AC and XC

AC and XC

The process – an interbank relationship – is unknown to the general public but allows 70% of financial transactions in the world…

1

What is “correspondent banking”?

A Belgian bank, ING Belgium (to use the example of the infographic above) manages its customers' deposits in euros only. It can carry out transactions in this currency with other banks in the euro zone. Problem: one of his clients wants to make a transaction in dollars. No worries: international finance has planned everything. ING Belgium can call on an American counterpart, Bank of America in this case, which opens an account in its name in the USA. The money for the transaction will then pass through the American bank to arrive at the final beneficiary in dollars, as requested by the client.

ING Belgium and Bank of America have entered into a “correspondence banking” relationship, a contract which will enable each similar customer request to be executed. The process, unknown to the general public, is nevertheless ubiquitous: according to the payment intermediary Swift, it concerns around 70% of financial transactions in the world.

This is indeed a commercial service: the banks pay each other for this type of operation. ING Belgium therefore has a set of partners of this type, broken down by currency. Some banks have up to several hundred correspondent relationships. The European bank can also sell the same “reverse” service to foreign institutions.

So far, things are, so to speak, simple.

This is where “nesting” comes into play: many small banks do not have access, for example, to the dollar, for lack of a correspondent relationship with an American bank. Once again, the problem is not one: these small banks can “rent” – this service is, of course, not free either – the correspondence networks of larger establishments. To do this, the small bank in turn establishes a relationship of correspondence with the large one, and can profit in the wake of its relationship with an American institution.

For example, the Bulgarian TBI Bank becomes a client of ING Belgium , opens an account with the latter and borrows its correspondent relationship with Bank of America to route its clients' transactions in dollars. “Nesting” is, in a way, a “double” relation of correspondence.

2

Is there a risk of money laundering?

The organizations in charge of the fight against money laundering that we interviewed are unanimous: although a cornerstone of the global financial system, “correspondent banking” is a “sensitive” activity.

“Correspondent banking relationships, particularly if they are cross-border, are considered inherently more risky and constitute a channel through which banks can be exposed to money laundering, such as the financing of terrorism. This is why appropriate measures must be taken to mitigate these risks”, explains a spokesperson for Gafi, the financial action task force, a supranational body which reigns over the fight against global money laundering.

As early as 2005, Europe also ordered a duty of “increased vigilance” for banks that do correspondence. Directive translated into Belgian law five years later. Since 2010, before establishing a correspondent relationship, Belgian banks must, in practice, clearly verify the identity and activities of their client (country from which he operates, background, nature of the services offered, etc.) and assess the measures that the latter has put in place to combat money laundering.

The client is therefore the bank here. What then of the client's client? Still using the same example, ING Belgium has TBI Bank as its client, which has Medina Networks as its client. Legally, the relationship of trust established between the two establishments is “sufficient”. ING should therefore not know who is hiding behind Medina. But if a transaction by a TBI Bank customer appears suspicious in the eyes of ING Belgium , the latter has the right (or even the duty) to demand additional information about this customer from the Bulgarian establishment.

3

Do Belgian banks sell this service?

We surveyed the country's top four institutions, BNP Paribas Fortis, KBC, ING Belgium and Belfius. First observation: the subject is visibly delicate. Second observation: all of them buy correspondence services from foreign institutions to offer this type of service to their clients. Third observation: only BNP Paribas Fortis has “stopped all its commercial correspondent banking activities since 2014”. Other group entities are potentially still active at this level, but BNP Paribas , the parent company, did not wish to respond to our questions.

Belfius specifies that it “provides this service in a marginal way, only for a few smaller Belgian financial institutions and only one non-Belgian and does not practice nesting. »

KBC and ING Belgium sell “correspondent banking” and “nesting” services to third-party banks. Prices charged, number of relationships established and with whom… For details, it will be necessary to go back.

The Febelfin banking federation does not have any figures on the subject either. Only the National Bank of Belgium provided us with some national statistics. Thus, in 2019, less than 20% of the banking establishments established here were active in this segment (their number would tend to decrease). The majority considered the activity “as incidental”. Together, these banks still had just over 2,000 correspondent banking relationships (this number would also decrease significantly from year to year), half of which with institutions outside the European Union . Finally, a small minority of institutions active in Belgium also practice “nesting”.