How correspondent banking works, and what the FinCEN clampdown on Banque Misr UAE means for business

🏦 Almost every USD a bank sends abroad has to pass through an account in the US, with Washington deciding who gets to keep one. That’s the lever the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) pulled in late August, when it proposed cutting the five UAE branches of state-owned Banque Misr (BM) off from US correspondent banking, as we’ve previously reported.

REFRESHER- FinCEN alleged that the branches processed around USD 1.8 bn between January 2024 and June 2026 for 103 companies that it claims may have been linked to Iranian shadow-banking networks. In late September, global credit rating agency Fitch said the proposed US clampdown on BM’s UAE branches will have a limited impact on the bank’s credit rating, given that the branches only account for under 5% of BM’s assets and net income.

Correspondent banking 101

But what exactly is correspondent banking? Simply put, in a correspondent banking arrangement, one bank (the correspondent) holds deposits belonging to other banks (the respondents) and handles payments and other services for them, according to the Bank for International Settlements’ (BIS) definition. To settle these cross-border transactions, banks open bilateral ledger accounts.

Two sides of the same coin: A nostro account (our account at your bank) is maintained by the respondent bank at the correspondent bank, while a vostro account (your account at our bank) is held by the correspondent bank for the respondent. When a bank, say in Cairo, keeps USD at a bank in New York, it books that balance as its nostro. The New York-based bank records the same amount as its vostro. When the Cairo bank’s client pays a supplier in USD, the NY bank debits that account and sends the funds on.

Why New York? USD ultimately settles on the books of US banks, so a non-US lender that wants to clear USD needs an account with one. Regionally, the USD is hard to avoid, and remains the most widely used currency in FX transactions and cross-border payments, according to the US Federal Reserve. The Fed’s index of international currency usage puts the USD at 64.9, against 23.9 for the EUR and 3.1 for the CNY.

In practice: For example, were an Egyptian importer to pay a supplier in a neighboring country in USD, that payment needs to go through a correspondent bank with the USD as the intermediary, which adds cost and delay — hurdles that the African Export-Import Bank (AfreximBank) is trying to avoid by planning to connect its Pan-African Payment and Settlement System (PAPSS) to Egypt’s InstaPay app.

Correspondent banking seems to be shrinking too: Cross-border correspondent relationships fell by roughly a fifth over the past decade, according to BIS. This is known as de-risking. While cross-border payments are continuing to grow, relationships are now concentrated among fewer global transaction banks.

Why? Anti-money laundering (AML) and sanctions enforcement is leading the charge, following a slew of high-profile regulatory crackdowns and USD-bn fines imposed by the US, which caused global banks to up the ante on compliance standards.

The probe

The BM branches in the UAE are the first publicly announced financial-sector target of Operation Economic Outcast, Washington’s drive to sever Iran’s financial connections. The Treasury Department’s tool, Section 311 of the Patriot Act, is one of the country’s most influential tools against foreign illicit finance. When a Section 311 finding is made against a foreign financial institution, it can mandate several special measures, including the USD cutoff that the US has proposed for BM’s UAE branches — the most drastic.

The proposal alone can be enough to sink a bank. When FinCEN proposed the same measure against Latvia’s ABLV in 2018, it set off a sudden wave of deposit withdrawals, according to the EU’s Single Resolution Board. Ten days after FinCEN's announcement, the European Central Bank declared ABLV failing or likely to fail.

What the proposal would mean for BM’s UAE branches: By enacting the special measure, FinCEN would mandate that US financial institutions terminate Banque Misr’s UAE correspondent relationships. US banks would also be required to conduct heightened due diligence and formally notify foreign correspondent account holders that they could not route any BM UAE transactions through US clearing channels, essentially shutting down access to global USD settlement.

💡NOTE- Banque Misr’s Cairo headquarters, Egyptian operations, and operations elsewhere are excluded from the FinCEN proposal.

A Hail Mary? In late September, the National Bank of Egypt (NBE) secured preliminary approval from the Central Bank of the UAE (CBUAE) to acquire Banque Misr’s branches in the Emirates. Despite no reference to the US measure, the move was deemed “possibly the only one available right now,” banking analyst Hany Abou El Fotouh previously told EnterpriseAM. It was described as a “purely political solution” by Motaz El Dreny, founding partner of Dreny & Co., who added that the US was likely briefed on the solution.

The road ahead

Back home, anti-money laundering rules are getting stricter: Weeks after the proposal to cut off the BM UAE branches, the CBE’s anti-money laundering unit issued updated customer due diligence guidelines for banks operating in Egypt and their foreign branches. The framework formally incorporates new banking practices that have emerged since the 2020 amendments to the Anti-Money Laundering Act, including electronic know-your-customer (eKYC). The rules also codify risk-based customer acceptance policies, general account-opening rules, and the use of third-party banking agents to conduct customer due diligence.

What’s next: Despite the comment window closing on 1 October, FinCEN has not yet issued a final rule, amended its proposal, or taken any other action. No decision has been made as of the time of publication.