Aug 24 2009 Brett Wolf
The Wolfsberg Group and The Clearing House Association LLC have released a document aimed at answering questions circulating in the banking world regarding the impending switchover to a new SWIFT cover payment message format. The document, dubbed "Cover Payments: Some Practical Questions Regarding the Implementation of the New Payments Messages," has failed to quell growing consternation among bankers, however. So have regulators; by failing to step forward and endorse the new message format, regulators have added to bankers' worries.
"Personally speaking, the Wolfsberg's Q&A on the 202 COV just further supported my position of the imperfection of this method. It's a crummy bandage to the transparency problem," a compliance officer with a major international bank said after reviewing the "Practical Questions" (PDF).
History of problems as banks used SWIFT's MT 202 for cover payments
As SWIFT describes it, the MT 202 "is the de facto standard used to cover customer credit transfers, and to settle payments resulting from other business transactions such as securities and treasury transactions." It is a bank-to-bank wire transfer message format. A similar message format, the MT 103, is used by a bank when its customers want to make payments to customers of other banks in other countries.
The problem is that when transforming MT 103s into MT 202s to make cover payments, certain European banks were "stripping" away any references to originators or beneficiaries blacklisted by America before forwarding the messages to their correspondents in New York for clearing. As a result, the Manhattan-based banks were unwittingly processing payments that benefited sanctioned entities, and could have aided known laundrymen and/or terrorism financiers.
This practice first made headlines in December 2005 when the US Office of Foreign Assets Control fined Dutch bank ABN AMRO $40m. More recently, Lloyds TSB was targeted by the US Department of Justice for "stripping" SWIFT messages and agreed to forfeit $350m. In April 2007, the Wolfsberg Group and The Clearing House Association suggested "the creation of a new or enhanced SWIFT payment message format for third-party cover payments that enables information regarding the originator and the beneficiary to be included."
SWIFT in turn designed a new messaging standard, the MT 202 COV, to improve the transparency of the cover payments process. The MT 202 COV will "go live" in November, and at that time, banks are supposed to stop using the MT 202 for cover payments. Among other things, the new format will force banks to include originator and beneficiary details.
"These new payment messages will provide for the replication of all information contained in certain fields of the MT 103," the Wolfsberg Group noted in its "Practical Questions" release.
However straight-forward this proposal may seem on the surface, there are a great many practical questions that remain unanswered despite the Wolfsberg document and a related Basel Committee on Banking Supervision paper issued in May.
Bankers have voiced worries about a bevy of unanswered (or partially answered) questions related to the MT 202 COV during conversations with Complinet. A few of the many vagaries include:
The Wolfsberg Group's answer to the latter question was not encouraging, according to Complinet sources. It said: "It is premature at this early stage to set forth the steps to be taken in the event that an intermediary bank becomes aware that an originator’s bank is not using the correct message format. Use of the incorrect message format is not in itself necessarily suspicious and may simply be due to operational circumstances or misunderstandings."
Clearly, this is not the kind of hard-and-fast guidance many bankers are searching for as they prepare for the November deadline.
Regulators mum
Several sources told Complinet that it would be helpful if regulators would simply endorse the MT 202 COV, and no one knows precisely why they have not done so. In an effort to shed light on the regulators' positions, Complinet contacted the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency for comment. Despite promises that someone would return the many phone calls and e-mails, not a single regulator ultimately responded.
Unfortunately, absent a miraculous turn-around by the regulators, it appears banks are going to be left to deal with this dilemma on their own. Bankers can only hope that the Wolfsberg Group and the Basel Committee come out with more and better guidance moving forward.
UPDATE: 'In response to Complinet's request for comment on this story, an OCC spokesman indicated after publication that an interagency message is "in the works" regarding the SWIFT payment message issue. The spokesman added that he could not comment on the contents or precise timing of the message.'
