Intermediary Bank Services

An intermediary bank acts as a conduit in international or cross-border transactions when the sending bank and the receiving bank do not have a direct correspondent relationship. For an intermediary bank to operate effectively between the sending and receiving banks, certain relationships and arrangements must be in place:

1. Correspondent Banking Relationships:

• With the Sending Bank: The intermediary bank must have a correspondent banking relationship with the sending bank. This involves mutual agreements to provide services and settle transactions on behalf of each other.
• With the Receiving Bank:  Similarly, the intermediary bank must have a correspondent relationship with the receiving bank. This enables the intermediary bank to transfer funds onward to the receiving bank.
•  Nostro Account: This is an account that a bank holds in a foreign currency in another bank (the intermediary bank, in this case). The sending bank might have a Nostro account with the intermediary bank to facilitate the transfer.
• Vostro Account: Conversely, the intermediary bank might hold a Vostro account for the sending or receiving bank, allowing it to manage funds on their behalf.

2. SWIFT Network Membership:

All banks or at least the intermediary bank, like IFB, or the receiving bank, involved typically need to be members of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network. This membership allows them to send secure financial messages to each other, ensuring accurate and timely processing of transactions.

3. Clearing and Settlement Systems:

The intermediary bank must have access to international clearing and settlement systems that enable it to process and settle transactions between different currencies and banking jurisdictions.

4. Regulatory Compliance and KYC/AML Policies:

• Know Your Customer (KYC): The intermediary bank must comply with KYC regulations, ensuring that it verifies the identities of the sending and receiving banks.  
• Anti-Money Laundering (AML)**: Compliance with AML regulations is crucial to prevent illicit activities. The intermediary bank must monitor transactions for suspicious activities.

5. Credit and Risk Management Agreements:

The intermediary bank may establish credit lines or risk management agreements with the sending and receiving banks to manage the financial risks associated with the transactions.

6. Fee and Charge Agreements:

There must be clear agreements on the fees and charges associated with using the intermediary bank's services, including any currency conversion fees, transaction fees, and handling charges.

7. Technological Compatibility:

The banking systems of all parties involved must be technologically compatible to ensure seamless communication and transaction processing. This includes compatible payment processing systems and message formats.

8. Legal and Contractual Agreements:

Formal contracts outline the responsibilities, liabilities, and obligations of each party. These agreements are essential for resolving disputes and ensuring smooth operation.

9. Communication Protocols:

Established protocols for communication ensure that all parties can quickly and effectively address any issues that arise during the transaction process.

By establishing these relationships and agreements, the intermediary bank can effectively facilitate transactions between the sending and receiving banks, even when they do not have a direct relationship. This network of relationships ensures that funds are securely and efficiently transferred across international borders.