BMI Offshore Bank, a tiny institution with links to the Bahraini royal family and governments of Oman and Dubai, was forced into the arms of the central bank after its correspondent bank, Bank of China (Johannesburg), exited the relationship in October – several months after JPMorgan did the same.
With Bank of China no longer facilitating BMIO’s main business of foreign currency customer transfers, and BMIO unable to find a replacement, the central bank was forced to take control on November 11.
BMIO’s business model is focused entirely on banking with nonresidents in foreign currency, so its transactions need to be carried out through a correspondent bank. Without one, it cannot accept deposits of BMIO’s customers from foreign banks, or make any customer payments.
The central bank says BMIO is financially sound in terms of capital and liquidity and there’s no indication that depositors’ money is in danger, but “access to the deposits will only be enabled upon resolution of the issue [a new correspondent bank or alternative solution]”.
BMIO’s problem is not an archipelago-wide problem, the central bank says, as none of the remaining eight banks in the Seychelles are exclusively offshore banks.
While small and remote, BMIO’s rescue highlights the direct impact of the pull-back of global banks from correspondent banking.
JPMorgan, HSBC, Standard Chartered and Citi have cut swathes of correspondent banking relationships in the past few years, spurred on in part by the sheer size of fines some of them have incurred for breaching US sanctions. But the rising costs of compliance and lack of profitability in some correspondent relationships have been key drivers too.
Indeed, the Financial Action Task Force, an intergovernmental body that since 2001 has overseen the implementation of international rules on money laundering and terrorist financing, has warned that global banks are using regulation as a ‘fig leaf’ to drop unprofitable clients from their balance sheets.
The FATF says that so-called “de-risking” – the industry term to describe the global banking retreat from correspondent banking – can be the result of various factors including concerns about profitability, prudential requirements, anxiety after the financial crisis and reputational risk. It is therefore a “misconception to characterise de-risking exclusively as an anti-money laundering issue”.
Assessing the extent to which global banks have cut back, and where, is difficult, but a joint-industry report produced in October by the Bankers Association for Finance and Trade included a survey of 17 global clearing banks, which said that thousands of relationships have been closed since 2011.
According to those respondents, the average reduction of relationships was 7.5%, with two of the 17 banks cutting one fifth of their entire correspondent network.
The developing economies are most acutely affected. Anecdotally, senior bankers say that the Middle East, Africa, Eastern Europe and the Baltics are especially vulnerable. HSBC, for example, is known to have cut back about a fifth of its correspondent banking relationships in the Middle East in the past year. JPMorgan has been cutting relationships there too.
The US bank, which made a rare public disclosure in its third quarter 2013 results that it was exiting 500 correspondent banking relationships globally, is known to have cut its ties to the UAE’s Emirates NBD, as well as Saudi Arabia’s Al Rajhi Bank and Jordan’s Arab Bank. JPMorgan is also understood to have exited correspondent banking entirely in Latvia.
Regarding BMIO, JPMorgan said it ended the relationship as it did not have a presence in the Indian Ocean and was “also having compliance challenges from their regulator to maintain these small accounts with risky profiles,” Frank Hoareau, managing director BMIO, told the Seychelles News Agency.
Bank of China told BMIO that it was getting out as its focus was on renminbi business in Africa, not US dollar, euro and sterling clearing.
Following BoC’s exit, Hoareau said the bank had tried to “seek [correspondent banking] facilities with a few other international banks but none of these attempts were successful”.
The US authorities are tightening control over US dollar transactions globally and are being “very aggressive” in money-laundering monitoring “making it difficult for international banks to offer correspondent facilities”, said Hoareau.