Wednesday, 16 April 2008

Moving Money Around the World: Extra Services and Practical Details of Using FX Dealers

This third installment on the options for moving funds from country to country focuses on foreign exchange (FX) dealers. I outline a number of practical considerations that differentiate FX dealers from one another and from banks. I found that these aspects can heavily influence which dealer is best placed to meet my needs.

Registration / Signing Up and Money Laundering - all FX dealers everywhere will require you to sign up or register as a customer. None of them charge for it and there are no fees or requirements to trade at all. The requirement to sign up stems from international agreements to prevent money laundering and terrorism financing. To register you must provide documentation of your identity and a fixed address. Typically, this means a copy of photo ID like a passport or driver's license plus something with an address like a utility bill. It all starts from the same recommendations of the inter-governmental Financial Action Task Force (FATF).

But each country seems to have implemented slightly different rules and the registration process is more or less of a hassle depending on the FX dealer and the country. Canada seems to be on the unduly picky end of the scale and it looks like it will get more complicated as the Canadian watchdog FINTRAC is introducing Guideline 4.6 on June 23, 2008 that will make it even more complicated by requiring either the client to be seem with original documents or to have them attested by a commissioner of oaths or a guarantor.

By contrast, OzForex accepts scanned and emailed copies of such documents, complying to Australian regulations.

In the UK, sign-up is even easier if you are a UK resident. Some dealers like MoneyCorp and Currencies Direct, are linked into electronic databases that enable verification while on the phone. Is it a case of the UK being negligently incompetent, or wisely light-handed, and Canada being prudently vigilant or obstructively bureaucratic? (Considering the huge gaps in control documented in studies like the World Bank sponsored The Canada-Vietnam Remittance Corridor, maybe what FINTRAC is doing could be likened more to aggravating the honest retiree than plugging the real holes of the informal international money conduits.) With OzForex, it seems not to matter in which country you reside since you are able to register via emailed scanned documents in Australia even if residing in Canada or the UK, or New Zealand and using those website storefronts - CanadianForex, UKForex and NZForex.

With banks, no registration is needed for currency transfers since the information was collected when you opened the account.

Though it should not be a concern to ordinary law-abiding people, it is a fact that big brother watches us all and large transactions (anything over $10,000) are reported automatically by FX dealers and banks. Anything "suspicious" must also be reported. In the UK, the reporting amount is EUR15,000 / £10,000 and reports go to the Serious Organised Crime Agency. That's why the FX dealer will ask you the purpose of your moving money internationally. There's no escaping this, no matter which country you live in. The WWB (World Wide Bureaucracy) is hard at work.

Security and Country of Regulation - all the FX dealers I found in my searches on the Internet were based in either Canada, the UK, Australia or the USA. When you sign up as a customer, you agree to be subject to the home base country's laws for any disputes. If you have large amounts at stake, like a transfer to buy a retirement home, that may be an important consideration. For instance CanadianForex is a subsidiary of OzForex, based in Australia, so your agreement is under Australian laws. Aussie laws may provide more protection than those of Canada (certainly, the mandatory product disclosure statement from Australia was informative, while there wasn't one at all from Canadian dealer Custom House) but if something happens where would it be easier to complain?

I'm not sure if all FX dealers do so, but all the FX dealers that I spoke to on the phone seemed willing to accept clients who live in almost any country. That means you can shop the world for an FX dealer. It seems any restriction would not be legal but practical in sending money to or from that place.

The security and stability of the organizations themselves may vary, though these days being a large financial organization may not itself be a guarantee of staying in business and not having your money unexpectedly tied up (holders of ABCP know what I mean!). One protection is for the FX dealer to hold your money, in the brief period it may be in their hands, in a bank account in trust in your name, so that if anything happened to the dealer, your money would be protected. TorFX and MoneyCorp, for example, do this but OzForex does not apparently ... though it is owned and backed by Macquarie Financial, a very large Australian bank.

It may help a little for security that the money laundering/anti-terror financing regulators keep a close eye on these companies (as well as the transactions of you and me, their clients), which may instill a more diligent work culture of audit and compliance. Beyond that, the reputation and business success of each dealer is what keeps your money safe.

To compare business reputation, one could ask questions Like:

  • when did they start up business? Of the ones below, the oldest are MoneyCorp and AFEX (both 1979), while the new boy is Halo Financial (2003).
  • How big are they in terms of staff or customers and sales? The biggest I found, and many do not provide that info on their website, is MoneyCorp.
  • What are their affiliations? - Does it help to know that CustomHouse is the official FX supplier to the PGA Tour ... if it is good enough for the world travelling pro golfers, is it good enough for you and me?

Offices, Local Knowledge and Affiliates - This is where FX dealers begin to stand out from the banks. The presence of an office and knowledge of the local banking system at both ends of a transaction can eliminate possible hassles. In addition, some dealers have developed region specialties, e.g. helping Brits establish themselves in retirement or vacation havens like Spain or France, and have allied themselves with complementary service providers like estate agents and tax firms. In contrast, my Canadian bank telephone representative knew nothing about BACS or CHAPS when I asked if it were possible to deposit money in a UK account that way instead of by wire.

Customer Service - It is most gratifying to call an FX dealer and not be shunted into a call centre telephone menu queue and end up speaking to a script kiddie who knows little and is on a timer to close the call. Of the half dozen FX firms I called, all were helpful, knowledgeable, patient and prompt. Some assign you an individual account rep.

In the previous post's example where I wrote about some live FX rates, it was only by being able to access them online that I could make the comparison. To get such data from the bank, the fastest way is to call, go through account authentication and telephone menus, wait for a person to come online, ask for the rate and wait for him/her to obtain it, all of which may easily take ten minutes. In the case of my bank, the telephone rep in the end could only give me a rate for exchanging $1000, saying that for $10,000 it would be less but could not specify how much less and said they could only pass me through to an actual trader for a real rate on $10k if doing an actual booking. Customer service, indeed!

Methods of Uploading Cash to the FX Dealer and Having It Delivered - Surprisingly there is quite a variation in the methods used, depending partly on the country where the dealer does most of its business. All support the basic standard that all banks use, wire aka telegraphic transfers, for both receiving and sending to destination. UK-based dealers typically accept payments by CHAPS or BACS, while forms of EFT are possible in Canada (on-line bill payment or pre-authorized chequing) and the USA (ACH/ABA).

A number of FX dealers accept cheques to upload funds to them, while some even accept credit cards (like MoneyCorp). On the delivery side, some will send payment to an address by Draft (e.g. CustomHouse), while most only deliver by wire or some electronic method.

Locking in Exchange Rates for Future Payments
For workers on overseas assignments with known pay to be received in a foreign currency and who wish to repatriate their earnings on a regular basis, currency swings may cause the end value to vary considerably, perhaps fall far below what they expect. The same goes for large purchases to close in a few months. Most FX dealers will allow you to lock in a rate today for a certain duration to eliminate that risk - e.g. HiFX. The future lock in
maximum varies from one year to two years. Usually a deposit of 10% of the amount is required for lump sums.

On-Going Scheduled Payments - Pensions, Salary
Many FX dealers will also automate the withdrawal, conversion, transfer and deposit of recurring small payments (the minimum varies from £150 to £250) from a source bank to a destination bank in another country. That takes a lot of the effort and hassle out of managing cash in two countries, for example, UK pensioners who retire in the warmer, cheaper climes of southern Europe, or Canadians in the USA or Costa Rica. When combined with guaranteed forward rates, a person's financial planning and budgeting can be greatly simplified.

Currencies Traded
The banks will handle, at a price, any pair of 'from' and 'to' currencies. All the FX dealers will handle the major currencies like the USD, GBP, EUR, JPY, CAD, CHF, but coverage beyond that varies according to their target market. The least number of currencies handled that I found was 12 at OnLineFX and the most was 85 at MoneyCorp. Check for the pair that you will need. Since I have a relative in South Korea wanting to send money out of that country, I tried to find one that would trade KRW (South Korean Won) to CAD. Only one said it could - Halo Financial.

Speed of Transfer
Strangely this seems not to be a great differentiator, unless financially out-of-the-way countries, like South Korea, are involved and intermediary banks come into the loop to slow down progress by weeks at times. The time it takes to move from one country/bank account to another seems to be more dependent on the country and its background banking settlement sytem than between companies. Wire transfers are the baseline, taking 1-4 business days. Some methods of uploading, such as BACS, take another 3-4 business days to clear before the funds can move on.

Countries Excluded
If you live in, or want to send money to, certain countries, some or all FX dealers may refuse your business. Places like Burma, Iran, Iraq, Russia and the Philippines may be excluded for various reasons - banking relationships too difficult, concerns about transparency and verifiability of individuals i.e. compliance with money-laundering regulations. Again, the exclusion of countries varies across different dealers. In general, the more mainstream you are, the more numerous are the viable FX dealer choices.

Telephone or Online Transactions and Hours of Business
All the FX dealers offer telephone transaction booking. In some case that limits their hours of business to the times at their physical office locations and some extend their hours by call forwarding around the globe e.g. OzForex is 24x7 M-F. About half the FX dealers offer online transaction access, which means access whenever you want it - very convenient. And the banks, well , they keep much more restricted hours - "the traders have gone home for the day so we cannot book a transaction".

Minimum Transaction Amounts
The minimum amount for a single transaction varies from £1000 up to £5000 at the various dealers. As mentioned in the first post of the series, for smaller amounts, money transfer services will provide service. Banks will transfer any amount. For all practical purposes, there is no upper limit (that probably excludes you, Warren Buffett).

My conclusion is simply that the variety of services available mean that no one company is best for everyone. You must shop around to find the one that best suits your needs according to their specialty, whether it be the straightforward lowest rate for mainstream currencies, or some less popular currency, or the convenience of online electronic trading, or a regional real estate retirement market niche. One thing for sure though, I believe that the much higher level of customer service and the possibility for prompt help from polite, well-informed staff that I found at a number of FX dealers, will be a pleasant surprise in this automated de-personalized world.

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