I 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 Wolfsberg Group 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.