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Financial Crime Risks in Correspondent Banking: Accelerating Compliance with ISO 20022
Date:May 24, 2024
In part one and two of this series, we explored the fundamental challenges and risks that Correspondent Banks face in the FinCrime landscape, and we dived into some use cases demonstrating the power of technology systems. In this final part of the series, we will be looking at how ISO20022 payments standards can support Correspondent banking FinCrime requirements.
The FATF Recommendation 16 on Wire Transfers[1] states that Correspondent banks as intermediaries should monitor the payment messages transmitted by the respondent bank for the purpose of detecting those which lack required originator and/or beneficiary information.
Although this is an FATF recommendation, and an expectation from regulators, payments and wire transfer monitoring remain challenging for CB. We see several issues related to payments data: from a business standpoint, clients expect fast payments, so holding transactions whilst ensuring there are no regulatory breaches is costly[2]. Secondly, the lack of insight into the business purpose of transactions is both a risk from a compliance perspective and impedes the ability to offer more tailored and value-added services to respondent clients.
The role of ISO 20022
This is where the ISO 20022 payment messaging standards come into play, introducing a single “common language” for all financial communications, and aiming to replace the unstructured data that is often incomplete or inaccurate in MT messages used for CB transactions. ISO 20022 will fully replace MT messages by November 2025 for cross-border payments.
ISO 20022 provides message formats, structured data model and API resources, to connect it to existing core banking systems, available through the complete end-to-end payment chain (clearing and settlement, cash management etc.) to feed data to FinCrime Compliance technology seamlessly.
Key Benefits
Although leveraging ISO20022 to support FinCrime Operations as a whole is a long-term endeavour, we see several key benefits to support CB Compliance:
- Sanctions Screenings: facilitates screening of sanctioned entities, individuals or jurisdictions, as structured data fields provide contextual data, removing ambiguities such as “Cuba” in a restaurant name in Florida or “Tehran” in a street name in Paris, reducing false positive cases.
- Transaction Monitoring: Structured data also gives a better view of counterparties, payment initiators and beneficiaries across the end-to-end payment flows to enable pattern identification, quicker investigation and provide extensive risk coverage.
- Customer Experience: Fewer payments held for compliance checks means that they can be cleared faster. More complete payment data will allow banks to identify fraudulent payments faster and recover funds more efficiently.
- KYC/KYB Processes: Better quality payment data can feed into perpetual KYC/KYB processes to inform on material events that would require changing the risks associated with a respondent relationship, reviewing documentation and/or performing EDD, or supporting off-boarding decisions.
- Business Insight: Better access to payments behaviours and economic purpose of transactions can generate enhanced business insight by feeding into machine learning engines, enabling both business growth opportunities and money laundering detection.
ISO 20022 adoption
To fully adopt ISO 20022 as a payment standard, it is therefore required to engage not only the business and back-office Payment teams, but the Technology and Compliance functions should also be involved as key stakeholders in the change process, gaining a full understanding of the impact of the change, along with training and communications. The Data Office will also be key, as removing data silos and adopting strong data management programmes is essential to ensure structured data is available to generate and receive ISO 20022 payment messages.
We can help addressing your Correspondent Banking challenges.
The complexity of the services provided on cross-border transactions and the lack of knowledge of the end beneficiaries of these services present additional FinCrime risks for FI’s acting as Correspondent Banks, which are increased by the uncertainty in the current global environment, with higher emphasis from regulatory bodies on sanctions, PEP monitoring, fraud and corruption prevention, all of which comes at a cost.
Our dedicated Risk and Compliance Practice provides comprehensive FinCrime Risk Advisory, Regulatory Horizon scanning and rules interpretation, allowing to fully embed CB activities into an efficient FinCrime Compliance framework.
The seamless integration of our Data Practice’s expertise in Data Management and Analytics, with our Transformation methodologies – from Target Operating Model design, Agile Implementation of digital solutions, to Best in class Business Adoption approach – ensures that digital transformation programmes involve all three Lines of Defence, together with Middle and Back Office, to integrate payments insights, and Chief Data Officer to ensure quality of input.
Finally, our Payment Practice experts will help you Harnessing the power of structured payments data through ISO 20022, to feed into technologies tailored to specific CB business requirements, is key to preventing backlogs, delays in transaction processing and ensure alignment with demanding regulatory requirements.
Want to know more?
Do you have questions about Correspondent Banking regulatory requirements within your organisation, or could use some help reviewing existing FinCrime framework?
[1] See FATF International Standards on combating Money Laundering and the financing of Terrorism and proliferation
[2] According to SWIFT, 10% of global payments are held up along their journey for all compliance purpose : ISO 20022: Better Data Means Better Payment – Why Correspondent Banking needs ISO20022 now
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