Transparency and Compliance for Cross-Border Cover Payment Messages: Federal Banking Regulators Issue Guidance on Transparency and Compliance for U.S. Banking Organizations Conducting Cross-Border Funds Transfers

Sullivan & Cromwell LLP - December 24, 2009

On December 17, 2009, the U.S. Federal banking regulators, in consultation with the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and Financial Crimes Enforcement Network, issued interagency guidance to clarify the supervisory perspective on certain key points discussed in the May 2009 paper of the Basel Committee on Banking Supervision (the “Basel Committee”) addressing transparency in cross-border cover payment messages (the “Cover Payments Paper”). The Basel Committee published the Cover Payments Paper in response to the April 2007 statement of the Wolfsberg Group and The Clearing House Association, which offers recommendations to enhance transparency in cover payment messages. In the Cover Payments Paper, the Basel Committee addresses supervisory expectations as to the inclusion of information in cover payment messages and the roles of the various financial institutions—the originator’s bank, the cover intermediary banks, and the beneficiary’s bank—with regard to that information and in implementing the new SWIFT message format, MT 202 COV. MT 202 COV was effective as of November 21, 2009 and contains mandatory fields for information on the originator and beneficiary of a funds transfer, information not provided in the previous message format. The guidance focuses on three aspects of the Cover Payments Paper:

  • Mandatory use of the MT 202 COV format for all cover payments originated by U.S. financial institutions.
  • Supervisory expectations regarding screening and monitoring of cover payments by intermediary banks.
  • The general supervisory approach with respect to cross-border cover payments in the form of instructions for examiners on assessing risk management practices and compliance processes.

The guidance is of particular relevance for financial institutions that act as intermediaries in cover payments, as it notes the role of correspondent banks in encouraging transparency in cover payment messages and indicates that intermediary banks are expected within reasonable time frames to have as part of their electronic monitoring processes for funds transfers a risk-based method to identify cover payments with incomplete fields or fields with meaningless data and should have processes in place to address such situations as part of its overall risk management for correspondent banking services.