November 19, 2009

As the battle against money laundering and fraud heats up, SWIFT (Brussels) is preparing to introduce a new cover payment for credit transfers designed to increase transparency in how bank-to-bank payments are processed worldwide. But at least one expert cautions users to beware of potential snags, at least initially.

The organization will be introducing the MT 202 COV General Financial Institution Transfer as a General Use message, meaning there is no need to register with a Message User Group to use this cover payment type. According to SWIFT, the message contains a mandatory sequence to include information on an underlying customer credit transfer and has a maximum message length of 10,000 characters. It will be introduced on Nov. 21.

In general, reactions from global banks to the pending introduction of MT 202 COV have been favorable, says Steven Beattie, Anti-Money Laundering Services Leader in New York-based Ernst & Young's financial services practice. However, the proof will be in the pudding.

"We are hearing from a number of the world's largest banks there is broad-based acceptance of the proposal, as it addresses a universally recognized gap in global payment transparency," Beattie told BS&T. "While this appears to be the initial reaction, we believe the diversity of opinion will manifest itself in how companies address these new requirements, and what the technology, operational and compliance impacts will be within each impacted organization."

He says current expectations among the banks once the new messaging standard is rolled out range from increased message information, which is essentially "business as usual," to the other extreme wherein some fear there will be a mountain of new alerts that will need to be investigated and dispositioned.

"Unfortunately, we don't believe the impact will be fully understood until the new message is in place and it has the opportunity to settle in as a new, universally agreed upon and understood method to intervene on both AML and sanctioning issues," Beattie notes.

In other words, as with anything new, there will be a learning curve. "In most cases, the institutions won't have the full benefit of understanding what is considered 'normal' transaction activity, and judgments will need to be made in real time to facilitate an orderly global payment flow," Beattie explains. "The opportunity for error, the pressure to get it right, and future cases of non-compliance will be more common due to the potential for inconsistency in how this monitoring is performed. Inconsistency among organizations will also undoubtedly lead to certain compliance functions and organizations being viewed as laggards in fulfilling their risk mitigation responsibilities. This is a criticism that no one wishes to face in the highly visible court of regulatory and public opinion."

As for implementation costs, Beattie says there is potential for some expense but that the full depth and breadth of operational, compliance and technology implications are not yet understood.

"If you leverage appropriate technology tools for monitoring of suspicious activity and potential sanctions violations, there should be a positive impact," he comments. "Validating that you have fully implemented and tested the application of your matching technologies to new fields within new message types is critical. In addition, there will undoubtedly be an increase in false positives that will need to be investigated and dispositioned, both from the perspective of potential money laundering to near-hits on sanctions-related areas. We can expect an impact on the investigative workforce, the role of compliance in determining what is SAR eligible, and ultimately, potential impacts to the expediency of global payments should these processes not function as intended."

In light of all these unknowns, Beattie says it is crucial for banks to stay ahead of these needs and not to succumb to a backlog.

And so far, that's what many banks seem to be doing. He says Ernst & Young has seen an increase in requests from clients for "validating their technology solution effectiveness, enhancing data quality, optimizing their compliance strategies and assisting in the investigation of alerts and suspicious activity highlighted by the technology monitoring solutions."

However, when it comes down to it, Beattie says this step by SWIFT to rein in money laundering was a necessary one and should not be viewed by banks as yet another compliance burden with which to keep up.

"I do believe it was necessary, and an initial step towards increased transparency," he explains. "It can be viewed as a regulatory burden only if one is undertaking these steps to satisfy a regulatory point of view rather than addressing a clear gap in our ability to fully monitor both potential money laundering or sanction-related activities. The role of compliance, when overlaid with the ever-increasing responsibilities and accountabilities, will face an enormous burden as it relates to quality and completeness of work performed. These roles and responsibilities are already challenging, and functioning within an environment where monitoring requirements and related technologies are subject to change, requires ongoing vigilance."

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