International Payments Compliance: Seeking Certainty Amid Complexity

Neil Burton

Today’s global population is more mobile than it has ever been – job-seekers looking overseas or across borders see barriers coming down; a second, or holiday home abroad is no longer the preserve of the very rich.

With all this travel and relocation, the business of international payments is, not surprisingly, a growth area. People need low-cost, secure, efficient cross-border financial services to pay wages into home bank accounts and to pay bills to providers abroad from their in-country account.

Yet against this backdrop of opportunity, institutions processing electronic transactions have to comply with complex, often indeterminate, occasionally conflicting, rules and regulations; and face severe penalties if they get it wrong. Is this fair? Appropriate? Sustainable? Is it even effective? And are the inevitable unintended consequences acceptable?

Neil Burton

The challenges come to a head around P2P transfers and remittances. People are far harder to KYC than firms; and the average value per transaction, and associated revenue opportunity, is much smaller than in B2B. A major bank recently said, “We make 1% of the value of each transaction but if we get one transaction wrong it could cost us over $100m in lawyer fees and $1-2bn of lost business.”

In several countries though, most notably the UK, the cost and risk of executing and policing KYC, AML and ATF policies has resulted in all the banks choosing to withdraw from serving some market segments; notably the UK to Somalia corridor. The break point occurs at the entry point to the financial system; regulated payments services providers have seen their bank accounts closed, not because of any transactional transgression, but because of the changed risk policy of the service providing bank. These specialist firms are being financially excluded; and thus so are their customers.

The Financial Action Task Force (FATF), in its paper ‘Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion,’ points out that overly prescriptive legislation can cause payment facilitators to be so risk-averse that millions of people are excluded from global remittances. Easily said, but less easily resolved, when fines are in excess of $1bn, and the right to operate in the US is at risk.

Indeed the UK’s International Development Secretary recently said that the challenge of money transfers and remittances to developing nations is, “one of the most important things I have dealt with in my political career.”

Challenges

The global challenge of restricting organised crime and terrorist financing from using electronic funds transfer mechanisms has led to a co-ordinated raft of AML legislation and CTF laws.

The course is not simple to navigate for those operating in multiple jurisdictions. Doing so requires particular expertise. Inevitably, legislation is implemented and enforced differently from country to country.

EU based providers facilitating payments to/from Cuba, for example, would be in breach of US regulation, but complying with the US embargo would breach EU legislation. There is a similar disconnect when it comes to reporting transactions for potential suspicious activity. The US requires reports of all transactions above designated amounts, while the UK has a system of assessment of the level of suspicion associated with an activity.

In Europe, the regulation of specialist payments service providers such as Earthport by the Financial Conduct Authority (FCA) gives protection to the funds of their clients. Client funds must be held in segregated accounts. The directors of these institutions need to pass FCA tests and the companies themselves are subject to bank-grade audits.

But beyond the EU, this category of financial institution, and the level of supervision accorded to it, doesn’t exist. ‘Non-banks’ tend to be grouped into a single category; thus a regulated firm with appropriate compliance functions, protected client funds, and fit-for-purpose boards may find itself in the same group as a virtual currency. The categorisation is, therefore, not much help; each participant must be reviewed on its merits.

Meanwhile, there are practical challenges. For example, complying with the rules globally when sanction screening tools recognise only Latin and Greek alphabets; some financial data comes in Cyrillic or other script.

With all this to contend with, a firm’s compliance function needs to be skilled and resourced to operate to global best practice.

Getting what we all want

To overcome the challenges, industry participants need to understand that compliance is not only about adhering to legislation; it is a journey, the aim of which is to get closer to what we all want – assurance that legitimate financial services are not abused by criminals and terrorists.

To progress we must constantly develop new tools, reassess operations, devise better products and automated solutions, put in place more secure systems and improve IT and communications. Above all, perhaps, service providers, their clients, regulators and law enforcement need to be in constant communication.

As identified in the FATF paper, a risk-based approach offers the best way forward, but stakeholders need to recognise this does mean the occasional materialisation of risk. When this occurs, learning must be used to feed a cycle of improvement.

Neil Burton is director of product strategy at cross-border payment specialists Earthport. His article here follows Earthport’s Head of Compliance Andrew H. Brown’s white paper ‘International Payments Compliance in Support of Globalisation.’ The full paper is available online now.

Earthport

Earthport provide a cost-effective and transparent service for secure international payments. Benefiting from Earthport’s innovative payments framework, that is specifically designed for high volumes of low value cross-border payments, their clients include banks, money transfer organisations, payment aggregators, e-commerce and foreign exchange businesses. Through a well-established payments infrastructure, clients can clear and settle payments directly to banked beneficiaries in over 50 countries.

As Earthport’s Head of Compliance since 2012, Andrew H. Brown provides leadership, direction and oversight across all financial crime and regulatory compliance issues including Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF), Anti-Bribery and Corruption (ABC), data protection and fraud.