UK: Changing The Payments Landscape - Increasing Transparency Through The New SWIFT Message Type For Cover Payments

Regulators around the globe are concerned that the usage of cover payments in their present form can expose banks to fraudulent or terrorist financing related activities.

The European Parliament approved regulation to implement the FATF Special Recommendation VII to aid payment transparency, which came into force on the 1 January 2007. The regulation required that comprehensive details of the originator of funds should be included in the payment messages to facilitate the tracing of funds and, consequently, the detection of money laundering and terrorist financing.

The current SWIFT message protocol for cover payments (the SWIFT "MT202") does not support an appropriate level of transparency as it does not contain the necessary underlying customer information to allow intermediary banks to assess whether payments contravene jurisdictional regulations.

As a result, the Wolfsberg Group and the Clearing House Association of New York developed a proposal to create a new SWIFT message format, the 'MT202 COV', for third-party cover payments that enabled information on the originator and the beneficiary to be included.

This new variation of the MT202 will be introduced in the SWIFT's Standard Release on the 21 November 2009. The MT202 COV will contain mandatory fields regarding underlying customer credit transfer (e.g. Ordering Customer (50a), Receiver's Correspondent (54a), and Beneficiary Customer (59a)).

The MT202 COV will be the only SWIFT message that banks will be able to send for fund transfer instructions for cover payments. The current message type MT202, will remain unchanged but will only be used for transactions which do not require the cover method.

As a result of the new message standard, banks will need to update their IT infrastructure to be able to receive and send MT202 COV messages.

It will be important to maintain STP rates and ensure that payments completed are in line with transparency requirements. It is envisaged that the MT202 COV could lead to a delay in payments of up to one day. The entire process of issuing cover payment will have to be reviewed and banks that act as intermediaries will have to construct new workflows for the processing of MT202 COV messages. Training for banks' operational and compliance teams will be required for the usage and implementation of the new payment messages. In addition, compliance teams will have to update their monitoring procedures to ensure that all originator and beneficiary information remains unchanged during transmission. Screening processes must also be rigorous to ensure messages are not stopped and reported by other institutions further down the payment chain.

The penalties for failing to comply with the new transparency requirements may be significant. Banks must ensure they are seen as acting responsibly and adhering to high standards of corporate governance, or potentially face high fines, reputation damage and negative publicity.

Preparing For The New Standard

There are numerous areas to be considered in advance of implementation of the new standards. Some questions you may like to consider include:

  • Have you reviewed all your business areas and determined the impact of the November 2009 SWIFT Standards Release? We can help you to review and assess cover payments within all business areas to determine the impact and scope of the required changes, increasing assurance that the new standards are implemented effectively with minimal disruption to business operations.
  • Will you be able to issue and receive MT202 COV payments by November 2009? As a third-party cover bank, will you be able to forward all the payments without making changes to messages that may violate regulation? Will you be able to update your end-to-end automated process with the new fields contained in the MT202 COV?

    Deloitte has strong expertise in improvement of payment processes and systems. We can help to improve the information flows and identify risks within your payment processes where the new standards may not be adhered to. We can also help define the information that must be made available to intermediary banks for processing of the cover payments.
  • Have You Assessed The Impact On Operations?

    Deloitte can assist you to decide which mechanisms should be used to ensure that complete and accurate information has been included in the messages. We can assess your operational workflows to guard against the risk of sender or beneficiary information being modified or not checked to the appropriate standards to ensure full transparency.
  • And On Sanctions Screening Operations?

    The increased information in an MT202 COV means the intermediary banks are likely to have more alerts to investigate, which impacts processing times. Deloitte can help you assess your alerts management process to ensure operations teams can deal with the increased volumes. We can also look at optimising existing screening technology to reduce the number of false positives.
  • How sure are you that your screening solution is adequate? If your screening solution is not adequate you may process an MT202 COV that is stopped and reported by another institution in the chain. A regulator would then be able to identify that you processed that message. Deloitte can help assess your screening solution and benchmark it against our industry experience.
  • Is your training programme adequate? We can also help review your training procedures for your operational teams to ensure that your procedures are well embedded to reduce the risk of non-compliance with the regulations.

Why Deloitte

We leverage the multi-disciplinary skills of the entire Deloitte organisation to provide an unparalleled breadth and depth of expertise, ensuring you receive the best advice on all aspects of payments.

Deloitte has a dedicated team for payments and has worked with many of the UK's leading payment service providers, banks and other financial institutions to help them assess and improve their payments processes and controls.

Our experience is wide-ranging, including sanctions, risk assessment, testing, remediation, business analysis and project management, as well as assessment of compliance with the SWIFT requirement, new FATF initiatives, and other legal and regulatory requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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