APS chief warns country’s reputation could trigger correspondent banks’ de-risking

If Malta’s financial services reputation is not safeguarded, more Maltese banks could potentially face situations where their correspondent banks decide to terminate the services they provided, APS Bank CEO Marcel Cassar said.

Cassar told this newspaper that, while APS Bank’s operations will not be affected by ING’s decision to terminate its correspondent services to Bank of Valletta, things could chance in the future if more correspondents decide to withdraw their Malta services due to reputational concerns about the jurisdiction.

Last Friday, BOV announced that ING – it’s last remaining US dollar correspondent bank – would be withdrawing its services in December.

In comments to BusinessToday, BOV public relations head Charles Azzopardi confirmed that ING would be terminating its correspondent banking services for all currencies which it currently services for the bank. While the termination of its USD correspondent banking services will have the greatest impact, ING is also BOV’s sole provider of correspondent services for other currencies, including the Polish zloty, the Romanian leu and the Hong Kong dollar.

Azzopardi reiterated that ING’s decision must be seen in a context where international banks are cutting down on their correspondent banking services all over the world. This constitutes part of a general de-risking which is taking place in the banking industry following a spate of anti-money laundering failures, especially in Europe, he said.

Smaller jurisdictions like Malta are being particularly hard hit, since the volumes of business they generate are insufficient to be of interest to the larger players, given the risks and the compliance costs involved, Azzopardi said.

“The Bank deems it critical to have in place a network of correspondent banks that offer clearing services in the main international currencies, such as the US dollar,” he said, emphasising that the bank was also undergoing a transformation programme aimed at lowering its risk profile and at strengthening its anti-financial crime structures, systems and policies and was continuously strengthening its Risk, Anti-Financial Crime, Anti Money Laundering and Compliance frameworks.

“BOV is making every effort to secure alternative clearing arrangements for currencies currently serviced by ING and any developments in this regard will be communicated in due course,” Azzopardi added.

Both HSBC Malta and APS Bank confirmed with this newspaper that their correspondent banks were still providing them with their respective USD services.

Questioned as to whether the issue of international correspondent banks terminating their services to various jurisdictions could affect HSBC Malta’s operations, a spokesperson for the bank limited their comment to confirming that the bank’s services for all currencies were functioning normally.

“HSBC Malta can only comment on our own business,” the spokesperson said, “All HSBC Malta’ services are operating normally in all currencies, including US dollars.”

APS Bank’s CEO, however cautioned that things could change if correspondents decide to de-risk due to concerns on Malta’s reputation.
“[The issue of international correspondents terminating their services] affects all banks but is even more serious in the case of non-Euro payments, in currencies such as the US dollar and pound sterling,” Cassar said.

“I am aware that a good number of Maltese banks continue to be serviced by their USD correspondents, and APS Bank is one of them. Therefore, our operations are not affected,” he highlighted.

“But things can change and a decision by a correspondent to de-risk may be triggered by general reputational concerns about Malta,” Cassar said. He noted that several factors came into play in such a situation, underlining that “whatever is necessary must be done to preserve the hard-earned reputation of Malta’s financial services industry.”

“The reforms under way at the Malta Financial Services Authority are good and show a needed sense of urgency, but it’s also important that all political, regulatory and industry players focus on presenting Malta as a place that upholds the highest standards of conduct,” Cassar said.

Cassar went on to describe four main reasons why correspondent banks are increasingly choosing to terminate the services they offer to jurisdictions around the world.

“First, more correspondent banks are finding that the business is not viable due to high compliance costs compared to lower volumes and low returns,” Cassar said.

“Second, the regulatory environment is also marked by more rigorous, compliance and prudential enforcement requirements – whether related to economic and trade sanctions, money laundering and tax transparency, compounded by the fact that there are often obstacles to cross-border information sharing,” he pointed out.

“Third, the business carries high risks of substantial penalties imposed by regulators, as various well-publicised cases in recent years confirm.”

“And fourth, where regulatory expectations about the respondent banks, their jurisdictions and business risks are unclear, or cannot be mitigated, the pressures on the correspondent banks mount.”

Cassar stressed that the matter was serious in nature and could potentially undermine financial stability, growth and development goals and lead to the financial exclusion of certain categories of customers, businesses and countries. “This is borne out by reports and studies which also point to the risk that transactions will be driven into the shadow market and weaken the role that an organised financial sector can and should play in national development,” he added.

Termination of USD correspondent services will affect various sectors

A financial sector practitioner who spoke with BusinessToday said that ING’s termination of its BOV USD correspondent services will affect various sectors where trading is done in US dollars.

The function of a correspondent bank, he said, was to act as an intermediary between one bank and the other, if the two banks in question don’t have a direct relationship.

“If a Maltese person or company wants to make a payment to another person or company in US dollars through BOV, and if BOV doesn’t have a direct relationship with the payee’s bank, then BOV has to send the dollars from the payer’s account to the bank account of the payee through the use of an intermediary bank.”

“If, for example, the payee’s bank is JP Morgan and BOV has no direct relationship with JP Morgan, then BOV would use ING to pass the payment through, and ING would in turn send it to JP Morgan.”

Several transactions in various areas are still carried out in US dollars in Malta, he said. Notably, oil purchased for Malta is paid for in US dollars. However, there are more everyday scenarios when US dollars are used, for instance if an individual is paying to buy a product online from a United States online shopping website.

Moreover, he said that there were still instances – albeit less than in the past - where exports from Malta are paid for in US dollars.

Asked whether he believed it would be possible for BOV to find a long-term solution to the problem, the practitioner said that the bank would probably be able to build a relationship with another bank. However, BOV would have to be subjected to a due diligence process by the other banks, he said, and this process would have to be finalised by 14 December, the date ING will stop clearing US dollar transactions for the bank.

ING’s withdrawal of grave concern, Finance Minister’s silence is deafening – Nationalist Party

In a statement on Wednesday, the Nationalist Party said it was “gravely concerning” that ING would be withdrawing its BOV correspondent banking services, and that the impact of this “could be significant.”

Through a joint statement from economy spokeswoman Kristy Debono and finance spokesman Mario de Marco, the PN said that it had consistently warned the government and results about the risk Maltese banks, particularly BOV, faced in retaining correspondent banking relationships and subsequently starting relationships with new correspondent banks.

“The possibility of BOV having difficulties to process USD transactions could potentially lead to a collapse of these vital sectors. As expressed by the Malta Banker’s Association (MBA), this development hits at the heart of Malta’s financial system. It is even more worrying if this action was not a direct consequence or directly related to BOV’s operations,” the party said.

“The Minister of Finance’s silence on the matter is deafening,” it said.

The Opposition had criticised the government and its lack of a serious commitment in the fight against the crime of money laundering, it said, and the government’s inaction was impacting Malta’s reputation, which in turn is affecting the financial services industry.

The same criticism was levelled against the government in the draft Moneyval report, the final version of which will be adopted and published in the coming weeks, the PN noted.

“The risk-reward factor for the correspondent banks to keep or start a relationship with a local bank is too high since we are a small economy and our local banks have relatively small volumes. Thus, it will not be economically viable for these correspondent banks to carry out the rigorous anti-money laundering and compliance procedures that they must adhere to,” it insisted.

The PN went on to say that it was not enough to have legislation in place if the same legislation was not rigorously implemented and that it does not suffice to strengthen the Financial Intelligence Analysis Unit if its reports regarding “the suspicious activities of high level government officials” are ignored by the police.

It also does not suffice to strengthen the Malta Financial Services Authority if as a regulator it is not truly independent and if its actions remain politically driven, it said.

“It is deplorable to say the least, that the Prime Minister downplays this reality and justifies a major bank losing its only correspondent bank by saying it is a victim of its own success,” the party said.