ExpertEASE: International Giving and Correspondent Banks

NGOsource will be featuring a new blog series called "ExpertEASE," intended to complement our existing LegalEASE blog. These periodic articles will feature the expertise of a member of the international grantmaking community to help shed light on issues of interest to our community. For this first issue, we've asked Crown Agents Bank to provide a background on what it means to be a "correspondent bank," as well as some of the key obstacles that charities face in the delivery of grants abroad.

What Is a "Correspondent Bank"?

A correspondent bank is one that provides services on behalf of another financial institution. Domestic banks will often use a correspondent bank abroad as an agent for making or receiving foreign currency payments for its customers. The domestic bank will hold an account with the correspondent bank in local currency to facilitate the settlement of transactions in that currency for its customers.

Why Are These Institutions Relevant to the NGO Sector?

Correspondent banks are relevant to NGOs to the extent that they are able to provide a good service and settle payment transactions in a prompt manner. If not, then there might be unnecessary delays for the NGO.

Much depends on the house bank and how it picks its correspondent partners. It also depends on whether there are direct links between the domestic bank and a bank in the country of the NGO's payment destination. In the case of many domestic U.S. banks, they will use the network of an intermediary bank, due to the fact that there may not be a direct overseas correspondent link.

NGOs have complained in the past that they do not know about all the intermediary banks in a payment chain, which can result in uncertainty as to where a payment is, longer settlement times, and increased costs. Domestic banks do not always have either the aptitude or desire to make payments to an emerging market destination. Crown Agents Bank (CAB) — this author's institution — is an example of a correspondent bank that has set itself up to carry out payments to such countries. 

What Do Banks Generally Require from a Grantmaking Entity?

If a grantmaking entity wishes to make payments to beneficiaries in emerging market countries, then banks will ask standard questions of the grantmaker around identity of officials, authorised signatories, authorised foreign exchange (FX) traders, and whether there are any controllers. Banks will also require audited accounting and projections information if an FX line of credit is required.

Then, in terms of the payments to beneficiaries in emerging markets, banks will typically request information on grantmakers' risk assessment processes, including anti-financial crime controls, source of donations, KYC on the beneficiaries, due diligence on partners and vendors, assurance that payments reach the correct beneficiaries and are used for the right purposes, KYC on projects, and compliance with international sanctions and screening processes.

What Is "KYC"?

KYC stands for "know your customer." It is a phrase used regularly in financial regulation circles and can be applied in different circumstances. Banks will carry out KYC and due diligence on new customers to understand the operations, the source of funding, beneficial ownership, management, and policies and procedures in place for anti-financial crime and so on. Banks will also expect grantmakers and NGOs to have carried out KYC and due diligence on beneficiaries, including ID verification, screening of individuals, review of policies and procedures, governance, activity monitoring, project assessment, funds reaching correct end beneficiaries, and so on.

What Do Banks Generally Require from a Grantee?

Banks will need to understand what policies and procedures are in place between headquarters and field offices of grantmakers to identify the beneficiary, the purpose of the funding, monitoring that funds do reach the correct beneficiary and are used for the right purposes, and that the beneficiary has been screened and is not on any sanctions list.

What Are Some Common Hurdles That NGOs Face in Working with Correspondent Banks?

Common hurdles include a lack of understanding by the banks of the NGO sector and its humanitarian and development objectives. A number of global banks have chosen not to support the nonprofit sector as risks are perceived as being too high and the returns too low for those risks.

Banks in home countries do not always have experience of sending money to emerging market operations or for monitoring its arrival. This can mean delays for the grantmakers and NGOs with difficulty in knowing where funds are at any point in time. Making cross-border payments can also be expensive.

Screening can be an issue for NGOs as banks will not always be able to advise an NGO why a payment has not been made, for example, anti-financial crime legislation around tip-offs.

What Can Grantmaking Entities Do to Help Ensure the Most Efficient Flow of Funds to Their International Grantees?

Grantmaking entities should choose banking partners that have the most experience in making cross-border payments and FX to the locations where it operates. Take time also to ensure that it is operating to best international practices as far as KYC, DD, and anti-financial crime policies and procedures are concerned. Ensure that local offices are properly controlled and monitored and fall in line with HQ policies and procedures. Really understand and carry out due diligence on beneficiaries and projects. Do ensure that the grantmaker has proper anti-financial crime controls in place, including screening of beneficiaries and also of donor fund sources.

About the Author

David Pitts is a Senior Advisor, International Development Organisations, at Crown Agents Bank (CAB), a U.K. regulated financial services entity that has been in existence since 1833 and which focuses on supporting the humanitarian and development sectors in more than 60 emerging markets around the world. David has been with CAB for nearly two years and has enjoyed a 40-year career in banking with Barclays, the Bank of England, Standard Bank, and Ecobank before being appointed at CAB. For the last 20 years, his focus has been on supporting international development organizations, including UN entities, international NGOs, foundations, and donors such as DFID, USAID, and the Global Fund with products including cross-border bulk and mobile payments, FX, intermediary project accounts, and deposits.  Recently, he has worked with the NGO Treasurers Round Table on de-risking and mobile payments presentations.

The views stated in this article are those of its author only and not necessarily of either CAB or NGOsource.