22 Nov 2019
The Australian anti-money laundering (AML) regulator’s case against Westpac for more than 23 million alleged reporting breaches will shine an international spotlight on SWIFT data reporting avoidance. Anti-money laundering experts have said the case will provide an unprecedented view into the processes that banks put in place to circumvent the SWIFT MT202 COV obligations, which took effect in 2009.
The MT202 COV requirement was introduced to allow banks and their regulators to trace the senders and recipients of international wire transfers. The cover note on SWIFT payments was an international format that SWIFT developed to facilitate data sharing on cross-border funds transfers between financial institutions.
Prior to the introduction of the MT202 COV format, the banks that processed these transactions had little visibility over the transactions they were processing on behalf of their correspondent banks.
The older MT202 messaging format did not require financial institutions to provide information on the sender and recipient of cross-border payments. This was particularly problematic with cover payments, where a combination of the MT103 and MT202 messaging formats were used.
AUSTRAC’s statement of claim makes it clear that Westpac’s decision to offer services such as LitePay and the Australasian Cash Management (ACM) platform were designed to bypass SWIFT. This in turn had a devastating impact on financial intelligence gathering.
“Westpac considered that the SWIFT payment network was costly and not an efficient means of sending low value, large volume payments for clients of global banks that need to make and receive payments around the world,” the regulator has alleged.
“For this reason, under a number of the ACM arrangement, the correspondent banks ‘batch’ funds transfer instructions from multiple payers to multiple payees and send the instructions to Westpac in a single structured data file, via non-SWIFT channels.”
The cost savings were not in the avoidance of payments to SWIFT, however. It was in the circumvention of compliance, reporting and data collection. There was a steady line of correspondent banks and their customers who wanted to avail them of this lite-cost, lite-visibility service.
The banking sector has a number of dark secrets. One is that many institutions around the world put complex systems in place following the 2009 SWIFT reporting changes to ensure they could continue to facilitate lucrative transactions in the shadows. The U.S. Department of Treasury’s recent case against UniCredit, for example, found that the Italian-headquartered bank had sought specific advice from consultants on circumventing the SWIFT reporting obligations.
The settlement agreement said UniCredit engaged a German consulting firm, which helped it “construct the evasive process by which UniCredit AG carried out this illegal conduct, apparently conducted a compliance analysis at the AG NY Branch in or about 2006.”
In internal emails bank staff made it clear that this was designed to mask payments to “sensitive” countries, such as Sudan, Syria, Iran, Cuba, Myanmar, Belarus, North Korea. The aim was to ensure there was no data in field 72 of the SWIFT message for transactions involving a U.S. bank.
The bank was intentionally avoiding oversight from the fearsome U.S. Office of Foreign Assets Control (OFAC).
As the AUSTRAC statement of claim has demonstrated, however, some banks had developed an even simpler way to avoid submitting SWIFT data. With its LitePay and ACM products for international cross-border payments, Westpac could bypass the SWIFT rails completely.
The claim says this concealed evidence of cross-border payments moving to and from sanctioned countries such as Sudan, Cuba and Iran.
The statement of claim indicates that several major international banks took advantage of this service.
The tripwire for banks that used these strategies in Australia, however, will be the country’s unique International Funds Transfer Instructions (IFTI) reporting rules. Australia was the first country to introduce these wire reporting obligations under pressure from AUSTRAC’s former chief executive Neil Jensen way back in 1989.
“Over the past 20 years I have been concerned that not enough is being done to readily identify cross-border funds transfers, whether the funds arise from corrupt practices, drugs, fraud, people smuggling and trafficking, or any other serious crime. I have made it a point to highlight in many speeches around the world since the early 1990s that we have ‘left the door open’ to sophisticated criminals to launder money through the global financial system and that we need to start to close that door by having ready access to these transactions in real time,” Jensen said in an article for Thomson Reuters Regulatory Intelligence.
By Nathan Lynch, MichaelWest.com.au, 22 November 2019
Read more at MichaelWest.com.au
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