Bankers: how to clear checks written against foreign accounts?

Suppose I get a check written on an account of the Bank of Nigeria. It’s denominated in dollars. I deposit it to my Bank of America account.

How does this check clear?

I understand if it was written against an American bank, it’d clear through the Fed’s check clearing system. But the Bank of Nigeria doesn’t participate in that system (does it?). So how does it make good on the check?

Did you receive a check from Nigeria? If you did, be very very careful. Nigeria is well known to be a hotspot for financial shenanigans.

There’s a nifty explanation here.

Basically, your bank posts the cheque back to the issuing bank for verification and fund transfer. Some foreign banks still require the cheque to be returned to the branch the account is held at for verification, so that can add delays.

The example in the link is a French, euro denominated, cheque being deposited in a British branch of HSBC. It took four weeks for the cheque to be verified and the funds to clear…and this is for two neighbouring countries with robust banking infrastructure, it may not be so quick for Nigeria, dollar-denominated or not.

No, but I know somebody who did. She waited for the check to “clear”, only to find out later it was a forgery. So I guess it didn’t really clear.

What I’m interested in is how final settlement occurs when a bank is outside the US and therefore (I assume) does not have a reserve account with the Fed.

Thanks. So I understand B of A may physically mail the check to the Bank of Nigeria, so they can check it out to see if it’s authentic. But let’s say B of N decides it’s ok. Now it needs to settle up.

Does it put some US currency in the mail addressed to B of A, or what?

There are various possibilities transactions (not just cheques, also wire transfers) can be conducted across borders without involving hauling cash around physically. A usual way is using correspondent accounts - basically, an American bank would have a standing arrangement with a Nigerian bank, whereby one of the two banks maintains an account with the other. Say a Nigerian bank wishes to make transactions in U.S. dollars. It maintains an account in the U.S. (which, eventually, any major bank dealing internationally will need because the U.S. dollar is a currency in which a lot of transactions are settled) with an American bank, possibly the Fed (though not all central banks maintain accounts for foreign banks, many of them do). This needs not necessarily be the recipient’s bank; any American bank participating in the American clearing system will do. So let’s call this the American Correspondent Bank. The transaction could g something like this:

You: Present your bank to Bank of America, where you have an account, for cashing.
Bank of America: Credits the amount to your bank account and gets it back from American Correspondent Bank.
American Correspondent Bank: Pays the money to Bank of America, for instance through the Federal Reserve’s clearing system, and charges it to the account Bank of Nigeria maintains with American Correspondent Bank.

If Bank of Nigeria and American Correspondent Bank do U.S.-Nigeria deals regularly (and there are banks that specialise in this sort of business), it’s possible that money flowing to the U.S. from Nigeria and money going the other way balance each other out over time, so the account is balanced. If it isn’t, and more money goes from the U.S. to Nigeria than the other way, then Bank of Nigeria will have to find a way to settleits outstanding balance with American Corresponent Bank, for instance, by buying dollars on the international forex markets against whatever currency they have, and wiring them to their American Corresponent Bank account.

I used to work for a company that regularly shipped goods to Nigeria. You can take it as read that neither side trusted the other.

We used old-fashioned, tried and trusted, letters of credit. In effect, the Nigerian customer deposited enough money in a third-party bank account to settle the transaction. When the goods are shipped, a bill of lading is produced and presented. This enabled us to collect our money, and assured our customer that we had in fact shipped the goods.

Thanks for the explanations.

Schnitte, just to relate this back to my friend: so at some point the original check, or a facsimile thereof, makes its way back to the Bank of Nigeria. B of N determines it’s fake - the numbers don’t match up to a real account, or the account has no money in it, or the real account holder says, “hey, I didn’t authorize that check”. Then it tells the correspondent bank, “Hey, that was a fake, credit me back,” at which point the correspondent bank says the same thing to Bank of America, which then goes after my friend?

Meanwhile, the check may have “cleared” a couple of weeks back.

I know this isn’t directly relevant to your situation, but in Canada a lot of people have financial dealings in the U.S., so it’s possible to get bank accounts in Canadian banks that are denominated in American dollars. Then they can write checks to people in the U.S. where it says on the check “U.S. Dollars” even though it comes from a Canadian bank.

I’ve deposited such a check into my American bank account and it took no more time to clear than any other American check.

This, of course, is the basis of a well known fraud. Mr Fraudster gives you a cheque, and when you see it on your statement you assume that it has cleared. You then give Mr Fraudster some money and he vanishes. A few days later the bank tells you that the cheque did not clear and they want their money back.

This is indeed a possible scam. Banks have different policies to mitigate that sort of risk. One possibility is not to credit the recipient’s account with the amount of the cheque until the transaction has actually been completed. This may have the additional advantage of giving the banks along the chain a longer float. A “float” is the profit in terms of interest that you gain from the time difference between debiting the payer’s account and crediting the payee’s account - if the latter occurs several days after the former, then you have, essentially, got a loan for free for the meantime. Of course in today’s low-interest rate environment, the float does not amount to much, but in large volumes it may still add up to nice sums. Another option is to credit the payee’s account immediately but to block the amount on the payee’s account - the money is credited but cannot be withdrawn or transferred away to another account until the transaction has been completed. Policies among different banks vary in this respect.

The Fed regulates float, doesn’t it?

There are 2 basic options:

  1. (most often) the check is drawn on a US bank, and is processed like normal. This could be “the American bank of Nigeria” or it could be the royal Nigerian account at BigAmericanBank

  2. It is drawn on a foreign bank and sent for collection, and it not credited to the depositor’s account until a notice from the other bank comes in. This can often be 1 or 2 months or more. This is the same for US or foreign currencies.

The problem with option 1 is that it can take 5 days or more for a check to get returned under normal circumstances, and 10 or more for unusual circumstances. By then the depositor has already given the money to the prince of Nigeria, and he has disappeared.
Now, if the bank takes the check for deposit, and they are worried for any reason, they can place a hold on the funds, and the amounts and the time are strictly limited by regulations. Some is available immediately ($100), some by 5 days (up to $4,900), and the rest by 10 days at the longest. This is still not enough time sometimes when the check is returned for fraud or something else more complicated than Non Sufficient Funds. Holds are rough! It pisses off the customer and the bank could still take a loss.

Sometimes with option 2 I have seen small amounts (Under ~$500) converted to USD from other currencies, but only for well established customers.We had to call someone to make it happen and package the item in a special way. I do not know how those are dealt with after they leave the branch.

I have not been a teller for more than 10 years (I did work for BofA a long time ago) so some of this may have changed.

A third-party bank in which country? Just curious.

I’m not sure about the United States; I ran a quick-and-dirty google search for “float federal reserve”, and stumbled across a number of articles on the Fed’s and affiliated websites that indicate that float was a big topic in the 1980s and 1990s, with the Fed seeking to reduce it, but apparently the problem has lost significance since then. It is, however, typical for jurisdictions to regulate float in some way. Within the EU, for instance, direct transfer payments must by law be credited to the payee’s account within one work day. Similar provisions may apply in the U.S. as well, even though I think that such laws would likely not apply to the U.S.-Nigeria transaction in question here.