Ifsa Presentation Feb2008


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Sample Presentation at IFSA Conference in Washington, DC

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Ifsa Presentation Feb2008

  1. 1. Vicky W. Lee
  2. 2. What is a Cover Payment? A term used to describe a payment made from one bank to another using a correspondent bank as an intermediary. 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.
  3. 3. 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 per day. Cover payments account for a large percentage of payments sent via the system due to efficiency, high automation and cost considerations.
  4. 4. 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.
  5. 5. What’s in the message?
  6. 6. 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.
  7. 7. Life of a Cover Payment Instruction MT103 Payment Credit Instruction Originator’s Bank Beneficiary’s Bank Beneficiary Originator (Austria) (Hong Kong) (Hong Kong) (Austria) MT202 MT910 Cover Payment Advice of Credit Book Transfer or CHIPS/FED Payment (MT202) Intermediary Bank Originator’s Bank Intermediary Bank Beneficiary’s Bank (New York) (New York)
  8. 8. BSA Guidelines • Responsibilities of an Originating Bank • Obligations of an Intermediary Bank • Due Diligence Requirements of a Beneficiary Bank • Transaction Monitoring • Travel Rule • Suspicious Activity Report
  9. 9. Monitoring Issues • Complete beneficiary and originator details are not required. • Information disclosed is insufficient to allow banks to identify payments from sanctioned countries and/or entities. • 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.
  10. 10. Short Term Solutions • Continued use of watch lists and risk scoring of jurisdictions to help manage and explore the false positives. • Provide updated client training on payment instructions.
  11. 11. Industry Response 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. SWIFT Response: 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.
  12. 12. Industry Environment Challenges: • Loop holes for cover payment use continue to be exploited. • Banks continue to monitor payment types MT202 and MT103 separately and cite possible overlap. Benefits: • Industry response is strong and changes are coming….possibly 4th Quarter 2008 through 2009.
  13. 13. 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.
  14. 14. Recommendations/Implications • 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 considered.
  15. 15. ….Continued Surveillance