Money transmission across borders is not done on a whim by licensed institutions. They need to have a well-defined correspondent tie-up agreement in place before the transfer of money can take place. This means, conducting enhanced due diligence and only then, agreeing on the commercials and settlement details that are inked into a correspondent tie-up agreement.
Hello. My name is Faisal Khan. I am a banking and payment consultant and I received a very interesting question today. What is a correspondent tie-up and why are they necessary?
The movement of money from point A to point B has two parties. The sending party and the receiving party. Typically they are in two different geographic locations. One may be in the United States, one may be in the Philippines. The United States party is a licensed entity and likewise in the Philippines that has to be a licensed entity. You cannot just do move money just like that and, you know, say, hey, I’m sending money to a bank in the Philippines and they’re going to settle for me or I’m going to send money to a money transfer operator in the Philippines and they will settle the money for it.
The party that is sending the money, the licensed entity that is sending the money has to do due diligence on the receiving party. They have to go and understand, is this party licensed? Where is the license copy? Have we checked it? Have we done some, you know, some sanctions screening on it? Have we seen the beneficial owners? Have we done enhanced due diligence? Do we have a copy of their photo ID copies of their owners and directors, etc.? Do they have a compliance officer? Have you seen a compliance audit? Can we see a compliance manual? All this thing takes about a good two, three weeks to happen and only then a correspondent tie-up agreement is made.
This is very important, the word, Correspondent Tie-up agreement. There’s a correspondent and a respondent and they have to have a tie-up agreement. Only when that agreement is in place is the flow of funds and the money movement can be done. Without a correspondent tie-up agreement, the party in the US, the licensed money transmitter in the US, you know, they may, the state regulator may come in and say, okay, you’re sending money to the Philippines. How? Well, we just found a money transfer company online and we’re giving it to them. Have we done due diligence? No. Have we done any enhanced due diligence? No. Do you have a flow of funds with them? No. Have you done a tie-up agreement? No. Can we see a legal contract on the settlement? No. You can’t just do that. You have to have a correspondent tie-up agreement.
Now, one of the biggest questions that people ask is, well, what if I am in the process of getting licensed in let’s say in Nigeria or in Kenya or in Bangladesh or in Pakistan? Well, until you are in the process of getting licensed, your provider in the US must work with a licensed entity. Second question is, what if I don’t like that licensed entity. Well, tough luck right now. Unless you bring some other party in. But, what if I want to bring another party? And what if I know someone else was licensed, can the entity work with them? Yes, they can. But like I said, it would take maybe two, three weeks or maybe two, three months just to tie-up that correspondent tie-up agreement and only then they can work together.
You may complain that the correspondent tie-up agreement with the existing party may not give you beneficial rates, maybe competition, etc. but these are all things that you need to do at the start of the conversation, understand and let the originating side money transmitter know that hey, listen, I am getting my own license. Right now I want to know who do you work with? How do I make you work with X and how can we work with Y? Which is my license somewhere down the line so that everything is, you know, hunky-dory going later on and that you don’t have any hurdles in the rollout of your plan.
So, a correspondent tie-up agreement is essential. It is between two parties and it is bound by an actual agreement which is a result of due diligence and commercial negotiations that have been done. As someone who wants to run as a money transfer as a service, you need to be cognizant of who the correspondent is, the tie-up is? Is it someone you deem as a competition or not? Is it someone who you want you can work with temporarily or not? All these kinds of questions are something that you need to ask at the start of the conversation.
If you have any more questions or comments, please feel free to email them to me. We have the contact form, the link is below. Till next time, have a good one.
This page was last updated on September 1, 2022.