A nested account is a bank or financial account that is linked to another account, often for the purpose of conducting transactions or managing funds. Nested accounts can be used in legitimate financial activities but may also be exploited for money laundering or fraud schemes. Financial institutions and regulators implement monitoring and due diligence procedures to detect and prevent illicit activities involving nested accounts.
How Nested Accounts Work
Nested accounts typically arise when a foreign financial institution gains access to the global banking system by operating through the correspondent account of another institution. In this setup, the nested entity does not hold a direct account with a large international bank, but instead “nests” within a local bank’s account relationship—often without the knowledge of the host (correspondent) bank.
This arrangement can occur for legitimate purposes—such as when a small institution lacks the resources to maintain direct international accounts—but it also introduces significant transparency and control challenges for the correspondent bank.
Risks Associated with Nested Accounts
Nested account structures are considered high-risk from an AML and sanctions compliance perspective. The key concerns include:
Lack of transparency: The correspondent bank may have limited visibility into the identity or activity of the nested customer.
Regulatory arbitrage: Nested institutions may be based in jurisdictions with weak AML/CFT oversight, using the arrangement to bypass stricter controls.
Sanctions evasion: Bad actors may use nested accounts to indirectly access the global financial system in violation of sanctions laws.
Money laundering and terrorist financing: Illicit actors can exploit nested structures to disguise the source and movement of criminal proceeds.
Reputation risk: Correspondent banks face reputational damage if they are linked to illicit flows processed through nested relationships.
These risks have led regulators worldwide to scrutinize correspondent banking arrangements more closely, especially where nested accounts are involved.
Regulatory Guidance and International Standards
The Financial Action Task Force (FATF) and global regulators emphasize the need for correspondent banks to conduct Enhanced Due Diligence (EDD) when nested accounts are detected or suspected. Key guidance includes:
Understanding the downstream relationships of respondent banks, including who else may be using the correspondent account.
Assessing the AML/CFT controls of respondent institutions, including their ability to monitor and report on nested activity.
Maintaining visibility and audit trails for all nested transactions.
Conducting ongoing monitoring and periodic risk reviews of the correspondent relationship.
Terminating relationships where nested activity poses unacceptable levels of risk or cannot be sufficiently mitigated.
Nested accounts that are hidden or undisclosed may also trigger regulatory enforcement actions and Suspicious Activity Report (SAR) filings.
Managing Nested Account Risk
To reduce the risks associated with nested accounts, financial institutions should implement the following best practices:
Onboarding assessments that specifically inquire about downstream or nested clients.
Contractual obligations requiring disclosure of nested activity in correspondent banking agreements.
Transaction monitoring rules designed to detect unusual payment patterns or high-risk corridor usage.
Geographic risk reviews that evaluate whether nested accounts originate from or serve high-risk jurisdictions.
Collaboration with industry utilities or initiatives that promote transparency and information sharing across correspondent networks.
Where nested accounts are permitted, institutions should document a clear rationale and maintain robust records of monitoring procedures.
Conclusion
Nested accounts present a serious risk to the integrity of the global financial system. While some uses may be legitimate, the opacity they introduce can make them attractive to money launderers, sanctions evaders, and other illicit actors. Financial institutions must maintain rigorous due diligence and monitoring practices to detect and manage this risk effectively—ensuring full transparency in correspondent banking relationships.
