Why is it necessary to have a correspondent tie-up agreement with a licensed entity?
A point often overlooked by those venturing into the cross-border money transfer business is that even though they may have managed to secure license coverage in the origination country, they still need to have the same true for the beneficiary country.
More importantly, the two entities must have a correspondent tie-up agreement in place.
When you are being provided sponsorship by a bank &/or a licensed financial institution (LFI), it is important you understand how correspondent relationships work.
Banks & LFIs cannot just unilaterally send money to another country. This is especially true when dealing with a repetitive business like remittances. In many countries, the payout country’s regulator would require the bank &/or the LFI be pre-approved and registered before they can offer such services in their country.
In many circumstances, a bank or LFI may already have an established relationship with a counterparty in the payout country or an aggregator/payment-network that can service the payout country. If these payout partners are acceptable to you, then there is usually no issue. It is business as usual.
In some cases you can come and say that the payout partner is not your preferred choice, the rates may not be good, or you might consider them to be competition, in which case, two things can happen:
- The bank / LFI can look for another partner in the interim period.
- The bank / LFI can start the necessary paperwork to start the correspondent tie-up relationship with a new partner that you want them to work with. This can take anywhere from 4-5 weeks up to 6-9 months. It all depends on the complexity.
In the interim period, it will be up to you if you still want to work with the same provider or if you wish to wait till such time that the bank &/or LFI has established the correspondent tie-up relationship.
Expecting the bank or LFI to work with a non-licensed company or someone unilaterally assigned is simply out of the equation. The originating entity will most likely have a mandatory requirement from their financial regulator to conduct enhanced due diligence (EDD) on the correspondent and only then sign-up a correspondent tie-up agreement with the licensed entity.
This page was last updated on December 28, 2019.