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FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism

A bank discovers that a respondent bank allows shell banks, which have no physical presence and are not affiliated with a regulated group, to use its account with the bank. What is the appropriate response under the Basel guidance?

The bank should refuse to continue the relationship unless the respondent stops allowing shell banks to use the account. Guidance prohibits dealing with shell banks directly or indirectly, and neither low volumes, extra reporting nor reclassification cures that exposure.

  1. AAccept it provided transaction volumes remain low
  2. BRequire extra quarterly reporting but continue the relationship
  3. CRefuse to maintain the relationship unless the respondent stops permitting shell bank accessCorrect
  4. DMove the account to a lower-risk category

Explanation

Banks should not establish or continue correspondent relationships with shell banks, and should be satisfied that respondents do not allow their accounts to be used by shell banks. Low volumes, extra reporting or reclassification do not remove the prohibited exposure.

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