What is payments beneficiary screening and why is this topic important?
Payments beneficiary screening is a control employed within Financial Institutions (FIs) to detect, manage, and prevent sanctions risk. Screening cross-border payments in real-time before processing a transaction is common, whereas screening purely domestic payments in real-time can be considered unnecessary for financial institutions that are subject to the same local regulatory requirements.
Unlike the payer, the payee can often be unknown to the originating FI and therefore hasn’t already been subject to its Anti-Money Laundering (AML) procedures. Consequently, payments screening is vital to ensuring the FI doesn’t do business with a sanctioned entity, and remains compliant.
Alerts generated by screening must be investigated further, and potential exposure to sanctions risks assessed, before reporting to the regulator. Making fast decisions is key as holding up genuine payments can lead to financial penalties, as well as customer dissatisfaction.
How does domestic screening differ from cross-border payments screening? And which area is harder to monitor?
Domestic payments involve any transactions that have taken place entirely within the country in question. Generally, in medium and large FIs, domestic payments do not go through the same screening because both the originating and receiving FIs are in the same jurisdiction, and are therefore bound by the same regulatory requirements when onboarding clients.
Cross-border payments, on the other hand, involve transactions between parties operating in at least two different countries. This process can also involve correspondent banking, where an agreement is held between a foreign and domestic bank and a correspondent account is established at one bank for the other. Correspondent banking typically involves the two banks establishing reciprocal accounts with each other, enabling the domestic bank to make payments or money transfers on behalf of the foreign bank so they can handle international financial transactions for customers.
The main difference, in terms of screening, is that cross-border pay ments are unquestionably screened more for risk and there is more rigour around the monitoring of these types of payments. This is largely due to many global organisations trading in the US dollar and being bound to follow the stringent requirements and jurisdictional reach of the Office of Foreign Assets Control (OFAC).
These payments are harder to monitor because FIs have to deal with cross-border regulations outside of their legal framework. This difficulty especially comes to the fore in the global banking space, where correspondent banking is at play in the majority of cases. A large proportion of the payments banks are processing don’t just involve their customers, meaning limited information is available to determine if a sanctions risk is present within the payment.
What happens if payment providers fail to comply with payments screening regulations? What are the consequences?
If the payee or payer is on a sanctions list, the FI must notify the regulator. Failure to do so carries a real risk of regulatory action, often leading to large fines and associated reputational damage, as we have seen to be the case for global banks recently.
Institutions that have failed to comply can also be subject to lengthy monitorships. Monitors are independent experts who, at a company’s expense, review its culture, systems, and processes before recommending improvements and validating their implementation. In the most severe cases, these can lead to a bank losing its licence to trade in certain currencies and can be in place for several years. Even after a court has lifted the monitorship, the bank can be audited at any time and must always adhere to what the auditor expects.
Dealing with a compliance breach drains resources and can make it difficult to attract and retain top talent, leaving payment providers at risk of falling behind in innovation.
At the same time, payment service providers and financial institutions cannot afford to compromise on customer service.
How can technology help payments providers tackle the challenges mentioned above while boosting UX?
Performing additional due diligence on alerts generated from sanctions screening poses a significant challenge for FIs. Sourcing and gathering required data from multiple sources is often a manual and error-strewn process, with the added pressure of needing to report to the regulator in a timely fashion.
Technology assists in speeding up processes, particularly around identifying and unwrapping Ultimate Beneficial Ownership (UBO) and ownership structures - especially those that are very complex.
Hiding criminal and corrupt activities behind complex corporate structures is not a new tactic; however, unwrapping the simplest of structures to discover beneficial ownership and control remains a time-consuming challenge when done manually. With pre-existing integrations to critical sources of company data – from national corporate registers to sanctions lists and premium data providers – Encompass automates the KYC discovery process to provide the full picture of a corporate customer, fast.
As a result, an analyst has all of the information they need to decide if an entity is a risk and they need to hold payment. This allows them to focus on areas that benefit most from manual intervention, and decisions being reached quicker means a more effective process for all.
This editorial was first published in our Financial Crime and Fraud Report 2021 - How to Fight Fraud and Master KYC, Onboarding & Digital ID, which provides a comprehensive overview of the major trends driving growth in fraud prevention, identity management, digital onboarding and KYC, transaction monitoring, financial crime compliance, regtech, and more.
About Verity Snelson
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