Banks have come under increasing pressure to ensure that payments are screened against sanction lists and more than $1 billion worth of fines have been handed out to non-compliant banks over the last 18 months. However as the requirements for sanction screening has increased, many banks have struggled to cope with the resulting workload.
According to Luc Meurant, head of banking, supply chain and corporate markets at SWIFT, there is an opportunity for SWIFT to not only work on the standardization of sanction lists and the filtering process but also to offer an outsourcing service for smaller banks.
"Banks currently have three options - to do nothing; to do it all manually or to install software solution in-house. The benefit of the service is that there would be no footprint in their back-office. Banks would simply give us a list of names and a list of transactions," says Meurant.
SWIFT introduced a new message standard for cover payments in November 2009, the MT02 COV, designed to bring added transparency to the process. The new standard includes mandatory fields for originator and beneficiary details. Early in 2009 UK bank Lloyds TSB was fined $350m for deliberately removing customer information from payment messages in an effort to escape the sanctions filters of US banks.
However the process is still manually intensive and susceptible to high error rates. A recent survey of 214 payments professional by Dow Jones Risk and Compliance found that the vast majority (78%) of payment industry executives feel the new message standard has helped to reduce banks' exposure to money laundering and terrorist financing. However, concerns over data quality, false positives and duplicate alerts have significantly increased. As many as 41% of respondents admitted to being "very" or "extremely" concerned about the number of false positives.
According to Rupert De Ruig, managing director, Dow Jones Risk and Compliance, the issue is not with the messaging standard but with the sheer volume of work and the inconsistent quality of data supplied by national intelligence agencies. "Banks have more information to enter, more payments to screen and more names to screen against. And because a person's name is an imperfect identifier this creates a high number of false positives which have to be dealt with manually."
De Ruig believes banks are taking the issue of sanctions screening seriously and a number have moved to address the concerns by purchasing additional message filtering technology, although such investment is not evident throughout the industry, particularly among smaller banks.
SWIFT will be aiming its service at these smaller banks with less than 1,000 transactions per day. It is currently in the process of selecting a screening software provider for what will be a SWIFT -branded service and a formal proposal will be made to the SWIFT board in December.
Pending board approval, the service will be rolled out in the second quarter of 2011, possibly in two stages - firstly outgoing transactions and then incoming transactions. The project will initially focus on the Europe Middle East Africa (EMEA) region followed by Asia and Latin America.