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INTERNATIONAL PAYMENTS COMPLIANCE: SEEKING CERTAINTY AMID COMPLEXITY

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Neil Burton

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

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.

Finance

Bank of England’s Haldane says inflation “tiger” is prowling

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Bank of England's Haldane says inflation "tiger" is prowling 1

By Andy Bruce and David Milliken

LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.

In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.

“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”

Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.

“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.

He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.

Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.

Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.

But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.

Haldane’s comments put him at the most hawkish end among the nine members of the MPC.

Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.

“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.

(Editing by Larry King and John Stonestreet)

 

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Bitcoin slumps 6%, heads for worst week since March

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Bitcoin slumps 6%, heads for worst week since March 2

By Ritvik Carvalho

LONDON (Reuters) – Bitcoin fell over 6% on Friday to its lowest in two weeks as a rout in global bond markets sent yields flying and sparked a sell-off in riskier assets.

The world’s biggest cryptocurrency slumped as low as $44,451 before recovering most of its losses. It was last trading down 1.2% at $46,525, on course for a drop of almost 20% this week, which would be its heaviest weekly loss since March last year.

The sell-off echoed that in equity markets, where European stocks tumbled as much as 1.5%, with concerns over lofty valuations also hammering demand. Asian stocks fell by the most in nine months.

“When flight to safety mode is on, it is the riskier investments that get pulled first,” Denis Vinokourov of London-based cryptocurrency exchange BeQuant wrote in a note.

Bitcoin has risen about 60% from the start of the year, hitting an all-time high of $58,354 this month as mainstream companies such as Tesla Inc and Mastercard Inc embraced cryptocurrencies.

Its stunning gains in recent months have led to concerns from investment banks over sky-high valuations and calls from governments and financial regulators for tighter regulation.

(Reporting by Ritvik Carvalho; additional reporting by Tom Wilson; editing by Dhara Ranasinghe, Karin Strohecker, William Maclean)

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Britain sets out blueprint to keep fintech ‘crown’ after Brexit

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Britain sets out blueprint to keep fintech 'crown' after Brexit 3

By Huw Jones

LONDON (Reuters) – Brexit, COVID-19 and overseas competition are challenging fintech’s future, and Britain should act to stay competitive for the sector, a government-backed review said on Friday.

Britain’s departure from the European Union has cut the sector’s access to the world’s biggest single market, making the UK less attractive for fintechs wanting to expand cross-border.

The review headed by Ron Kalifa, former CEO of payments fintech Worldpay, sets out a “strategy and delivery model” that includes a new billion pound start-up fund and fast-tracking work visas for hiring the best talent globally.

“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.

Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.

“This review will make an important contribution to our plan to retain the UK’s fintech crown,” finance minister Rishi Sunak said, adding the government will respond in due course.

The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance all mean the sector’s future in Britain is not assured.

Britain increasingly needs to represent itself as a strong fintech scale-up destination as well as one for start-ups, it added.

The review recommends more flexible listing rules for fintechs to catch up with New York.

“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.

The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).

“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.

Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.

“It’s a question of knowing who to call when there’s a problem,” Swinburne said.

($1 = 0.7064 pounds)

(Reporting by Huw Jones; editing by Hugh Lawson and Jason Neely)

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