What is a Cover Payment?
A term used to describe a payment made from one bank
to another using a correspondent bank as an
Payment is generated where the two ultimate banks
involved in a transfer do not have a direct banking
relationship and the need to use intermediaries to settle
payments between them arise.
Funds Transfer 101
How are Cover Payments Delivered?
SWIFT (Society for Worldwide International Financial
Telecommunications) provides the standard message
formats employed by banks. The global daily volume of
payments is significant with over ten million messages
Cover payments account for a large percentage of
payments sent via the system due to efficiency, high
automation and cost considerations.
Specific SWIFT Message Types Employed
MT103: Direct payment order to the Beneficiary’s Bank linked with a SWIFT code.
MT202: Bank to Bank Order to Intermediary Bank(s) to cover the Originator’s
Bank’s obligation to pay the Beneficiary’s Bank (Second Funds Transfer).
MT202 is also used for Bank-to-Bank payments which account for the
bulk of this message type making Cover Payments difficult to detect.
Why use cover payments?
• Cover Payments are batched for economic reasons
and help to manage the fee deduction process.
• Automated payment using SWIFT standards allow for
low cost and streamlined operating environments.
• Encourages reciprocity by gaining various types of
other cash management business opportunities.
• Reduces overall cost and timing of commercial
transactions for clearing banks.
Life of a Cover Payment
Instruction MT103 Payment Credit
Originator’s Bank Beneficiary’s Bank Beneficiary
(Austria) (Hong Kong) (Hong Kong)
Cover Payment Advice of Credit
Book Transfer or CHIPS/FED Payment
Intermediary Bank Originator’s Bank Intermediary Bank Beneficiary’s Bank
(New York) (New York)
• Responsibilities of an Originating Bank
• Obligations of an Intermediary Bank
• Due Diligence Requirements of a Beneficiary Bank
• Transaction Monitoring
• Travel Rule
• Suspicious Activity Report
• Complete beneficiary and originator details are not
• Information disclosed is insufficient to allow banks to
identify payments from sanctioned countries and/or
• Difficulty in deciphering between transactions due to
customer activity versus bank to bank settlement.
• Institutions actively seeking information via “Request
for Information” emails after the fact spend a
significant amount of time and money creating
backlogs and a decrease in compliance productivity.
Short Term Solutions
• Continued use of watch lists and risk scoring of
jurisdictions to help manage and explore the false
• Provide updated client training on payment
Wolfsburg/Clearing House Association:
April 2007 – issued statement endorsing measures to
enhance the transparency of international wires to
promote effective monitoring. Primary measures focus
on the global adoption of basic messaging principles.
Industry pressure to adopt an enhanced MT202. A new
MT20X formatted to require maximum transparency of
the originator and beneficiary information based on
populated required and optional (if available) fields.
• Loop holes for cover payment use continue to be
• Banks continue to monitor payment types MT202 and
MT103 separately and cite possible overlap.
• Industry response is strong and changes are
coming….possibly 4th Quarter 2008 through 2009.
Long Term Solutions
• Develop a system which will automatically map the
MT202 payments to the respective confirmation
message (such as the MT103 prior) as part of the
firms alert detection application.
• Continued feedback from SWIFT regarding the
development of new standards which will provide more
transparency in the information flow.
• Regulatory commitment required globally in
conjunction with SWIFT advances.
• Impact of system changes required would be
significant but the offset would be a decrease in
compliance staffing and costs.
• Enhanced scrutiny may result in less “straight through”
processing allowing for delays or possible non-
payments. Impact on funds cycle would need to be