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Volume 18 (2024)
Each volume of Journal of Payments Strategy & Systems consists of four 100-page issues, published both in print and online.
The Articles published in Volume 18 include:
Volume 18 Number 1
Special Issue: Compliance in the payments industry
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Editorial
Gerard Hartsink, Editor -
Special Issue Practice Papers
Speed at the expense of safety? Economic crime security concerns in the implementation of the G20 Roadmap for Enhancing Cross-border Payments
Nick J. Maxwell, Head of the Future of Financial Intelligence Sharing research programme, Centre for Financial Crime and Security
This paper argues that, in its current form, the G20 Roadmap for Enhancing Cross-border Payments raises substantial risks for fraud and financial crime, and is highly likely to reduce the effectiveness of the financial sanctions regime. Furthermore, it holds that there is a fundamental disconnect between those G20 policy makers responsible for payment system reform and those authorities responsible for fraud prevention and tackling financial crime. This disconnect is leading to imbalanced policy-making that risks embedding fraud and financial crime vulnerabilities within cross-border payment systems. This paper argues that G20 policy makers need to ensure that payments reform does not create new economic crime vulnerabilities or undermine existing defences against fraud and financial crime. This should involve: (1) greater coordination and a sense of shared responsibility between payments and economic crime-related policy makers, internationally and at the domestic level; (2) the establishment of a policy principle of ‘economic crime security by design’ in payments reform policy; and (3) the deployment of a risk-based approach in faster cross-border payments that would enable customers to opt into safer corridors for payments, allowing for appropriate analysis, screening and the recall of payments where appropriate from a risk perspective.
Keywords: fraud; financial crime; sanctions; anti money-laundering; G20; cross-border payments; legal standards; ISO 20022; Financial Action Task Force; Bank for International Settlements; Committee on Payments Market Infrastructures; Financial Stability Board -
Compliance requirements in the future EU Anti-Money Laundering and Countering the Financing of Terrorism Framework
Roger Kaiser, Head of Tax and Compliance, European Banking Federation
As gatekeepers of the financial system, financial institutions and payment service providers play a pivotal role in detecting suspicious activities and transactions. Recognising the inefficiencies and ineffectiveness of the current EU Framework for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT), in 2021 the European Commission issued a package to address these issues and improve the framework. This package is very likely to be adopted by the EU co-legislators in Q1 2024. It encompasses four legislative instruments: (1) the proposed AML/CFT Regulation will harmonise the rules and obligations for the private sector (COM/2021/420 final); (2) the proposed AML/CFT Directive will harmonise tasks and powers of public authorities (COM/2021/423 final replacing the existing Directive 2015/849/ EU); (3) the proposed AML Authority Regulation will establish the Authority for Anti-Money Laundering and Countering the Financing of Terrorism, amending Regulations (EU) No. 1093/2010, (EU) 1094/2010, (EU) 1095/2010 COM/2021/421 final); and (4) a proposal to recast the Fund Transfer Regulation to trace the transfer of crypto-assets (COM/2021/422 final reviewing Regulation 2015/847/EU). This paper will describe each of these legal instruments, with a focus on the AML/CFT Regulation, which provides financial institutions and payment service providers with a new ‘AML Rulebook’.
Keywords: compliance; payments; anti-money laundering; financing of terrorism; AML/CFT framework; regulation; directive; EU; financial system -
Know your customer: Unravelling the challenges
Hans-Joachim von Haenisch, Director, Von Haenisch Consulting Ltd and Thomas Egner, Secretary General, Euro Banking Association
Regulated financial institutions must conduct regular know-your-customer (KYC) reviews on corporate clients to prevent money laundering and the financing of terrorism. However, national add-on requirements and regulatory discrepancies challenge the vision of a unified Europe, hindering the creation of an efficient, digital and hence scalable pan-European anti-money laundering (AML) process for all stakeholders who are active beyond their national borders. The current inability of banks to introduce efficient but robust pan- European KYC processes delays customers’ access to finance and other banking products, and indirectly impedes the free movement of goods, services and capital. The European Commission plans to introduce the Anti-Money Laundering Regulation (AMLR) to harmonise and strengthen the EU AML framework. This could reduce national divergences, allowing for a level playing field across the internal market and consistent application of provisions throughout the EU. Unfortunately, harmonised regulation alone does not solve the current issues faced by financial institutions. While a harmonised rulebook provides certainty related to ‘what’ needs to be done, significant pan-European discrepancies remain related to ‘how’ the requirements can be fulfilled. For example, the EU has directed all member states to establish commercial and beneficial ownership registers, but left the design of such registers under the authority of the member state. Consequently, banks active on a pan-European level have to adjust their processes based on the type and content of the national register. Also, the definition of what constitutes a politically exposed person (PEP) varies significantly across the EU, as do the enhanced due diligence requirements which are triggered upon the identification of such a PEP. This paper provides suggestions on how EU member states can help the financial industry in a joint effort to prevent money laundering and combat the financing of terrorism more effectively. The objective of this discussion is to create a streamlined and unified approach to KYC processes across Europe.
Keywords: know-your-customer; KYC; ultimate beneficial owner; politically exposed person; anti-money laundering; AML; Anti-Money Laundering Regulation; European business registers; financial crime compliance; harmonisation of regulations -
Leveraging the Legal Entity Identifier to mitigate the risk of financial crime and enhance fraud prevention in cross-border payments
Clare Rowley, Head of Business Operations, Global Legal Entity Identifier Foundation
While today’s global digital economy promises a new era of commerce, its sheer complexity also presents opportunities for malicious actors to perpetrate money laundering, terrorism financing, and other forms of financial crime. Despite the escalating compliance costs faced by financial institutions needing to meet increasingly rigorous anti-money laundering (AML), counter-terrorist financing (CTF) and sanction screening obligations, the lack of harmonisation within cross-border data flows inhibits the identification of suspicious actors and exposure of criminal networks. This contributes to a cross-border payments ecosystem that can be broadly characterised by limited trust, high costs, low speed and insufficient transparency. This is leading to increasing industry recognition of the need to promote unified, data-driven approaches to combating financial crime globally. In view of this growing consensus, the Legal Entity Identifier (LEI) is emerging as a key enabler. This paper examines the drivers of this consensus by: (1) detailing findings from key industry organisations, such as the Bank for International Settlements (BIS) and Financial Action Task Force (FATF), outlining the need to increase data quality and standardisation of the data identifiers used within cross-border payment messages to counter complex global criminal enterprises; (2) outlining regulatory and industry momentum to leverage the unique benefits of the LEI within cross-border payment messages, to include an analysis of the implications and opportunities of ongoing initiatives to enhance payment market infrastructures; and (3) demonstrating how, by addressing inconsistencies in how legal entities are identified, connecting a greater range of datasets, and capturing entity relationships and ownership structures, the LEI mitigates AML–CFT risks, enhances fraud prevention, and supports more efficient sanction screening in cross-border payments. This is supported by examples of real-world industry initiatives.
Keywords: cross-border payments; digital identity; financial crime; FSB cross-border roadmap; FATF principles; fraud management; AML–CFT management; counterparty risk management; management of sanction risks -
Transaction Monitoring Netherlands: Fighting financial crime through data collaboration and advanced analytics
Norbert Siegers, Chief Executive Officer, Transactie Monitoring Nederland
This paper discusses the experience of Transactie Monitoring Nederland (TMNL) — a collaboration between ABN AMRO, ING, Rabobank, Triodos Bank and De Volksbank, established in July 2020 to enhance financial security and compliance within the Dutch financial sector. The paper explores TMNL’s impact, the key lessons learned from its implementation and operation, best practices and its potential future role in safeguarding the integrity of the financial sector. As the paper explains, there is a growing consensus that more can be done to strengthen the framework for fighting financial crime through public–private partnerships and increased data/information sharing. To this end, TMNL works to identify potentially unusual transaction patterns that are not visible to individual banks in isolation, underscoring the significance of collaboration and information sharing among financial institutions (and with other key players in the prevention ecosystem), and developing a united front against financial crime. The paper calls for the integration of artificial intelligence and machine learning in identifying complex patterns and anomalies in transaction data and emphasises the need for this to happen in a secure, sustained and viable fashion. It also underscores the ongoing need for regulatory adaptability, arguing that as financial crimes evolve, regulatory frameworks must be dynamic to address emerging challenges effectively. In conclusion, the paper provides valuable insights into the successful implementation of collaborative compliance efforts and the continuous adaptations required to combat financial crime.
Keywords: Transaction Monitoring Netherlands; TMNL; financial crime; money laundering; payments; banks; risk management; terrorist financing -
A pan-European fraud taxonomy: Do you speak fraud?
Annick Moes, Head of Industry Issues, Cooperation Initiatives and Communications, Euro Banking Association and Meral Ruesing, Communications Expert, Euro Banking Association
Understanding the myriad activities of fraudsters, and finding effective measures to rapidly counteract them, continues to be a vexing problem for payment service providers (PSPs) — a challenge that is being intensified by the move to a 24/7/365 and real-time payments environment. To strengthen the fraud detection and prevention tools available to PSPs, there are growing efforts within the industry to create a pan-European ecosystem for sharing fraud data and intelligence, facilitated by regulatory and legislative developments. To ensure that the benefits of these new tools can be fully reaped, this paper argues that there is a need for PSPs to get their own houses in order by harmonising the fragmented fraud terminologies and internal reporting requirements in practice today. By leveraging the Euro Banking Association (EBA) Fraud Taxonomy — a common pan-European vocabulary for fraud categorisation — PSPs can ensure their data are not just comparable across the European ecosystem, but also granular and actionable. This paper contends that the move to this pan-European fraud taxonomy will serve as a foundational step in the introduction of fraud data sharing solutions.
Keywords: fraud taxonomy; fraud combating; instant payments; data sharing; IBAN-name check; GDPR; PSD2 review -
The imperative of building and fostering a strong compliance culture in the evolving cross-border payments space
Michele M. Fleming, New York State Licensed Attorney
It is a period of substantial change for the ever-growing cross-border payments space, with numerous new trends emerging, along with new technologies, new market entrants and participants, and unprecedented regulatory collaboration around the G20 Roadmap for Enhancing Cross-border Payments. This paper discusses the drivers for the changes underway, explains the continued context of elevated compliance risks in the cross-border payments space, and calls for the entire ecosystem, including banks, service providers, new entrants and regulators, to focus on building and fostering a strong culture of compliance. This imperative is even more critical for new entrants who may not be subject to the same level of stringency within their current applicable regulatory regime and who may believe that this gives them more flexibility than other service providers. Building and fostering such a culture of compliance will have numerous benefits, including the reduction of crime. This paper argues that the universal commitment to such a culture of compliance among all parties involved in the ecosystem must begin with the adoption of an inquisitive compliance mindset, that is, a mindset that acknowledges the critical importance of compliance requirements, the rationale for their adoption and a willingness to ask questions and get detailed responses on an ongoing basis. Such a dynamic understanding would facilitate any future changes required by evolving regulations.
Keywords: cross-border payments; compliance requirements; compliance culture; inquisitive compliance mindset; new entrants; criminals; regulators -
A model of decentralised oversight for the digital asset industry with an example anti-money laundering/know-your-customer standard
Ben Van Vliet, Director, Center for Strategic Finance, Illinois Institute of Technology
The financial industry makes wide use of data standards for both subjects — people and firms — and objects — digital assets and messages. Having the correct data is critical for achieving operational and compliance goals. Rarely employed, however, are management standards that define the obligations of subjects. In traditional finance, the need for such standards is supplanted by compliance with rules-based regulations. Decentralised finance presents a new paradigm that is not necessarily optimally overseen in the traditional way. This paper explores the potential usefulness of industry-defined ISO management standards for decentralised oversight of the digital asset industry. ISO standards are known to promote the diffusion of norm-driven practices and responsible innovation, and to potentially reduce costs and facilitate global trade. The paper includes a simple, theoretical model to verify a firm’s adherence to such standards as a way to establish trust when needed. The appendix presents an example management standard for anti-money laundering/ know-your-customer procedures, which defines obligations with respect to customer onboarding and transaction monitoring, similar to traditional banking regulations, as well as the travel rule. It follows the structure and style of ISO 27001. Firms could potentially be audited against such a standard (potentially alongside others) as a way of signalling their trustworthiness.
Keywords: decentralised finance; cryptocurrencies; regulation; anti-money laundering; trustworthiness; virtual asset service providers; ISO standards -
Payments Practice Paper
Instant payments: Providing the rails for new payment solutions
Niels M. Pranger, Policy adviser, Dutch Payments Association
In November 2023, European legislators reached an agreement on legislation to increase adoption of instant payments. Instant payments enable consumers and corporates to make transactions in real time and 24/7. These unique features allow for value-added services such as e-commerce and point-of-sale payment solutions that can compete with card payments. Through a discussion of a number of successful payment solutions built on instant payments, this paper explains how instant payments could help Europe in its quest to develop a homegrown payment solution. The analysis starts with a discussion of Brazil’s Pix and India’s Unified Payments Interface, providing interesting insights into the possibilities of instant payments. The paper then moves on to a description of the European Payments Initiative — the consortium of European banks that recently acquired iDEAL, the Dutch accountto- account e-commerce payment solution. The paper also shows how Swish — the Swedish payment solution — provides valuable lessons to Europe as regards the launch of a payment solution, notably with respect to the importance of realising network effects.
Keywords: instant payments; pan- European payment solution; payments soreveignty; European Payments Initiative; Pix; UPI; Swish