West African Institute for Financial and Economic Management (WAIFEM) Inherent Risk in Global Remittances. Presented by Mike Ogbalu III

Transcription

1 West African Institute for Financial and Economic Management (WAIFEM) Inherent Risk in Global Remittances Presented by Mike Ogbalu III

2 Fraud and losses due to fraud is an acceptable cost of doing business?

3 Fraud is a major source of income for organised crime which amounts to several billion dollars every year

4 Fraud is mostly opportunist and there is little that can be done to impact fraud numbers!!

5 Fraud is highly organised (55%). Banks who can control fraud can directly impact the bottom line. Regulations, Regulatory Compliance, Systems and processes can drive fraud losses down!!

6 Banks and remittance agents don t need to report that fraud has taken place on transactions in their premise TO PROTECT BRAND.

7 It is ethical and indeed wisdom to report material incidents or attempts to RSPs and regulators. Fraud systems are updated, processes are improved and strategic direction is taken from fraud reported to RSPs and Regulators.

8 What is Remittance? An international remittance is a cross-border, person-to-person payment of relatively low value. Typically by migrant workers to their families. Especially from developed to developing countries Person-to-person, low value - ie not commercial or wholesale payments Domestic remittances also exist Recurrent - but typically made by individual transfers (eg not by standing order) Typically credit transfers especially from the US and UK For remittance service providers (RSPs), often indistinguishable from any other retail cross-border transfers

9 PARTIES TO REMITTANCE BUSINESS Principal Partners (RSPs like WUMT, MoneyGram, Ria) Agents (e.g. Banks, FIs, MTOs) -Send Agents -Receive Agents Consumers (individuals) -Senders -Receivers

10 RISKS IN REMITTANCES As transaction and dollar volumes grow, so do concerns about potential risks. RSPs and their agents face five major categories of risk when processing EFT payments or remittances: FINANCIAL/CREDIT RISK: The risk that a party cannot provide the contracted funds necessary to settle the account. Credit-risk-related losses typically arise from company failure or bankruptcy. OPERATIONAL RISK: The risk that an employee or computer system unintentionally impedes the intended transaction, including losses due to clerical errors or to hardware and software failures. FRAUD RISK: The risk that someone will intentionally alter a payment transaction in order to misdirect or misappropriate funds, including embezzlement initiated either by a financial institution's employee or by an interloper who gained unauthorized access to a system. LEGAL/REGULATORY RISK: Regulatory risk represents the risk of non compliance with applicable legal and regulatory requirements REPUTATIONAL RISK: Reputational Risk will only manifest itself after the damage to the firm s name has already been done.

11 Risks in Remittances (Cont.) RSP Risks Consumer Risks Customer Identification and Verification Receiver Fraud (e.g. Canadian Lottery scam, Nigerian 419, Credit card scam) Transaction Authorization and Merchant Liability Sender and or Receiver Fraud Account Takeovers (Identity Theft) Money Launderers Rogue Websites (Internet/Ebay fraud) Account Takeovers (Identity Theft) Undisclosed Fees Limited Consumer Protection (Emerging Sources) Terrorist Organizations Possible Limited Recourse Website Compromises Security & Phishing Disasters

12 REGULATION AND COMPLIANCE Remittances should be welcomed, encouraged and facilitated and one critical area in this regard relates to the costs that migrants sending money home have to absorb. However, what specific actions could governments and RSPs take to facilitate these flows while guaranteeing the security of the payment systems? How can criminal misuse of the remittances channels be avoided? Regulation: All legislation, regulations, internal rules, processes and procedures that apply to or exist within remittance or local/international funds transfer business Compliance: It is the conformance or adherence to all legislation, regulations, internal rules, processes and procedures that guide remittance or local/international funds transfer business

13 Risks from Regulator s Perspective Over regulation forcing growth in informal flows which are difficult to track Rapid Proliferation with low barriers to entry Lack of Regulation (Emerging Sources) Unregistered Companies Money Laundering and Terrorist Financing Borderless

14 Risks from Regulator s Perspective (cont.) Stopping links between legitimate and illegitimate transfer methods Consumer Protection Who Regulates? What/who do you regulate?

15 Laws and Regulatory Environment The fact that a significant proportion of remittance flows travel informally may be a rational response to the obstacles regulation places in the way of the formal development of this market. Regulatory obstacles are associated with three main pieces of legislation: Exchange control legislation: exchange control legislation such as Application to buy fx, limits on maximum fx requirements, robust reporting systems-regulation E (Transaction receipts and account statements), etc tend to squeeze remitters out of the market. Only authorised dealers, who must have a banking license and have made an investment in an expensive exchange control reporting system, can remit funds. This increases the cost of remittance transactions Anti-money laundering and combating the financing of terrorism regulation: Implementing know your customer legislation is difficult in poor communities, which are unlikely to have the necessary paper trail. Immigration laws: under current immigration law, there are few legal options available to unskilled individuals wishing to migrate to UK and US. Thus much unskilled migration is undocumented. Without proof of legal residence, it is very difficult to access the formal financial system, and thus remittances must be made informally

16 World Bank/BIS Principles for International Remittances The following principles for international remittances were developed by the World Bank /Bank for International Settlements (BIS) to guide Governments and practitioners in optimising the effectiveness of remittances taking into account national security and legitimacy concerns. Transparency and consumer protection: The market for remittance services should be transparent and have adequate consumer protection Payment system infrastructure : Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged Legal and regulatory environment: Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework in relevant jurisdictions Market structure and competition: Competitive market conditions, including appropriate access to domestic payments infrastructure, should be fostered in the remittance industry Governance and risk management: Remittance services should be supported by appropriate governance and risk management practices

17 World Bank/BIS Principles for Int l Remittances (Contd.) Thinking Behind The Principles Premise is that best way to reduce cost is to have competition as far as possible The principles are not a call for remittances to be regulated. Sometimes it may be more important to remove existing regulation They do not aim to set specific service levels. Low price may often be more important than high level of service The application of the Principles They are voluntary. Designed to help countries that want to improve the market for remittance services. Not designed to be a basis for judging countries May have to apply to all crossborder retail payments (difficult for RSPs to tell purpose of a payment or if it is person-toperson) Purpose is to tackle weaknesses in the market that inhibit competition

18 Standardization of Control and Remittance Mechanisms Regulatory cooperation among Governments, Professional bodies, and International organisations. Cross border Laws and regulations like Basel II, AML Compliance, Know Your Customer regulations, Laws on Electronic Commerce, Sarbanes Oxley etc. RSPs, Banks/Financial Service providers adapting to systems (software/hardware) offered by major global systems service providers.

19 CAUSES OF FINANCIAL RISKS Possible events or factors that could cause financial risks: Changes in general economic conditions and economic conditions in the geographic regions and industries in which MTOs operate Adverse movements and volatility in capital markets and other events which affect RSP s liquidity, the liquidity of RSP s agents, or the value of, or RSP s ability to recover its investments Political conditions and related actions in the United States, UK and abroad which may adversely affect MTO businesses and economic conditions as a whole Changes in foreign exchange rates, including the impact of the regulation of foreign exchange spreads on money transfers; Changes in immigration laws, patterns and other factors related to immigrants Technological changes, particularly with respect to e-commerce

20 Mitigating MTO Financial Risks In entering into remittance agreements with MTOs, remittance agents are advised to make a careful review of the terms and conditions of the service contract and consider measures to mitigate financial risks and other analogous precautionary procedures such as: Pre-funding of accounts Fixed deposit account requirements Proper KYC Liability tilts

21 Steps to Controlling Operational risk Sever links between your products and unapproved transfer methods Police the internet and protect your brand especially for services on Internet Impose limits and velocity checks on amounts that can be transferred Review and enhance your customer authentication remember international! Enhance your transaction authorization process Ensure that all value chain personnel are well trained and knowledgeable. Develop a robust monitoring and early warning program

22 Results of Non-Compliance UBS $100US million OFAC fine Royal Bank of Scotland 750,000 fine for AML weaknesses Northern Bank-Ireland 1.25 million fine for AML weaknesses Abbey National 2 million fine for AML weaknesses

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