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How ISO 20022 Helps with AML and Fraud Monitoring

March 15, 2024

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How ISO 20022 Helps with AML and Fraud Detection

The new instant payments standard, ISO 20022, powers cybersecurity for banks, credit unions, and payment providers with AML and fraud monitoring.

Migrating to the new global messaging standard is more than just about compliance. ISO 20022 opens up new opportunities for banks, credit unions, and third-party payment providers in cross-border payments. Since the new format standardizes payment messages, its adoption is being encouraged by governments worldwide. For instance, the Nexus Initiative, by the Bank of International Settlements (BIS) and the Monetary Authority of Singapore (MAS), has created a blueprint for building connections between various payment systems for instant cross-border payments with ISO 20022 as its foundation.

Despite the deadline to migrate to the new messaging standard drawing ever closer, many financial institutions (FIs) are still procrastinating the adoption of this standard due to the cost and the hassle of transitioning to new technology. However, the benefits offered by ISO 20022 far outweigh the investment and initial learning curve required for the migration. Not only will it allow organizations to support payment innovations, as and when they occur, but it will also power better control over anti-money laundering (AML) and fraud monitoring, detection, and prevention. Here’s how.

Source: Deutsche Bank

Richer Data Improves Financial Crime Prevention

ISO 20022 brings in richer data schema, which provides FIs with new opportunities to enhance payment messages and reinforce their AML and fraud prevention mechanisms. For instance, with the new standard, both sending and receiving banks can effortlessly share risk scores and other key data associated with the payment or the customer. In fact, the payment network will be able to include an additional network risk score in the messaging.

The universal standard and additional data will help identify and stop unauthorized fraud, flagging potentially fraudulent transactions and improving investigation automation. The better structured and richer data in the payment message can also help the remediation process by improving the way recovered funds are reverted to victims.

For instance, recovered funds could be returned to the rightful beneficiary without the usual long and cumbersome processes, even when multiple banks and jurisdictions are involved, improving the customer’s banking experience.

Other areas where the additional data can prove useful in AML and fraud monitoring include:

AML Compliance

The unstructured messaging in SWIFT tends to create downstream issues in important financial crime monitoring processes, such as AML transaction monitoring and name list screening. On the other hand, the structured data under ISO 20022 is a perfect fit for leveraging AI/ML techniques for AML procedures. For example, AI/ML can be deployed to create predictive models to run numerous AML and fraud checks. Legitimate transactions can be automatically and more accurately identified by comparing them to the individual customer’s transaction history. Any red flags can then be investigated by the FI’s security team or government agencies. Over time, such investigations might also be automated.

The ISO 20022 messaging format easily transfers data to AI/ML and RegTech solutions. This ability to transfer data can power FIs with actionable insights from the data.

Transaction Monitoring

With more standardized and richer data, FIs can gain better insights into the entire payment flow, and any issues associated with counterparties during the process. Beneficiary banks or FIs, on the other hand, will be able to better understand the intended purpose of the transaction, while improving verification for the beneficiary and raising alerts if suspicious activity or anomalies are detected.

In addition, fraud monitoring will improve, with a reduction in false positives, which usually occur due to missing or misread data fields. The data structures of ISO 20022 can handle complex data, which can also be integrated with RegTech and cybersecurity solutions. Powered by AI/ML, these tools are better positioned to analyze transactions and raise relevant and accurate alarms. This will ensure that AML and fraud prevention teams do not waste their time chasing false positives but focus on investigating genuine high-risk situations.

Additional details related to remittances and payment invoices in the ISO 20022 format can help FIs better understand the true context of where the payment originated from, its destination, and the risk scores linked with the transacting entities.

Cross-Border Transaction Reporting

AML and counter-terrorist financing (CTF) regulations require FIs to report cross-border transactions in most jurisdictions. For example, banks in the US are required to file a Currency Transaction Report (CTR) for international monetary transfers that exceed $10,000. Similarly, the Australian Transaction Reports and Analysis Centre (AUSTRAC) imposes reporting obligations under Section 45 of the Anti-Money Laundering and Counter-Terrorism Financing Act of 2006. This requires FIs to report any funds transferred out of Australia or received in Australia within 10 business days.

FIs are required to include the most precise and relevant information in these reports, while adhering to the reporting format prescribed by the specific regulatory body. Failure to comply with the reporting obligations can lead to not just punitive fines but can also result in sanctions. The reputation damage as a result of such criminal proceedings could be irreparable.

The messaging format of ISO 20022 includes all mandatory and relevant details required to create these reports. Reporting can be further eased by automating the filtering of required data from the ISO messages to populate reports based on the submission norms of each jurisdiction.

Key Improvements in ISO Message Structures

Key Improvements in ISO Message Structures

Source: Deloitte

Enhance Risk Mitigation by Migrating to ISO 20022

Risk mitigation can be significantly enhanced by adopting the ISO 20022 standard. The rich data of this messaging format enables both sending and receiving FIs to exchange risk scores of the sender and recipient of each transaction. This reciprocity can help bolster the respective AML systems of both FIs with additional information that strengthens their risk rating models.

To ensure that the migration occurs smoothly and with minimal disruption to daily operations, it is important to partner with an experienced and skilled technology partner. Modernize your payments architecture for ISO 20022 compliance with Opus Technologies, a technology solutions provider with almost three decades of experience in helping banks, credit unions, and FinTechs stay abreast of the rapid evolution in the finance sector. Talk to our experts today to learn how migration can be eased with a custom strategy.

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