FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism
A correspondent bank offers payable-through accounts and nested relationships to a respondent. The bank's compliance head wants to identify the most significant additional risk compared with a plain vanilla correspondent account. Which is it?
The key added risk is that the correspondent may be processing transactions for the respondent's underlying customers or other banks that it has not identified or vetted. This opacity weakens the correspondent's ability to monitor, so it should confirm the respondent performs CDD and can supply customer data on request.
- AThe correspondent may be processing transactions for the respondent's underlying customers or other banks, whom it has not identified and does not knowCorrect
- BThe correspondent will face higher foreign exchange translation risk on balances held
- CThe respondent's own customers will have lower transaction limits
- DThe correspondent's liquidity coverage ratio will automatically fall
Explanation
In payable-through and nested arrangements, the respondent's customers, or other banks using the respondent, transact directly or indirectly through the correspondent without being subject to its own CDD. The correspondent therefore cannot see who ultimately uses the account, which is the heightened ML/FT risk. The other options are not the principal AML concern.
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