In this video, Aamir Khan explores how these arrangements create gaps in oversight, increasing exposure to money laundering, sanctions evasion and other financial crime risks.
He outlines practical ways to strengthen control, from improving transparency and due diligence to enhancing monitoring and identifying risk signals more effectively across complex correspondent networks.
What is “Nesting”?
Nesting takes place when a Respondent Bank provides the same international payment services to other third-party financial institutions.
The Visibility Gap & Oversight Risks
Nesting creates a visibility gap and increases risk for the Correspondent.
A Correspondent Bank performs due diligence on the Respondent Bank, before and throughout the life of their relationship, to ensure they have robust financial crime controls and an acceptable financial crime risk appetite.
In a nested scenario, the Correspondent has no direct relationship with a third-party financial institution and no opportunity to directly apply its own due diligence. If those downstream institutions have weak controls, the Correspondent Bank may be exposed to risk, unknowingly facilitating money laundering, terrorist financing or sanctions evasion. Criminals understand these processes and will seek to exploit them.
Strategies for Risk Mitigation
To mitigate nested risks in correspondent banking, banks should consider the following:
The Disclosure Mandate
Establish a clear legal foundation by including contractual requirements that force Respondent Banks to declare any nested banking arrangements. This transparency is vital as it allows the Correspondent to perform Enhanced Due Diligence where necessary. This process must include an evaluation of the Respondent’s financial crime compliance framework regarding third-party institutions, supplemented by public source research to identify any underlying risks.
Adaptive Surveillance
Risk is never static, so your oversight shouldn’t be either. Conduct regular due diligence on the Respondent specifically to spot shifts in their nesting activity. By maintaining a schedule of periodic reviews, you can identify if the Respondent’s business model or risk appetite has evolved in a way that no longer aligns wih your institution’s safety standards.
The Compliance Gateway
Implement ongoing monitoring of all transaction originating from the Respondent. You must pay particular attention to the completeness of transaction data. Under FATF Recommendation 16, all cross-border payments must include full originator and beneficiary details.
Perimeter Protection
Your monitoring tools must be finely tuned to detect activity involving high-risk jurisdictions or sanctioned parties. You must assess and update your monitoring calibration on a regular basis to ensure it remains effective against emerging threats.
Behavioural Intelligence
Utilize monitoring through analytics to identify deviations in the Respondent’s typical behaviour. Look for sudden spikes in volume, shifts in geographic exposure or introduction of new currencies.
The Transparency Test
Treat the quality of communication as a core risk metric. You should constantly evaluate the Respondent’s transparency when inquiries are made. If a partner becomes evasive, it’s a primary signal of underlying risk.
Risk Signal Identification
Building on the transparency test, any instance where a Respondent is non-responsive to compliance inquiries should be documented as a formal risk signal. Failure to provide clear and timely information regarding nested activity often indicates intentional concealment, requiring a re-evaluation of the entire banking relationship.
In an interconnected world, your security is only as strong as your weakest link. Let’s make sure your correspondent network is a source of growth, not a source of risk.