Correspondent Bank Agreement

A correspondent bank agreement is an agreement between one bank and another bank where a payment is made or received. This type of agreement is for handling financial transactions for a customer when he is not present and able to do so himself.

Purpose

Correspondent banking is typically used for international transactions. A correspondent bank agreement takes place when one bank performs a transaction on behalf of another bank.

Types

A correspondent bank agreement is used for various types of financial transaction. They are used for payments or electronic transfers, foreign currency exchanges, investments and loans.

Problems

Correspondent bank agreements are vulnerable to money laundering problems. This happens because two banks are involved for one customer. One bank is performing a transaction another bank asks them to do, and the first bank has no agreement with the actual customer. The bank performing the transaction follows appropriate measures to ensure the transaction is legitimate. If a bank believes there is fraudulent activity happening, they may choose to contact the customer directly.

References

• European Central Bank: All Glossary Entries
• Australian Government: Correspondent Banking
• FATF: FATF Recommendations, Glossary: FATF Methodology
• Bank of New York: Certification Regarding Correspondent Accounts for Foreign Banks