Correspondent banking relationships under the AML/CTF Act

What is a correspondent banking relationship

A correspondent banking relationship is defined in section 5 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). It describes a relationship between an Australian-domiciled financial institution and a financial institution located outside of Australia.

This relationship typically involves the foreign institution holding an account with the Australian institution. Vostro and nostro account arrangements are common examples of correspondent banking relationships.

The regulatory regime governing these relationships focuses on mitigating the money laundering and terrorism financing risks associated with acting as a financial intermediary for foreign financial institutions.

Pre-entry due diligence (section 95)

Before establishing a correspondent banking relationship, an Australian financial institution is required to conduct due diligence on the foreign institution. This process aims to understand the foreign institution’s operations. The due diligence must establish the nature of the foreign institution’s business, its ownership, and its management structure.

A key component of the due diligence is assessing the anti-money laundering and counter-terrorism financing (AML/CTF) supervision the foreign institution is subject to within its home jurisdiction. This evaluation informs the Australian institution’s risk assessment.

Senior management of the Australian financial institution must approve the correspondent banking relationship before it is entered into. Furthermore, the respective AML/CTF responsibilities of both institutions must be documented prior to the commencement of the relationship.

Shell bank prohibition (section 95)

Australian financial institutions are prohibited from establishing or maintaining correspondent banking relationships with shell banks. A shell bank is defined as a foreign financial institution lacking a physical presence in any country and not being part of a regulated financial group.

The prohibition applies continuously, meaning institutions must regularly assess their correspondent relationships. This obligation is not limited to the initial establishment of a relationship.

If there is reason to believe a foreign financial institution is facilitating the use of its accounts by a shell bank, an Australian financial institution must not enter into or continue the correspondent banking relationship.

Ongoing review obligations

Periodic review of correspondent banking relationships is mandated by Section 98 of the *Anti-Money Laundering and Counter-Terrorism Financing Act*. These reviews must specifically address the ongoing AML/CTF risk associated with the relationship, any changes in the supervision of the foreign institution’s home jurisdiction, and developments related to sanctions.

The purpose of these reviews is to ensure the continued suitability and integrity of the correspondent banking relationship. Reporting entities must maintain records of both the initial due diligence and subsequent reviews for a period of 7 years, as stipulated by Section 113.

Non-compliance with sections 95 to 99 of the *AML/CTF Act* constitutes a contravention, which may result in civil penalties of up to 100,000 penalty units per contravention. AUSTRAC has the power to direct reporting entities to remediate identified weaknesses in correspondent banking relationships, utilising powers under Part 8.