Top AML challenges for cross-border payments firms in 2023

Any obligated firm faces a range of practical challenges in meeting compliance demands and addressing financial crime risks. For those operating in cross-border payments, these challenges are greater still; not only do regulators see cross-border activity as generally ‘riskier’ than domestic transactions, but such activity is also wide open to criminal abuse.

Chapter five of our Guide to Anti-Money Laundering (AML) For Cross-Border Payments and Remittances discusses some of the practical challenges arising from compliance requirements and the underlying risks associated with these. Here, we explore a few of these challenges and highlight how high-quality data and regulatory technology (regtech) can help compliance teams to tackle them. 

1. Knowing when to perform enhanced due diligence (EDD)

When conducting a settled business relationship, firms need to know who their customer is, be assured that they and their activities are legitimate, and have enough information about them to identify unusual activity against an expected baseline. This is the essence of customer due diligence (CDD).

When potential clients may be deemed higher risk, firms must undertake enhanced due diligence (EDD) measures to attain assurance. In some situations where the prominence or scale of a business is significant, this might require the engagement of outside resources from some of the many business intelligence companies now providing EDD services. However, most high-risk clients will not warrant this level of activity, leaving many firms to conduct in-house, desk-based research on the sources of a potential client’s wealth and income, as well as their wider connections. 

An invaluable addition to this is automated adverse media screening, which can provide a wider body of background risk information about potential clients, their associates, and their activities. Such material can help a firm better calibrate whether a client sits within their risk appetite and clarify concerns on other risks, such as potential sanctions exposure. 

2. Building strong partnerships

Executing cross-border payments often involves working with partners of varying types. While banks typically work through a correspondent banking network, dedicated cross-border payment service providers – depending on their size – will work with various larger financial institutions. In every case, a significant amount of trust is involved, with firms needing to rely on other chain elements to fulfill their AML/counter-terrorist financing (CTF) and other anti-financial crime obligations. If they do not, there is a significant risk that an individual firm can unwittingly become a conduit for illicit funds. 

A major part of the response to this challenge is ensuring the technology being deployed by the vendor is leading edge. In addition to being efficient, effective, and in line with global standards – such as ISO data requirements – firms should look for a vendor whose technology is easily interoperable with partners’ platforms through, for example, the use of APIs. 

For AML solutions like transaction monitoring and screening, one important feature compliance teams should look for is ‘plug and play’ capabilities that make the set-up process more efficient. Examples may include a pre-built library of rules and typologies, a rule library, an API guide, and dummy data for testing. 

3. Meeting regulator expectations

Firms should ensure the areas of their policies, procedures, and controls that relate specifically to cross-border operations and risks are well-documented and explained, providing a reasoned and auditable record that can be used during regulatory examinations. If, for instance, a firm has decided to apply more detailed transaction monitoring requirements on certain client segments that use cross-border payments regularly, the reasons for this need to be set out clearly. While regulators applaud applying a risk-based approach, they also wish to understand its logic. 

Although regulators continue to take a ‘solution neutral’ approach to how firms implement AML/CTF requirements, others – such as the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) – are also now nudging firms towards the use of advanced technologies, such as artificial intelligence, to fulfill a wider array of compliance requirements. 

Given the volume and velocity of transactions cross-border firms handle, the savviest teams are exploring the benefits of extensive automation both to support practical and risk-based compliance objectives. Regulators will therefore be looking for firms to deploy regtech solutions that are not simply innovative for their own sake but can deliver effective outcomes in identifying risk. Technologies that can deliver this at scale, such as machine learning and cloud computing, will likely become increasingly staple requirements for meeting regulatory requirements over time.