license, a trigger for enhanced due diligence, including ownership, purpose of account and whether it serves downstream banks. It is not automatically prohibited.

Scenario B: During a review, a compliance officer notices that checks drawn on a foreign respondent's correspondent account are signed by many different individuals who are customers of the foreign bank. Analysis: This is a payable-through account. The officer should confirm the respondent has conducted CDD on these individuals, obtain the respondent's commitment to provide CDD information on request, and reassess the risk rating and monitoring of the account.

Scenario C: A prospective respondent's address is a registered agent's office, it has no employees, and it is not part of any regulated financial group. Analysis: This is a shell bank. The relationship must be declined.

Scenario D: Transaction monitoring reveals that a respondent's account is processing payments originated by several other banks from a neighboring high-risk country. Analysis: This is nested correspondent banking. The correspondent must understand who the downstream banks are, how the respondent performs due diligence on them, and whether the activity is consistent with the approved relationship; escalation and possible suspicious activity reporting may be required.

12. Summary

Correspondent banking enables global commerce but creates a structural information gap between the bank processing a payment and the people behind it. Payable-through accounts widen that gap by giving unidentified third parties direct access. The exam expects you to recognize these structures, name the specific risks (indirect relationships, nesting, shell banks, offshore licenses, weak jurisdictions, opaque payment messages), and apply the specific controls prescribed by FATF Recommendation 13, Section 312, 313, 319 and 311 of the USA PATRIOT Act, and Wolfsberg guidance. Master the vocabulary, the control checklists and the decision logic above, and you will be well positioned to answer any correspondent banking or PTA question on the CAMS exam.