Correspondent banking relations are the oil that keeps the mechanism of trade in motion. Small banks need the support of larger ones in major financial centres to clear customers’ transactions made in different currencies. Over the past years, banking regulators increased pressure on clearing banks, especially in the US, to ensure all transactions passing through their system were legitimate and not connected with financial crime.
To ensure they were compliant with regulators’ strict instructions, large international banks invested massively in systems to detect transactions that were in some way linked to possible financial crime. These systems include databases containing details of possible illicit businesses and the people who manage them. The banks also revamped their inward and outward payment processes, making them more intrusive to ensure they only serviced legitimate businesses.
US banks, but also those in the EU with branches in the US, often decided to terminate correspondent banking relations with smaller banks claiming the cost of compliance outweighed the income benefit to maintain such relationships. Although not admitting it, this move was primarily aimed to affect banks perceived to take their anti-financial crime less rigorously than required.
The withdrawal of correspondent banking services to Bank of Valletta, first by all major US banks and now by Deutsche Bank, needs to be seen in this light. Describing it as a ‘normal occurrence’ may show that the bank may be in denial of how its activities are perceived by sections of the international banking community.
Last autumn, the Prime Minister travelled to the US with the chairman of the Malta Financial Services Authority to meet and persuade the top brass of a major US bank to re-establish correspondent banking relationships with Maltese banks. Despite the hype that surrounded the event, nothing much has been heard on whether this visit achieved its aim. Apparently, it did not.
There are politicians and clients who wrongly consider Bank of Valletta as an extension of the government.
The rapid expansion of the online gaming industry and varied financial services has often been punctuated by incidents of alleged illicit activities conducted by certain foreign operators. These incidents are extensively reported in the international media and are also noted by international regulators and banks. In financial services, perceptions are at least as important as actual evidence of financial crime committed in a particular country.
Bank of Valletta faces tough challenges to ensure it is perceived to be fully compliant with and sensitive to the increasing importance being given to anti-financial crime polices.
The government needs to acknowledge the tensions that local banks experience when they aim to strike a balance between accommodating clients’ requests and observing tough anti-financial crime regulations. It can do this by cleaning up the shady offshore activities of certain operators, especially in the gaming industry.
Bank of Valletta was downgraded by a rating agency last year. It needs to avoid facing similar negative developments, especially at a time when it will soon be asking its shareholders and other investors to subscribe to its substantial capital increase.
Growth at all cost is never a viable option. Protecting depositors’ long-term interests is a stronger priority for any bank irrespective of who owns it.