According to McKinsey research, cross-border payments are a major revenue driver for payments companies and banks, representing worldwide flows of around $150-trillion a year. Remittances offer particularly attractive opportunities for money launderers, terrorist financiers, and other financial criminals to exploit.
By James Saunders, co-founder and chief technology officer at RelyComply
Remittances refer to cross-border transfers of money between individuals, often a gift or stipend sent from a migrant to their family residing in their country of origin. According to the World Bank, international remittances increased by around 3% year-over-year to $860-billion in 2023. Remittances to Low- and Middle-Income Countries (LMIC) grew an estimated 3,8% in 2023.
While remittances represent a lifeline for many families in LMICs and even make a significant contribution to GDP in certain territories, they have become a significant money laundering and terrorist financing threat. Fragmentation and inconsistency in global regulation have created a range of gaps for financial criminals to exploit.
Given the high volumes and low values most remittance organisations process, suspicious transactions are not unusual to escape scrutiny. This is facilitated by a lack of information sharing, which allows criminals to break large amounts down into numerous remittances with different organisations. They can quickly move money across borders and into untraceable assets like cryptocurrencies.
Criminals can infiltrate the system to flush dirty cash via what appear to be legitimate means. It’s easier to hide suspicious money flows when there is more transactional data. This is made more convoluted by the numerous payment systems (including SWIFT or ISO) and the many remittance products in the market, including MoneyGram and a host of popular digital wallets.
Addressing a growing compliance requirement
At the same time, it is neither desirable nor possible to stem growing volumes of cross-border transactions at a time when nearly anyone can send money to another country with a press of a button. Thus, financial institutions must invest in solutions that reduce friction in sending and accepting remittances while complying with tighter regulations in a time of closer regulatory scrutiny.
This concerns understanding who is sending money, to whom, and from where, and sorting genuine transactions to other countries from fraudulent ones. It also means addressing the Know Your Customer (KYC) or Anti-Money Laundering (AML) protocols or regulations across different markets. Most firms will need to modernise their tech stack to keep up with tricky compliance demands and growing transaction volumes.
Many organisations still struggle with legacy solutions that house disparate data that are too disjointed to correlate with manual processes for KYC, watchlist screening, and transaction monitoring. This makes it impossible for them to account for every data point that could be salient for investigative purposes. Strange payment behaviour goes under the radar while time gets wasted ticking off completely legitimate cross-border payments.
When screening politically exposed persons (PEPs) or those on sanctions watchlists, identifying entities transferring money involves screening them using watchlists from third-party data providers. Manual processes can be inefficient, costly, and inaccurate when checking names against these watchlists. High false positives abound while actors slip through the net.
The answer? Become adaptable
The changing nature of remittance handling is overwhelming, but the evolution of regulatory technology is keeping up. Screening payments and individuals in real-time, consistently, and over time helps build accurate risk profiles.
Achieving this hinges on machine learning (ML): algorithms can ensure massive numbers of names are matched to updated PEPs or sanctions watchlists in milliseconds. The self-learning ability can inform better decisions by scanning historical data and contextualising language nuances.
Juggling various AML systems, payment standards, and jurisdictional differences also involves a unified customer view. When data is stored in one place, compliance teams will find it more accessible to screen individuals, track transactions, and more efficiently investigate high-risk alerts flagged by an AI-driven platform.
Use cases are unique, so it’s critical for a platform to set up different risk thresholds. This flexibility gives human analysts the power to conduct remittance checks, all helped by a platform that can acclimatise according to future regulatory and fincrime changes.
The current regtech environment means now is the time to update remittance solutions and avoid getting left behind. Tracking cross-border payments may seem like a colossal and complex task. By using a single end-to-end way to screen payments and the parties, institutions can reduce gaps for bad actors to exploit while offering a smooth experience for legitimate customers.