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8 Risks Open Banking Poses to Financial Crime Compliance

Financial Institutions’ compliance officers and teams should be concerned that Open Banking may render their existing AML/CTF and KYC compliance programs inadequate.

These companies interface with FIs’ systems – via any method from regulated Open Banking APIs to unmonitored screen scraping – in order to access data or transactional functions.

They provide added services to customers ranging from personal budgeting and spending alerts to personal funds transfers and cryptocurrency wallets.

Here are 8 risks compliance managers should keep in mind when evaluating AML/CTF compliance programs for Open Banking: Many TPPs have used customers’ login credentials to screen-scrape data from banks’ customer web portals and apps, sometimes without the bank’s knowledge.

Without API standards, centralized databases, and clear AML/CTF compliance rules for TPPs, it will be even more difficult to gain full visibility into how money flows across accounts, borders, FIs and fintechs.

There are concerns that a TPP could be vetted as an AISP – those that only read and gather account information – but later become a PISP – providing payments and transfers, without being authorized or becoming AML/CTF compliant.

An FI may see funds’ last hop into their accounts but have no visibility into or across TPPs and other FIs which the funds have previously transited, potentially including their own systems in cases of customers hopping in and out again.

The burden is on FI compliance officers to expand AML programs to cover the TPP ecosystem and to define, evolve, and enforce standards against which any TPP partner must be held over time.

SWIFT Transaction Monitoring Best Practices Guide

With worldwide international money transfers amounting to trillions each day, SWIFT codes exist to ensure the safety and security of all those transactions.

In addition to customer and bank funds transfers, SWIFT is used to transmit foreign exchange confirmations, debit and credit entry confirmations, statements, collections, and documentary credits.

In May 2021, SWIFT recorded an average of 42.3 million financial messages per day, a traffic growth of +11.7% versus same period of previous year.

But Telex has mostly been superseded by SWIFT after facing an ongoing slew of issues, including low speed, security concerns, and a free message format.

Using SWIFT codes helps financial institutions to combat financial crime like money laundering, increase security and make the straight through processing of international funds more seamless.

As well as customer and bank funds transfers, a SWIFT message is used to transmit foreign exchange confirmations, debit and credit entry confirmations, statements, collections, and documentary credits.

Cross-border payments that involve sending large amounts of money can be complex, so the process needs to be secure and foolproof, and the same applies when receiving international payments.

While every bank has the option to join, SWIFT messages are used for secure cross-border money transfers, but not all financial institutions have a banking system that uses that facility, or may see the need to opt into the SWIFT messages network.

As part of the Compliance Analytics portfolio, SWIFT has developed Correspondent Monitoring, designed to deliver global, top-down reports needed for in-depth reviews of correspondents’ activities, with patterns flagged for investigation as they occur.

SWIFT has developed Correspondent Monitoring in close collaboration with the industry to address the specific requirements of correspondent banks for a group-level, top-down view of payment chains and relationships.

Transaction monitoring and reporting frameworks have been experiencing serious difficulties over the last 30 years, with high volumes of wasted alerts, wasted investigative effort, and little evidence of value added to the broader fight against financial crime.

Added to this, due to the significant costs associated with transaction monitoring,FCC teams face internal pressures to keep those costs down, while following regulators’ requirements that financial institutions cover all relevant risks.

Combined with escalating costs, regulatory censure and uncertain intelligence outcomes, the issue of transaction monitoring reform is a key issue for financial institutions and the wider AML ecosystem.

SWIFT studies found that in the first ten years of the monitoring requirement, it was common for an automated platform to be built in-house, often using pre-existing models based on credit risk and fraud.

In a 2017 survey for example, Europol, found that only 10% of STRs received by Financial Intelligence Units in the European Union were likely to spur an immediate investigation, with the vast majority of reports filed for later usage.

With rapidly changing market circumstances there is an increasing need for flexibility within business operating models, and businesses now more than ever need monitoring and performance management solutions to help them leverage emerging technology effectively.