was looking through notes of a banker friend, who was making a
presentation on the key trends in payments for the next two years last
week,and one of the stand-out lines was:
“The Implementation of SWIFT MT202 Cover Payments”
It piqued my interest as I had not heard people discussing this in many other payments conferences.
To find out more, I googled
the key words "Implementation SWIFT MT202 Cover Payments" and lots of
stuff came back about Anti-Money Laundering (AML). No wonder it had
been on the side of my radar, as I generally try to avoid Money
Laundering Regulatory Officers (MLROs), Compliance Officers, Law
Enforcement Agencies, Fraud personnel, Customs and Excise and others
involved in this area of financial services, as they may find out too
much about my own activities (just joking … honest :)).
However, I thought I better research the subject in more depth.
First it is worth defining ‘cover payment’.
A cover payment is the agreement to cover the funds related to an
underlying monetary movement. In other words there are two payments.
One is a payment order wrapped up in a SWIFT MT103 message. This
message instructs the bank for the receiver of the payment, the
beneficiary, to pay the receiver a certain amount.
There is then a second message, the cover payment MT202 message.
This is the bank-to-bank instruction that tells the intermediating bank
to cover the payment of the beneficiary’s bank.
It is easiest to wrap it up by saying that the bank paying the
person getting the money has to receive a valid MT103 or MT202 SWIFT
message. However, to get that message, it quite often involves other
banks because these monies are moving across borders, countries,
regions and geographies, and those banks in the middle move these
messages around too.
Therefore, the two messages are separated. The receiving bank and
sending banks will see both legs of the payment, MT103 and MT202; but
the banks in the middle, the so-called ‘intermediating banks’, only see
the MT202 messages. As a result, some people believe it could be
possible to buck the system. Hence these MT202 messages, that tell the
intermediating banks to cover the payments made by the receiving bank,
have become the target for regulatory focus.
Regulators are concerned that the acceptance of cover payments can
expose banks to fraudulent or terrorist activities, without being aware
of their involvement. For example, intermediating banks cannot tell the
difference between MT202 messages that relate to covering a payment,
versus those that are being used for other bank-to-bank payments to
settle FX trades, pay interest and so on.
The result is that the US Department of the Treasury’s Office of
Foreign Assets Control (OFAC) created sanctions over this area, and the
reacted with a proposal to create a new or enhanced SWIFT message
format for third-party cover payments that enables information on the
beneficiary and originator to be included.
The solution will be introduced in November 2009 and, for some, is
as big a change as things like SEPA Direct Debits, so watch out for
discussion of this area in more depth.