Correspondent banking is an arrangement in which one bank (the “correspondent”) provides banking services — such as processing payments, holding accounts, or facilitating currency exchanges — on behalf of another bank (the “respondent”). These relationships are the backbone of international finance, enabling money to move across borders between countries where the two banks do not have a direct presence. For example, a small bank in a developing country may rely on a large European correspondent bank to process its customers’ international payments.
EU law classifies correspondent banking as a mandatory higher-risk situation requiring Enhanced Due Diligence. Before establishing a correspondent banking relationship with a non-EU institution, EU banks must assess the respondent’s AML/CFT controls, obtain senior management approval, and document their responsibilities clearly. The concern is that a correspondent bank can unwittingly become a conduit for illicit funds if the respondent bank’s own KYC and AML controls are weak. This risk has led some larger banks to “de-risk” by exiting correspondent banking relationships in certain regions altogether.
The so-called Wolfsberg Questionnaire was put together to simplify obtaining the required information for opening a correspondent banking relationship.
