The world is moving to real-time or near-real-time payments. The G20 established a Roadmap for enhancing cross-border payments in November of 2020. The roadmap aims to reduce costs and increase cross-border payments’ speed, access, and transparency. The speed target is to have 75% of all payments, including wholesale, retail, and person-to-person, settled within 1 hour and the remainder settled within one day by 2027. Some cross-border payment infrastructure providers, like the Bank for International Settlements (BIS), are moving to instant payments for certain currencies and jurisdictions like the Euro in the EU and EEA.
From a Financial Crime Compliance (FCC) perspective, reducing the time between when a payment is instructed and settled reduces the opportunity for the intermediaries to analyze the payment before the funds are gone. The Future of Financial Intelligence Sharing (FFIS) research program recently released a discussion paper highlighting the economic crime issues with the G20 roadmap. The paper highlights that in the current financial crime compliance framework, elements, including transaction screening and recall of fraudulent payments, rely on the time gap to meet their current regulatory obligations to ensure their infrastructure is not being exploited by criminal actors.
The paper also highlights the established connection between faster payments and financial crime, as demonstrated by several recent programs in multiple countries. A report by the Aite-Novarica Group found a significant increase in mule activity, account takeovers, and authorized push payment fraud reported by financial institutions in India, the UK, Malaysia, and Australia after introducing newer and faster payment capabilities. The Brazillian police have attributed a 40% increase in kidnappings directly to the roll-out of their Pix digital payments initiative.
How do we reconcile the laudable goal of making payments faster and cheaper with the need to prevent financial crime?
One approach is to emphasize entity screening as an independent ongoing activity outside the transaction flow. The challenge with this approach is that sanctions information is complicated and always changing as jurisdictions impose new sanctions or revise existing sanctions as part of their ongoing policy process. The current practice of re-verifying an entity that is not on a list before releasing the payment provides an additional layer of protection.
Other approaches include allowing entities to ‘opt-in’ to a slower network that provides additional screening and introducing a forced lag on any first-time payments, as many financial crime scenarios are tied to the first payment of a new entity.
New technologies that leverage advanced analytics and take advantage of faster processing power can help, but policymakers need to establish a process to balance the risk vs reward as we move to an all-digital payments regime.
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