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Attorney Joel Nagel on the future of correspondent banking

27 June, 2017

Today I bring you an interview with US attorney Joel Nagel on the future of correspondent banking. Joel is is founder and managing partner of the international law firm of Nagel & Associates, the Chairman of Caye Bank in Belize, and an expert in correspondent banking. Much of his legal practice is dedicated to assisting small and medium sized international banks secure correspondent partners.

When I have a question on correspondent banking, or a client in need of a new bank, Joel is the first person I call. He has an extensive network in Europe, the US, and the Caribbean and has his finger on the pulse of the industry.

And the correspondent banking industry is changing at lightning speed. Over the last few years we've seen the big players exiting the offshore segment, a lack of correspondent banking causing all kinds of havoc, and now the emergence of FinTech banks and non-bank processors filling that void.

For more on this, see: Correspondent Banking Powered By Machine Learning And Using Blockchain (on lowtax.net)

For these reasons, I met with Joel to get his thoughts on the correspondent banking industry.

Conversation with Attorney Joel Nagel

Christian Reeves: Hi Joel, nice to see you. Thanks for taking the time and I'll get right to it. Can you give us a little history on the correspondent banking industry?

Joel Nagel: Hi Christian, sure. Ever since FATCA was announced in 2010, banks and correspondent banks have been "de-risking." This is a relatively new word in the banking lexicon that basically means to remove anything that could be risky to the bank.

Foreign banks have reduced risks by closing their doors to US citizens. The lowest cost way to deal with FATCA is to not hold accounts for US persons... and this is the route most international banks taken gone, kicking out the Americans.

Correspondent banks have dealt with risk in much the same way - by closing the accounts of smaller offshore banks and increasing the compliance costs and demands on banks they deem worthy. The exit of large numbers of correspondent banks has left a hole in the industry that a few new entrants are beginning to fill.

Christian Reeves: Can you tell us a little about the risks facing correspondent banks and why they've become more of an issue in recent years?

Joel Nagel: Correspondent banking relationships create significant money laundering and terrorist financing risks because the correspondent bank carrying out the transaction on behalf of the offshore bank has to rely on the foreign bank to identify the customer, determine the real owners, and monitor transactions for risks.

These risks have always existed, but have become the focus of US and EU regulators of late.

More importantly, government regulators have moved the fines and risk of loss from the offshore bank to the correspondent bank. If a client or transaction slips through the cracks, the correspondent can be hit with hundreds of thousands or millions of dollars in fines.

If the risk of taking on a small offshore bank is a fine of $500,000 for an unintentional mistake, and the income to be earned is $100,000 per year, the correspondent bank will have a tough time justifying the business.

Basically, any transfer that could be classified as money laundering exposes the correspondent bank to great risk. And the definition of money laundering is every changing.

Christian Reeves: How has the definition of money laundering changed?

Joel Nagel: Back in the day, money laundering was finding ways to get cash from drug dealers and mob money into the banking system. The term "money laundering" is said to have originated with Al Capone who purchased 'Laundromats' so the mob could clean their illegal profits from bootlegged liquor sales.

Today, money laundering means cleaning the cash from illegal activities AND moving untaxed money to hide it or protect it from the government. Thus, correspondent banks are hesitant to do business with banks on zero or low tax jurisdictions.

For these reasons, most big banks have stopped providing correspondent services to small international banks, especially banks domiciled in tax haven countries.

Christian Reeves: Are their new banks coming in to fill the void?

Joel Nagel: Yes, a number of specialized FinTech banks and money service companies are beginning to enter the market to offer correspondent services. These players bring their own compliance systems and offer a high tech solution to AML, KYC and BSA.

They also bring Know Your Customer's Customer (KYCC) systems, which has become the industry buzzword in 2017.  Basically, the correspondent bank wants to know everything about the customers of your bank and the customers of their customer. These systems are designed to track the source of funds through the network and test the quality both the sender AND the receiver of a wire.

New software and real time systems monitor all aspects of a transaction continuously. The correspondent can now block any transaction if it fails KYC, AML or KYCC.

Christian Reeves: What's a money service company and how is it different from a correspondent bank?

Joel Nagel: A money services business is a legal term used by financial regulators to describe businesses that transmits or converts money. The definition covers banks, non-bank financial institutions, foreign exchange brokers, cash exchange houses, check cashing companies, and any business that transmits money.

In the case of correspondent banks, a money service business is a FinTech company with state of the art KYCC and AML that set up a master account at a large financial institution (sometimes referred to as a nested account).

These money service providers then offer correspondent services to smaller international banks on a fee basis.

Christian Reeves: It looks like there are new players coming on the market to support the offshore banking industry. How difficult is it to get an account?

Joel Nagel: It can be very difficult to open a correspondent account. Demand is far outstripping resources and providers are taking on only the best banks. You'll need a serious compliance review and to leverage a lot of relationships to get an account.

Christian Reeves: Thanks for the summary Joel. We really appreciate your time today.

Joel Nagel: No problem.

For more information on Joel Nagel, check out his website www.nagellaw.com. Joel is an expert in securing correspondent banks for small to medium sized international banks and startup banks. Please contact him through his website for more information.

For a list of banking articles by Christian Reeves, see:

  1. Lowest Cost Offshore Bank License is Puerto Rico (PremierOffshore.com)
  2. Top International Bank Jurisdictions (LowTax.net June 2017, 5 pages)
  3. How to Raise Money for an Offshore Bank (Premier, ICOs)
  4. International Financial Entities (PremierOffshore.com)
  5. 8 Components of an Offshore Banking License (Premier)
  6. Offshore Bank Advertising Rules (6 exciting pages advertising for banks written for laypersons)
  7. Offshore Banking Licenses (onlowtax.net)
  8. Capital Reserve Requirements (onlowtax.net)
  9. Correspondent Accounts for Offshore Banks (EscapeArtist.com)
  10. Best Offshore Banking Jurisdictions (PremierOffshore.com)
  11. International Tax Planning for Payday Lenders (PremierOffshore.com)
  12. Correspondent Banking Powered by Machine Learning and Using Blockchain (onlowtax.net)
  13. How to get an Offshore Bank License in Dominica (Premier)
  14. How to benefit from Puerto Rico's bankruptcy (Premier)
  15. FinTech Banking License (EA)
  16. Top Offshore Banking Jurisdiction in 2017 (EA)

Tags: Euro | Money | Offshore | Banks | Banking

About the Author


Premier Offshore Tax & Corporate, Inc. is a leader in international consulting, planning and incorporation services for offshore investors, entrepreneurs, asset protection, and U.S. retirement accounts. We are the only international incorporator that offers U.S. tax compliance. Premier has served thousands of business people, attorneys, accountants, physicians and expats. premieroffshore.com


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