Bank of Valletta has in the recent years had one notification after another of overseas banks closing their US$ correspondent accounts.  First Deutsche Bank withdrew the facilities, ING  Bank followed in its tracks, and now Raffaisen has given notice of the impending closure of BOV’s last US$ correspondent account.

Only last week another local bank, Sparkasse, informed its clients that it will stop transacting in British sterling.  Sparkasse offered an explanation by saying that this is “to lessen its exposure in view of the uncertainty brought about by Brexit”.  This explanation is of course altogether non-sensical and lacks a modicum of credibility. 

The real reason is none other than the fact that the difficulties already faced by BOV in retaining US$ correspondent accounts is now spreading like a  contagion to other currencies and affecting other local banks.  It is all attributable to overseas correspondent banks shunning Malta in the wake of bad press Malta and its government has been receiving for some considerable time  – a wave that gives no sign of abating.  Malta and its banks continue to feature in international press far too often and for the wrong reasons.

Correspondent accounts are bank accounts in the name of our local banks maintained with overseas banks in foreign currency for the purposes of clearing – receiving and paying – moneys in foreign currency.  Local banks would need to have one or more such accounts in the main currencies, particularly US$, £Stg, Euro, Japanese Yen and Swiss Franc.  It is only by maintaining such correspondent accounts that they can efficiently and inexpensively receive remittances in foreign currency and likewise make payments in foreign currency for an account of their personal and business clients.

Correspondent accounts are a lifeline to efficient banking and to the servicing of our import and export sectors and to our services sectors.  A banking system where its banks no longer enjoy such facilities is severely handicapped.

Banks that lose their correspondent facilities would have to resort to much less efficient, riskier and much longer winded ways of receiving and paying foreign currency.  Typically they would have to hook on to the correspondent accounts of much smaller and less reputable fringe banking operators. Ultimately, a time will come when even these secondary institutions will feel pressurised to withdraw their facilities.

The affected clients will first try to change to a bank that has no such correspondent banks problems, in our case, HSBC. If that is not possible – HSBC has always been very selective in their clients, and rightly so – Maltese customers will have to start contracting in other than the currency of their choice, increasing their foreign currency exposure risks. 

For example, a Maltese company buying goods or commodities denominated in US$ will have to go through the humiliation of asking their foreign supplier to invoice and accept payment in another currency, and in all probability, the foreign supplier will oblige, also by loading a considerable provision in the rate of exchange to cover his own foreign exchange risk.  Ultimately, all this builds into a higher importation bill for the same goods.

Correspondent banking has long been recognised as a risk-laden business, especially since the early post-Soviet experience of US banks clearing the barrage of hot capital in the hands of the nouveau riches of the new CIS republics oligarchy.  America’s largest New York banks became unwittingly involved in a major money-laundering operation.

Since then regulatory authorities have made correspondent banks responsible for supervising and monitoring their overseas banks’ business very closely, including the assessment of the adequacy and effectiveness of the overseas bank’s anti-money laundering policies, controls and procedures.  Add on top of this the draconian nature and long arm of US law, including its policy of extra-territorial jurisdiction extending to any territory and transaction involving the use of its legal tender currency, the US$, and any correspondent bank taking undue risks does so only at its own peril.

Bank of Valletta would have us believe that the reason is that its correspondent accounts are being closed due to reasons associated with economies of scale that Maltese banks cannot provide due to Malta’s small size.  This is nothing but hogwash.  Malta’s international payments business is not small and is in fact much larger than one would expect for its size.  And then, how have the much smaller banks like Lombard, APS, Banif and ME managed to have their own correspondent facilities?

The reason, of course, lies in the reputation BOV has managed to build for itself, with one episode after another leaving its mark with their overseas bankers who continually monitor the risks of doing business with it.

Do you remember the accounts with cash-laden Gaddafi troves exceeding €80 million, the Falcon Funds debacle, the Dieulemar Trust nightmare, BOV controversially acting as lenders for the Electrogas consortium and bankers for Pilatus bank, the clearing of Venezuela’s PSDA billions, the dirty oil bank accounts, the recent hacking episodes?

If Malta fails in the Council of Europe assessment – popularly known as the Moneyval test – on how effectively Malta has adopted the international standards of combating money laundering and international economic crimes, and as a consequence Malta is placed in the grey list, the correspondent banking crisis will precipitate further.

Malta will be in the same league of other jurisdictions that are considered high risk to do business with because of weak anti-money laundering, in the midst of a host of African, Caribbean and other third world countries such as Albania, Bahamas, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe.

If Malta fails the test, the Government and its regulatory authorities will have no one to blame other than themselves for not taking effective action in good time, rather than draconian measures at the eleventh hour.  It will not be the work of some imaginary foreign conspiracy.  At that point, Malta will become a real pariah of the international community, shunned by all in the economic sphere.

Effecting a payment abroad will become a nightmare. International financial services operators – already finding it almost impossible to open a bank account in Malta – will find it upsetting to continue to operate in such an environment.  Legitimate high-value financial services – already not continuing to expand since quite a good number of years – run the real risk of exiting altogether from Malta.

Quite an unenvious loaded agenda for our impending new Minister of Finance. Good luck dear Clyde, if only wishes of good luck would make a difference!

Paul Bonello is the Managing Director ay Finco Treasury Management Ltd.

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