Financial crime is a complex, multi-faceted and evolving global issue. But governments globally are looking to strengthen financial regulation as a priority to ensure complete and accurate information is passed to all financial institutions involved in processing transactions.
The regulatory recap
Bringing financial crime into focus
Financial crime is a complex, multi-faceted and evolving global issue. According to the UN Office on Drugs and Crime, an estimated 2 to 5 per cent of global GDP (USD800 billion to USD2 trillion) is laundered each year.1
With such high figures, governments are now looking to strengthen associated global financial regulation as a priority. Efforts are being made to improve payments transparency to help in the fight against money laundering and terrorism financing. In this context, payments transparency centres on having complete and accurate information on all parties to a payment transaction; information that is passed to every financial institution involved in processing that transaction.
In its technical report to the G20 on enhancing cross-border payments, the Financial Stability Board (FSB) noted that for banks, missing information can compromise their efforts to fulfil their anti-money laundering (AML) and combatting financial terrorism (CFT) regulatory-obligations. For corporates, lack of information about the speed, fees and FX rates of payments-in-process leads to uncertainties over the timing and amount of payments and can impact business service levels.2
Scope, scale, and structure
The main regulatory actions to date
Regulatory efforts are focused on ensuring any payment transaction is accompanied by critical information such as the names, addresses and country of origin of the ultimate payers and beneficiaries. While regulations do not directly target corporates, they need to be aware of the regulations that govern their banking partners. Missing information can create returned or rejected payments, causing delays in processing. The ability to provide such information accurately and in a timely manner to banking partners will deliver benefits of reduced costs and faster payments processing.
Regulatory action related to payments transparency is multi-layered: global, regional, and country-level requirements present a complex challenge for financial institutions and their corporate clients. Perhaps most noteworthy to date is the Financial Action Task Force (FATF). Introduced in 2012, these specified new recommendations for originator and beneficiary information in payment messages3. In the EU, these recommendations were implemented via the Funds Transfer Regulation. Payments transparency is also addressed in the EU Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
Currently, the Wolfsberg Group, an association of 13 global banks, is developing frameworks and guidance for the management of financial crime risks, particularly with respect to KYC, AML and CFT. It has developed four payment message standards to be observed by all financial institutions.
Accompanying such actions are tools that can help achieve transparency by improving information processing. Foremost among these is the ISO 20022 standard, which enables much richer information to be attached to payments messages.
Building the blueprint for your organisation
Standardisation and transparency best practice
As corporates expand across borders, they are exposed to more risks, particularly as they operate in new, unfamiliar markets with perhaps unknown business partners along the supply chain. At the same time, they are operating in a world of constant innovation with the acceleration of payments and myriad of new channels opening up.
Their banking partners are required to act as ‘gatekeepers’ to prevent the misuse of payment systems for financial crime such as money laundering and terrorist financing. To do this, banks must conduct customer due diligence to verify the identity of their clients and assess if the transactions with third parties are consistent with the understanding of their clients’ businesses. They must also apply targeted financial sanctions based on UN and national lists, and to verify that their counterparts apply the same requirements.
Payments transparency is not solely about fighting financial crime: by ensuring accurate and timely information is attached to payment transactions, corporates can also significantly reduce their reconciliation challenges. If every player in a payments chain provided the full information required, the number of rejected or repaired payments would fall dramatically. Moreover, in this fast-moving environment, the need to avoid delays in payments processing is accelerating.
There are some key steps a corporate treasurer can take to improve transparency, as their banking partners increasingly require this to manage financial crime risk and ensure compliance with regulatory obligations:
- Understand your own customers. Where are they based, what are their needs and what is the rationale behind their payments flows?
- Understand your own payment flows. Think about your payments flows – which corridors, currencies and countries do you have a presence in and how does the account structure affect the payment flows?
- Assess the financial crime risks. Examine the risks of the countries in which you operate. It is likely that you will have different risk profiles for different countries. Understand the risk that is attached to your cashflow.
- Understand the industry standards. Assess technologies and infrastructures, such as ISO 20022 and application programming interface (API) connectivity, that play a role in improving payments transparency and processing.
- Engage banking partners early on. The earlier you engage with your banking partners on payments transparency, the more likely it is that a simple account, payment, and currency structure can be developed.
Building the blueprint for the industry
The benefits of a collaborative approach
As a member of the global financial industry, we take seriously our obligation to work with others in preventing financial crime. By working collaboratively, all participants in the payments value chain, including corporate treasurers, can benefit from accelerated payments processing safe in the knowledge that regulatory obligations have been fulfilled.
For many corporates, payments are at the front and centre of competitive advantage. Using the right tools and selecting the right banking partner to navigate financial crime compliance will help you to stay on the right side of the law while retaining your competitive advantage.
Championing change with Standard Chartered
Playing a pivotal part in fighting financial crime
Payments is a fast-changing environment and remains a pain point for many corporate treasurers. We are well placed to participate in the development of globally accepted, common sets of standards and expectations around KYC, AML screening and sanctions compliance for corporate clients engaging in new territories and with new payment methods. We are a member of the Wolfsberg Group and are also working with companies such as Silent Eight to develop regtech solutions.4
With our wide network and footprint, we can help guide treasurers through the regulatory jungle of payments transparency requirements that could impact them, especially in emerging markets.
We have many years of experience in complying with regulations across the globe. This helps us create solutions for corporate clients that ensure payments are not only transparent but are fit for purpose in the rapidly-evolving payments landscape. And, as corporates enter new markets, our team can provide insights on the different regulatory requirements relevant to payment activities.
As financial crime regulations evolve and change in the coming years, we commit to being a strong partner, providing simple rules and guidelines for our clients to follow.
1 Money laundering and Globalization, United Nations Office on Drugs and Crime, (2020) https://www.unodc.org/unodc/en/money-laundering/globalization.html
2 Enhancing Cross-border Payments, Stage 1 report to the G20: Technical background report, Financial Stability Board, (April 2020) https://www.fsb.org/wp-content/uploads/P090420-2.pdf
3 International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, the FATF Recommendations, Financial Action Task Force (Updated, June 2019) http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf
4 Regtech and the fight against financial crime, Bankable Insights (September 2019)