Despite a number of high-profile international banks having withdrawn from their partnership with Maltese banking institutions, several local banks have confirmed that they are still able to offer correspondence banking services to businesses operating in Malta.
The correspondence banking controversy first came to the forefront at the end of last year within the context of a growing concern among the business community and financial practitioners on restrictions to the correspondence banking services, which are considered vital to the growing financial services and gaming industry in Malta. In November 2016, Prime Minister Joseph Muscat announced that he would be carrying out a personal visit to the United States in order to meet representatives of top banks to ensure that the services now in force are not withdrawn. Then last month, the concern re-emerged after a leading bank confirmed that Deutsche Bank had stopped offering such services to the local bank.
Although the aftermath of the Panama Papers and the local controversies concerning PEPs and their alleged usage of Malta’s financial services in an unorthodox way did not help the situation, it appears that the problems faced locally related to correspondence banking services coincided with a global upheaval, rather than a problem related exclusively to Malta’s compromised reputation as a financial services centre. Surveys, reports and studies from the World Bank, IMF, the Financial Stability Board and various other research organisations indicate that this is a problem affecting a number of countries and hundreds of banks, especially in smaller emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europe and the Pacific.
Some banks are finding the business model no longer viable due to high compliance costs compared to lower volume and low returns. Others find that the threat presented by high risks of substantial penalties imposed by regulators is too high, especially where regulatory expectations and risks are unclear or cannot be mitigated or there are impediments to cross-border information sharing. Furthermore, the regulatory environment has increased in stringency, marked by more rigorous, compliance and prudential enforcement requirements in areas related to economic and trade sanctions, AML/CFT and tax transparency. Smaller banks are particularly affected, since their volumes and scale justify even less the compliance risks and economics for their correspondences.
However, Malta’s banks remain vigilant of their duties to their clients and international partners, as well as the problems that ‘de-risking’ brings with it. The Business Observer reached out to Malta’s major local banks to see how the situation had continued to develop since it hit headlines last November and then in June. “There is no doubt that the curtailment of correspondence banking services offered by large international banks to smaller banks is not a local phenomenon affecting only banks in Malta, but an international development,” said Deo Scerri, Chairman of BOV, after it was confirmed in June that Deutsche Bank had withdrawn its correspondence banking services for US dollar transactions from the bank. “It is also a major cause of concern for respected international institutions like the International Monetary Fund and the Bank of International Settlements. Bank of Valletta is very conscious of its obligations to ensure that the transactions it handles on behalf of its clients are bona fide and not aimed to condone or encourage financial crime. We regularly speak to our EU regulators to update them on the efforts we make to improve our anti-financial crime systems.”
Other banks contacted by The Business Observer confirmed that their correspondence banking facilities remained fully operational. “HSBC Bank Malta carries out USD transactions on behalf of its customers via its correspondence banking arrangements within the HSBC Group. Our services are available to customers who have fulfilled all the necessary due diligence requirements which are part of our commitment to adopt the highest global standards of compliance which apply in Malta as in all other markets where HSBC operates,” a spokesperson from HSBC Malta stated.
Corinne Lanfranco, Head of Financial Institutions & Deposits at FIMBank confirmed that Deutsche Bank as one of their “prime, longstanding relationships in various currencies, including Euro and USD,” adding that it has always endeavoured to meet its correspondence banks’ expectations and risk appetite. “We have very stringent policies and an Anti-Financial Crime Programme with a risk-based approach which has been recognised by our partners as a key driver to safeguarding our common interests. Risk factors in our business segments, as well as the applicable risk mitigants, have been acknowledged and commended, thus allowing us to preserve the integrity of our key relationships. In the wake of the recent surge in de-risking which has affected the international community, local banks have their fair share of challenges to manage. If a bank is not serviced through an international network, it will not be in a position to provide international payments services to its own clients. Different levels of inherent risks must be clearly understood, and appropriate controls applied accordingly.”
“Malta is not immune to the de-risking problem, with the banks and authorities following it with great interest and concern especially in recent years,” said APS CEO Marcel Cassar in a conference speech in May, quoted by the bank’s spokesperson as a reply to The Business Observer’s questions. “APS Bank is a respondent bank, i.e. it receives services from global correspondence banks, such as Deutsche Bank. Our services and correspondence relationships remain as before, unchanged, however that does not mean that the challenge has receded since the correspondence banking problem is a country as well as a cross-border phenomenon and the reasons stated above continue to be relevant as ever. What we can do is ultimately what is in our control, as a bank and as a country, i.e. upholding and maintaining the highest standards of governance, risk and compliance management that provide a measure of safety for our correspondences.”
This article originally appeared in the July edition of The Business Observer.