What is a segregated account and why does a payment system need it?

Contents:

1. How does a segregated account work? Practical example
2. Why are segregated accounts needed and what are their advantages?
3. Why is a segregated account easier to open than a corporate one?
4. What difficulties can arise when opening a segregated account?

What is a segregated account and why does a payment system need it?

Segregated account is an account that is opened with a foreign bank to service payments from customers outside the jurisdiction. In practice, this means that the payment system is able to connect to the international banking network to make money transfers and payments that are sent on behalf of a foreign bank.

How does a segregated account work? Practical example

Segregated accounts have correspondent properties. For example, a customer of a payment system wants to send a certain sum of money to another country. In this case, the payment system debits this amount from the sender's account in the local bank and instructs the correspondent bank in the receiving country to carry out the money transfer. It is made from a segregated account of the payment system. The correspondent bank debits the required amount and commission for services. The recipient is given money in local currency.

Thanks to segregated accounts, clients of Russian payment systems can transfer money all over the world. The main thing is that a certain payment system has access to the destination market. For example, if a user needs to send funds to Australia, then the payment system can make such a transfer only if there is a segregated account with an Australian bank.

Why are segregated accounts needed and what are their advantages?

The benefits of opening segregated accounts are clear. Because of them, payment systems get access to financial services in different jurisdictions. At the same time, there is no need to open additional offices abroad, go through a lengthy registration procedure on the territory of other states.

Modern business and trade cannot exist without international money transfers. Every business has trading partners abroad, and even for individuals, cross-border transfers and payments are also not uncommon. Opening a segregated account for payment systems means being able to offer your customers a greater choice of financial services at a lower cost. A payment system that wants to deal with money transfers in foreign currency does not need to obtain a license abroad if a segregated account is opened.

Why is a segregated account easier to open than a corporate one?

After the 2001 terrorist attacks, laws were passed in Europe and the United States aimed at tightening banking regulation. This has made it much more difficult for companies and individuals to open an account with a foreign bank. The main reason for refusals is the impossibility of going through the compliance procedure, which is valid for all new clients. The main essence of compliance is analyzing the data of a potential client to check his reliability. Before opening a corporate account, a foreign bank thoroughly checks what activities the company is engaged in, with whom it cooperates, whether it complies with the current requirements for maintaining accounting and tax reporting, and what types of payments it makes.

All of these measures are aimed at countering the laundering of money obtained as a result of illegal activities and combating the financing of terrorism.

As practice shows, many companies get rejected when trying to open a corporate account abroad. For this reason, they are forced to use other methods of making international payments. First of all, we are talking about the use of payment systems that offer such services to their users. The largest international payment system today is Swift. It operates in 200 countries of the world and unites over 11 thousand banks.

When opening a segregated account, the local correspondent bank conducts all checks in accordance with the AML / CFT policy requirements applicable in the jurisdiction.

What difficulties can arise when opening a segregated account?

When opening a correspondent account, the payment system may face all sorts of difficulties. By no means all European banks willingly go towards the formation of international financial ties. This is primarily due to the strict AML / CFT policy and frequent checks by the regulator.

The conditions for opening correspondent accounts differ in different banks, therefore, before connecting to the international banking network, it is important for a payment system to objectively assess its capabilities, determine priorities, and competently prepare a package of documents.

The lawyers of A4 Law Firm, who have extensive experience in supporting the opening of segregated accounts abroad, will help you in solving this problem.