Viewpoint: Getting Set for Change in Bank-to-Bank Transfers

November 12, 2009, 5:25 p.m. EST 5 Min Read

For years, the use of Swift cover payments for bank-to-bank transfers has been demonized as an unmitigated risk in efforts to combat money laundering. The lack of originator and recipient information within the payment type MT202 has impeded efforts to monitor and potentially intercede in payments that are either suspicious or specifically prohibited under current sanctioning programs.

With the introduction of the revised cover payment type (MT202COV, also known as the "cover variant") on Nov. 21, there is anticipation of increased transparency in payment activity and a broad expectation of greater intervention in the activities of "bad actors."

Given this significant change in how global bank-to-bank payments are processed, what is the state of industry readiness? Will the new message type usher in a new era of transparency? Will the operational and technology implications be immense? Or, is this just another payment type to monitor with only an incremental impact on business as usual.

While the revised cover payment standards have been actively endorsed and communicated by Swift, the U.S. Treasury Department's Office of Foreign Assets Control, the Wolfsberg Group and other professional bodies as a critical, albeit partial, panacea for the payment transparency problem, many questions remain. In addition, the regulatory authorities have not specifically mandated compliance or examination expectations, and disparate regulatory expectations may exist across various non-U.S. regulatory authorities. With the industry expectation of future cases of deferred prosecution agreements and massive associated penalties for violating U.S. sanctions, organizations processing international payments will certainly face increased risk and operational challenges to fully comply.

Unanswered operational questions persist as well. It is nearly impossible to anticipate the volume of incremental money laundering alerts and potential sanctions hits until the new processes and payments are in place. Will compliance professionals be faced with a towering stack of new false positives requiring immediate investigation and disposition? And will identifying the actual cases of money laundering or sanctions violations be like finding a needle in a haystack?

Also, how will increased transparency influence an organization's relationship with its existing network of correspondent banks? If a correspondent relationship introduces additional risk, will the U.S. firm have the information and commitment to terminate or severely curtail that relationship when doing so could have business, revenue and client impact? The lack of complete guidance and full understanding of the potential impact of the revised payment type necessitates an increased focus on the cover payment monitoring process. Three stages are required in organizing your compliance efforts. The first is preparing:

Identify inventory areas within the global enterprise that could potentially process Swift payments. In large organizations, payments are sometimes processed without being under the full scrutiny of existing enterprise-level controls.

Invest now in training and build case studies on the nature of issues that may surface from the enhanced monitoring procedures. Cover payment monitoring will likely identify previously unforeseen issues and risks; the attentiveness of skilled resources to capture and quickly intercede is critical.

Through rigorous testing, ensure your organization's monitoring technologies are accurate and fully monitoring the revised cover payment message.

Devote time to a formal, documented risk assessment. Fully understand the correspondents you do business with to identify those that expose your firm to the greatest levels of risk and vulnerability.

Have a ready bench of additional investigators to assist with the investigation and disposition of the likely increased volume of money laundering and sanctions-related alerts.

The second stage is executing:

As experience is gained, clarify the open compliance, operational and technology-related questions. Questions may surface related to correspondent relationships, nonparticipative countries, responsibilities for cover payment information quality, delays introduced by cover payment intercession and, ultimately, client impact.

Continue to adjust risk-based strategies as greater awareness of your cover payment alert volume is achieved.

Finally, evaluate and optimize:

Further tune your AML alerts and rightsize your thresholds for OFAC issues. This effort is unique to each organization based on its newly identified volume of MT202COV message types and specific risk profiles.

In addition to undertaking compliance self-assessments, document the rationale for decisions made and ensure the quality of dispositioned cases. The first internal audit or regulatory reviews may be challenging, particularly when executed against a backdrop of evolving regulatory requirements and numerous unanswered industry questions.

Evaluate the operational effort required against the profitability of certain correspondent and client relationships. Are higher risk payments robbing your organization of its margins?

It remains to be seen whether the increased transparency of Swift cover payments will be a major deterrent for money launderers and individuals hoping to evade sanctions programs, thus sending a flurry of activity to other payment methods to be addressed in future transparency initiatives.

Though there will likely be increased interceding and identification of potential money laundering, there is also the opportunity for more error, greater regulatory pressure and a rising number of highly visible cases of noncompliance. Proper anticipation, appropriate investment, continued re-evaluation and the ongoing sharing of perspectives on these evolving topics can help your firm intercede successfully in money-laundering activity — and ensure that your organization is not criticized in the highly visible court of public and regulatory opinion for something that remains at the forefront of the compliance and financial services agenda.