In our increasingly globalised and digital world, the ability to make payments at high speed and low cost is widespread, especially within national borders. Cross-border payments, however, are another matter. Speed, cost, access and transparency are all issues that the G20 and the Financial Stability Board (FSB) have identified as causing significant friction in cross-border payments, which are anticipated to value as much as$250 trillion[1]by 2027.
As Victoria Cleland from the Bank ofEngland explained, “faster, cheaper, more transparent, and more inclusive cross-border payment services would have widespread benefits for citizens across the globe both directly and by supporting economic growth, international trade and global development.”[2]
Under the G20 Saudi Arabia presidency, in February 2020 enhancing cross-border payments was established as a key priority, and the Financial Stability Board (FSB) was tasked with coordinating global activities to “address challenges and frictions in existing cross-border payment systems and processes”[3].
Complexities in meeting compliance requirements, including for AML and CFT purposes, were identified as one of these seven underlying frictions[4]which contribute to the current challenges faced by cross-border payments. The ability to apply AML/CFT rules consistently and comprehensively is therefore one of the key building blocks of the G20’s roadmap for enhancing cross-border payments.
Charged with identifying the precise pain points associated with the divergence of AML/CFT standards, the FinancialAction Taskforce (FATF)surveyed financial industry participants across the globe, publishing the results in October 2021.
Key Findings from the FATF Survey
Consequences of divergent AML/CFT rules
By far the most significant consequence of differences in AML/CFT rules between jurisdictions was the impact on costs, with almost 66% of respondents citing this as either the ‘most significant’ or ‘significant’ challenge. Reducing the speed with which cross-border payments were made was the second most significant consequence, followed by access and lastly, transparency.
When it comes to cost and speed, the largest impacts are from technology system development, screening and monitoring and education. Being able to implement the differing AML/CFT requirements from multiple jurisdictions into a single surveillance solution is expensive, for example, and economies of scale are rarely realised due to the inability to centralise or streamline processes within financial groups. At the other end of the spectrum, manual processes and the increasing use of Requests for Information also add cost and can double the time it takes to process transactions.
There is huge variance in the customer on boarding and due diligence rules across jurisdictions, which not only increases cost but also delays the processing of transactions. Cross-border payments are also deemed to be high risk, necessitating sanctions screening which can lead to further delays as alerts are investigated.
In terms of access, the ‘gold plating’ ofFATF recommendations and inconsistency in how regulatory requirements are applied to different types of actors in the payment ecosystem can be exclusionary - either to different types of market participants or to customers if they are unable meet the more onerous conditions for customer identification documentation.
Finally, conflicts between AML/CTF frameworks and data protection legislation can impact the transparency of payments due to the restrictions on data sharing between jurisdictions, resulting in delays to screening and processing.
Key challenges caused by divergence
When it comes to where divergent national approaches are causing the biggest problems, survey respondents ranked the following six key areas in order of priority:
- Identifying and verifying customers and beneficial owners
- Targeted financial sanctions screening
- Sending and receiving customer / transaction information
- Establishing and maintaining correspondent banking relationships
- Transaction monitoring and filing suspicious transaction reports
- Onboarding and maintaining agents
Drivers of challenges
The survey also asked which were the key drivers of the challenges caused by the potential areas of divergence for each of these key areas. Drivers included:
● Conflicts of law
● Rules which exist in some jurisdictions but not others
● Rules which exist in all jurisdictions, but are interpreted or applied in different ways or to different extents
● Inconsistent supervisory approaches across jurisdictions
In the area where divergence has the greatest impact - identifying and verifying customers and beneficial owners -the first three drivers listed above were the main contributors to these challenges. For sanctions screening, the presence or absence of rules in some jurisdictions was a key driver whereas challenges in establishing and maintaining correspondent banking relationships was impacted more by differences in interpretation or application of rules in different jurisdictions.
In general, FAFT notes that the picture of challenges and what is driving them is complex, with close relationships between challenges in one area (e.g. identification and verification of customers and beneficial owners) and the consequences of this on other areas(e.g. sharing of customer information).
Spotlight on Correspondent Banking
The survey findings for correspondent banking are particularly interesting, given the essential role that correspondent banking relationships play in the global payment system and international trade. Establishing and maintaining correspondent banking relationships was the fourth largest area impacted by divergence in AML/CFT regulations.
Knowing your customers’ customer (KYCC)
FATF recommendations do require that banks perform normal customer due diligence on the respondent bank when establishing correspondent banking relationships. Correspondent banks also have to satisfy themselves that they understand the respondent bank’s business model, reputation and any supervisory issues relating to AML/CFT and conduct an assessment of the respondent bank’s AML/CFT controls. There is no requirement for correspondent banks to conduct due diligence on the respondent bank’s own customers.
Problems arise, however, when regulatory requirements about KYCC differ between jurisdictions. In cases where regulators are more stringent and demand KYCC under certain circumstances, compliance costs for correspondents increase, potentially leading to them pulling out of certain payment corridors altogether, further exacerbating the ongoing issue of de-risking.
Cumulative burden of EnhancedDue Diligence (EDD)
Divergence in national AML/CTF requirements is also a problem for EDD in correspondent banking relationships. When conducting assessments of respondents’ controls, correspondents have to take into account any difference between their own supervisor’s regulations and the framework governing the respondent bank’s jurisdiction. Escalating costs and delays are the inevitable fall out. In high risk jurisdictions where the EDD burden is already higher, respondent banks may be further limited in their access to cross-border payments.
The need for a common risk framework
It is clear from FATF’s work that the divergence in AML/CFT standards at a national level has a profound impact on the global cross-border payment system - increasing costs, reducing speed and limiting access and transparency. However, the survey is also very light on recommendations, with additional guidance or changes in standards likely to emerge further down the line.
In the case of correspondent banking, it is worth exploring non-regulatory solutions that could help to build trust in correspondent-respondent banking relationships that could go some way to solving the issues caused by divergent AML/CFT rules.
Consider the differences in regulatory expectations about KYCC. This is largely borne out of a perception that respondent banks do not themselves have adequate risk assessment and control mechanisms in place to perform the necessary standards of CDD.
If there was a common risk framework in place which could provide an objective and trusted assessment of the risk of a respondent bank, some of the burden placed on correspondent banks to go over and above their usual due diligence processes could be removed.
The Elucidate FinCrime Index (EFI) is such a mechanism, using hundreds of data points to automatically assess the financial crime risk of a financial institution and providing a set of benchmark measures which can be used on an ongoing basis to monitor progress towards improved financial crime risk management.
Correspondent banks can use the EFI to reassure themselves that their respondent banks were doing the right thing in terms of their own CDD and EDD processes. In turn, respondent banks can use theEFI to demonstrate their risk management capabilities and improvements overtime.
Trust in correspondent banking relationships can be augmented through the use of the EFI, hopefully overcoming some of the difficulties and challenges imposed by divergence in AML/CFT requirements and ultimately contributing to faster, cheaper, more accessible and transparent cross-border payments.
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[1] https://www.bcg.com/en-ch/publications/interactives/global-payments-interactive-edition
[2] Cleland, V (2020) Cross-borderPayments Innovating in a Changing World Bank of England (accessed December 2021)
[3] Financial Stability Board (2021)Work Programme for 2021
[4] Financial Stability Board (2020) EnhancingCross-border Payments - Stage 1 report to the G20,
