U.S. dollar role in sanctions, AML fight threatened by looming rival payments system

May 14, 2015

A looming erosion of U.S. dollar dominance in international payments threatens to cripple the worldwide reach of financial sanctions and anti-money laundering controls led by the United States and its allies. This would compel Western financial institutions to improve data and analysis about their customers to guard against tainted money, officials said.

“It’s not if; it’s when,” retired Rear Adm. Chris Parry, a U.K.-based strategic forecaster, told a Thomson Reuters Financial & Risk conference in New York. “Every financial institution needs a strategy to be developed now for the days that are coming when money will be thrown across the wall to you and you have no indication whatsoever of where it’s come from and its provenance.”

The importance of the U.S. dollar in international finance has given the United States powerful reach to exert foreign policy and fight crime through the payments system. Banks that violate U.S. controls and sanctions can be barred from clearing dollar transactions.

What Parry called the “desertion of the dollar-based international system” is expected to come from Russia, now smarting from international sanctions over Ukraine, and China, which is on track to overtake the United States as the world’s largest economy and moving to assert a leading role in the financial system.

“The big threat is that Russia, China, and those aligned with them — I include Iran and possibly Iraq in the future — will seek to set up an alternative financial and payments system that will be totally opaque to the rest of the world,” Parry said. “This illusion that we’re going to have globalized standards that are actually rules that are in force is an illusion that you should disabuse yourselves of, because half the world is going to go over to the dark side.”

China is ready to launch by year-end its long-awaited international payment system to process cross-border yuan transactions, Reuters reported in March. The China International Payment System (CIPS) will remove one of the biggest hurdles to internationalizing the yuan. It will also put the yuan on a more even footing with the dollar and other major global currencies, as CIPS is expected to use the same messaging format as other international payment systems.

Meanwhile, Russia last year drew up legislation to create an alternative to the global interbank payment system SWIFT, amid calls by some Western policymakers to exclude Russia from the system as a last-resort economic sanction over its intervention in Ukraine. Russia has also created a national payment system for processing credit card transactions, after Visa and MasterCard stopped providing services for some Russian banks that were subject to Western sanctions.

Iran was cut off from SWIFT in 2012.

Looking closer

A weakening of U.S. reach into the international payments system would require banks to look more closely for evidence of illicit money, said Jim Wistman, head of operational risk and compliance at National Australia Bank in New York. Wistman is also a former U.S. Federal Reserve senior examiner.

Traditional approaches to money laundering view the activity in three phases, and a rival, opaque payments system would make it harder to spot transactions at the “placement” phase where dirty money enters the system. Instead, Wistman said, the focus will have to be further along the line, where money is “layered,” or “structured” to obscure its source, or “integrated” back into the control of the illicit actor.

“The placement phase is going to be far away from us,” Wistman said. “It’s not going to be in U.S. dollars. What I’ve noticed, though, is that bad guys don’t trust bad guys, so they integrate their money back into the healthy society … It’s the layering or integration phases, and it’s not easy to really see.”

Building up sophisticated databases is vital, he said. Some banks have got an unwitting head start by conducting extensive and costly “look back” process reviews ordered by regulators after transaction-control violations.

“The first millions of dollars in a look back are really to improve our data,” Wistman said. “In the future we can run analytics across that data and say what is different in this customer behavior from a like peer group of customers, and that suggests some portion of their business is integration. So the placement or layering is too far away from us, but (the data show) that institution … has been penetrated.”

Detailed information

The next step, he said, is collecting detailed information from future customers.

“Our questionnaires are going to get more and more aggressive on our clients,” Wistman said. “The purpose is to pull the data in so we can put bright analytical minds, experienced people on it and say we want to push that business out.”

“Two or three bad customers can double your cost structure. It’s a risk-based approach to preserving your revenue,” he said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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