Money laundering fears affects SWIFT Banking

Uganda, Kenya and Tanzania are among African countries where international lenders have cut-off correspondent banking relationships for fear of being exposed to charges of money laundering and terrorism financing.

“The withdrawals of correspondent Bank relationships (CBRs) could result in longer payment chains, an increasing number of intermediaries involved in processing the same payment, an increasing number of restrictions, and higher concentration on the correspondent and respondent side,” said the International Monetary Fund in a statement.

The IMF said this action was likely to increase the cost of doing business and disrupt economic activities, especially in countries that receive high diaspora remittances such as Kenya.

Some international banks have been fined heavily over money laundering charges originating from failure by their correspondent banks to make payments and in order to protect themselves, the risk-averse ones chose to cut off relationships used for international payments.

Large withdrawals are bound to arouse suspicion given the stringent measures put in place by the Central Banks to ensure compliance with international anti-money laundering (AML) standards.

Last year, several banks were penalised for laundering money associated with the multibillion National Youth Service scandal.

Uganda and Tanzania have also been strengthening their AML regulations, with Uganda convicting its first money laundering suspects in June.

Correspondent banks

Correspondent banks act as agents of foreign institutions and complete transactions originating from abroad locally. For example, a Ugandan bank making payments on behalf of its customer to a person in the US will issue instructions to its correspondent bank in the US to pay the customer through their bank in the US. The Ugandan bank will then credit the account of the correspondent bank, held in its books, with the amount paid out.

Instructions to make international payments are passed across banks through the SWIFT system.

SWIFT data, which captures fair share of correspondent banking activity, shows that Uganda was among the countries that experienced the largest drop — 38 per cent — in SWIFT transactions in value terms in the five years between 2016, putting it in the same league with Angola and Mozambique.