Personal agent in every country
The requirement of having correspondent accounts is becoming more and more popular amongst businessmen when they are looking to open their business accounts with a particular bank. This type of account acts as the bank’s personal agent in the jurisdiction where the Clients require the financial service. Also, having a correspondent account makes financial transactions across the globe easier, faster and less costly.
What is a correspondent account/correspondent banking?
Correspondent accounts enable financial institutions to provide their Clients a faster and better service. They are “established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution”, as defined by the USA PATRIOT Act. They are primarily used by banks, money remittance businesses and other money services businesses that deal with multiple currencies.
Correspondent accounts are used directly by financial institutions that are making cross-border transactions in a currency not issued in one of those states. These accounts are also used to consolidate payments or deposits before transferring the amounts to another financial institution at a lower fee, negotiated by the two parties.
Another purpose of these accounts is to support emerging and growing banks before they gain access to the SWIFT network. As they might not have access yet to international transfers, they make an agreement and settle their correspondent accounts with domestic banks that can receive international payments for them.
There are a lot of other advantages for having a correspondent bank account, such as optimization of deposit and clearing services or certification of documents in the correspondent bank office. You can discover a complete list of the advantages on correspondent bank account webpage.
International payment infrastructure
Foreign correspondent banking translates to banks holding accounts on behalf of other banks or financial institutions. The process is regulated by agreements between these parties and by “legitimate business purposes” such as those stated by the Federal Reserve Bank of Atlanta:
- International trade and investment
- Settlement purposes
- Funds transfer activity
- Clearing of foreign items
- Jurisdictions where bank has no presence
Furthermore, each bank involved in the agreement is required to conduct due diligence for each Client. This should be done through the KYC and AML processes prior to opening the correspondent account. Each party is responsible to determine the exact level of risk associated with each account, and therefore conduct the correct due diligence as well as monitor the transfers.
How does it work?
As stated before, this type of account is most commonly used for international transactions that require to be made in the local currency.
The easiest example would be the following situation: a Singaporean Client with a Singapore bank account needs to pay a British supplier with a British bank account a large sum of money for the provided services and products.
The transfer is made through a correspondent account as following: Bank Y in Singapore checks the exchange rate of the two currencies and takes the exact amount of money in Singaporean dollars out of the Singaporean bank account. Bank Z in UK deducts the same amount of money in British Pounds from the correspondent account of Bank Y and transfers the amount into the British bank account of the supplier.
If you would like to open a correspondent account, contact our banking solution experts today at (+65) 6735 0120, or via email at firstname.lastname@example.org.
- Independent Review for Banks – The Complete BSA/AML Audit Workbook By Howard Steiner, Stephen L. Marini
- Wolfsberg – Correspondent Banking Principles
- Roundtable: a world of real-time payments