The U.S. has anti-money-laundering laws in place to prevent the support of drug traffickers and terrorists throughout the U.S. financial system. Federal laws prohibit individuals and entities from providing large sums of undocumented, untraceable cash to offshore and foreign entities. Nested accounts are foreign bank accounts contained within another foreign bank account and tied to a corresponding U.S. account. Although the vast majority of nested accounts are legal and compliant with laws, some are not.
Nesting refers to the practice among foreign financial institutions conducting international transactions of allowing one foreign bank to process the cross-border bank transactions of another foreign bank through its U.S. correspondent account. Essentially, one foreign bank serves as the service provider and acts on behalf of its customer, another foreign bank, to wire or transfer funds from or to the U.S. via its account in the U.S.
The Foreign Country Bank provides wire transfer and payment transaction services to the many smaller banks in its country that it calls its customers. Foreign Country Bank has a relationship with and corresponding account at Large U.S. Bank. Foreign Country Bank transfers $100,000 for a customer, Small Country Bank, on behalf of Small Country Bank’s client, ABC Agricultural Products Ltd., to a regional bank in the U.S. The fund transfer shows Foreign Country Bank as the named account, Small Country Bank as the nested account and $100,000 as the amount.
The foreign bank customers whose accounts nest inside of their foreign banking service provider are not inherently suspicious. Nesting is a relatively common practice. A U.S. bank may establish a regular correspondent account with a service provider foreign bank. The service provider foreign bank, in turn, acts as a financial intermediary for other foreign banks to facilitate cross-border transactions.
Potential problems arise when the service provider foreign bank does not fully or properly identify the nested account in the third party bank. When this occurs, the third party bank and its customers essentially gain anonymous access to the U.S. banking system through the U.S. financial institution’s account. With insufficient controls, through nested accounts, the foreign service bank could allow an unscrupulous foreign bank to transfer funds on behalf of terrorist financiers, drug traffickers and other money launderers. Improper tracking of nested accounts enables those engaged in illegal or terrorist activities to circumvent the controls in place within the U.S. financial system.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.