The SWIFT network is a vital utility through which banks can securely exchange the electronic messages needed in order to transact international financial operations for their clientele.
Banks must confirm to one another through the SWIFT Relationship Management Application ("RMA") that they are willing to exchange messages, and this used to be a formality that any SWIFT member would do for one another, to keep the wheels of international commerce turning.
That is until the intervention of a body called the Wolfsberg Group, composed of thirteen of the world's Global Systemically Important Banks – all of whom are major correspondent banks.
Unfortunately, this body has come to be regarded as authoritative by other banks and by financial regulators. In 2016 Wolfsberg issued a guidance paper called "SWIFT Relationship Management Application (RMA) Due Diligence 2016", the upshot of which is that banks should only exchange RMA with the banks with whom they hold a cash account i.e. with the correspondent banks they use and the ones that use them.
The result in the Trade Finance space has been disastrous in our view, since a vital component of implementing operations is an ability for banks to exchange messages with banks where they do not otherwise have direct correspondent relationships.
This is because Trade Finance involves absorption of several risks such as Commercial Credit Risk, Bank Risk and Country Risk, and different banks will have various appetites for taking those risks: it cannot be assumed that the importer's bank and its network of cash correspondents will be willing to take the risks presented by the importer's range of Trade Finance needs.
Banks tend to follow one of two policies regarding the Letters of Credit ("L/C") they issue for their clientele, and it is either (i) to open them through the exporter's bank, whichever bank that is; or (ii) to open them through their local correspondent in the exporter's country, with whom there would normally be a line for confirmation if requested by the importer (at the behest of the exporter).
If the opening bank pursues the second policy, it will already have what Wolfsberg term a "Customer RMA" in place with its correspondent in order to transact its day-to-day payment business, and Wolfsberg raise no issues with that version.
If the opening bank pursues the first policy, though, it will need an RMA with the exporter's bank and any other banks that become involved – which may not include its correspondent: this is the situation that Wolfsberg terms "Non-customer RMA", and which their guidance advises against.
In fact without "Non-customer RMA" the first policy becomes unviable, and this in turn precludes using SWIFT messages at all for Letters of Credit where (i) an exporter will not accept the confirmation of the correspondent that is willing to confirm the opening bank's L/Cs and (ii) where the opening bank has run up against its limit for confirmation of its L/Cs at a particular bank in the exporter's country.
This gives a lot of scope for "Non-customer RMAs", because the parties willing to take a given Credit, Bank or Country risk cannot be relied upon to have a mutual account relationship.
In order then to transact the Letter of Credit with these multiple risk-taking parties involved, the opening bank must send and receive SWIFT messages in the so-called MT7nn series to and from the banks playing the roles of advising, negotiating and confirming bank. These messages cannot be sent without an RMA in place between the message’s sender and its receiver.
The Wolfsberg paper on RMA refers to putative Anti-Money Laundering risks as being the grounds for their guidance, without going into detail, other than to say that the main risks are operational (i.e. having to deal with unwanted messages) and that the risk can substantially be mastered if a bank runs a normal supervision and control process around its RMAs.
In other words, Wolfsberg's justification for its guidance is thin, and banks should be able to manage any risks around RMA via normal frameworks of policy, process, control and reporting.
The impact of its guidance on the ability of banks to service the normal international banking needs of their clientele, however, has been significant, detrimental, and out of all proportion to the impact of the materialisation of the putative risks that the Wolfsberg guidance claims to mitigate.
One reads about official bodies like the World Bank and the Bank for International Settlements decrying the shrinkage of Trade Finance availability: they should look at the Wolfsberg RMA guidance.
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