A correspondent payable through a nested account is an arrangement used by some to move money between financial institutions in foreign countries and financial institutions in the United States. A correspondent account is one maintained in a U.S. bank by a foreign financial institution; it becomes a "nested" account when that institution permits another financial institution access to the account.
Nested accounts involve foreign banks or financial institution that have access to U.S. investments and assets by another foreign financial institution’s accounts with U.S. banks. Essentially, this allows foreign financial institutions to have anonymous access to the American banking system, because the U.S. banks see the transactions as coming from legitimate foreign channels.
Oftentimes, foreign financial institutions want to take advantage of better offers, better terms or better regulation by doing some business in the United States. In addition, business is often easier or cheaper when done through a U.S. financial institution rather than a foreign institution doing so directly. One major aspect is clearly international funds transfers, but accounts in U.S. territory can also help with check clearing, exchanging currency and loans. When done for legitimate business reasons, such nested correspondent account activity is often benign.
The biggest possible legal concern from the U.S. viewpoint is to avoid allowing money laundering through theses correspondent payable through a nested account arrangements. Foreign banks and other financial institutions generally are not subject to the same level of oversight as in the United States. The Federal Financial Institutions Examination Council states that any relationships that U.S. banks have with foreign entities as correspondents in foreign countries should be outlined in explicit contract form with all details included. Correspondents payable through nested account arrangements have been used by drug traffickers. Worried about the use of nested accounts, some foreign countries have also put in anti-money-laundering procedures.
There are steps U.S. financial institutions can try to stay one step ahead of foreign entities trying to move money anonymously in U.S. banks. U.S. banks should be sure to have appropriate security measures surrounding opening accounts to very identify. U.S. banks can also analyze transactions to monitor for spikes in buying or selling of certain assets, as well as for activity not normally associated with the named account holder. Visits to financial institutions in other countries are also suggested.
