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Correspondent banking is the provision of banking services by one bank (“correspondent bank”) to another bank (“respondent bank”). These services may include cash/funds management, drawing arrangements for demand, international wire transfers, drafts and mail transfers, payable-through-accounts, cheques clearing, etc. Banks must gather sufficient information to understand fully the nature of the business of the correspondent/respondent bank. Information on the other bank’s management, major business activities, purpose of opening the account, identity of any third party entities that will use the correspondent banking services and regulatory/supervisory framework in the correspondents/respondent’s country may be of special significance. Similarly, banks should try to determine from publicly available information whether the other bank has been subject to any money laundering or terrorist financing investigation or regulatory action. While it is desirable that such relationships must be established only with the approval of the board, in case the boards of some banks wish to delegate the power to an administrative authority, they may delegate the power to a committee headed by the chairman/CEO of the bank while laying down clear parameters for approving such relationships. Proposals approved by the committee must perpetually be put up to the board at its next meeting for post facto approval. The responsibilities of each bank with whom correspondent banking relationship is established must be clearly documented. In the case of payable-through-accounts, the correspondent bank must be satisfied that the respondent bank has verified the identity of the customers having direct access to the accounts and is undertaking ongoing due diligence on them. The correspondent bank must also ensure that the respondent bank is able to provide the significant customer identification data immediately on request.
Banks must refuse to enter into a correspondent relationship with a “shell bank” (bank which is incorporated in a country where it has no physical presence and is not affiliated to any regulated financial group). Shell banks are not allowed to operate in India. Banks should also guard against establishing relationships with respondent foreign financial institutions that authorize their accounts to be used by shell banks. Banks must be extremely careful while continuing relationships with respondent banks located in countries with poor KYC standards and countries identified as non-cooperative in the fight against money laundering and terrorist financing. Banks must ensure that their respondent banks have anti money laundering policies and measures in place and apply enhanced due diligence procedures for transactions carried out through the correspondent accounts.