Topics in Cross Border Risk

Transcription

1 THE PAYMENTS INSTITUTE July 20-23, 2014 Emory Conference Center Hotel, Emory University, Atlanta, Georgia Topics in Cross Border Risk Richard Fraher VP & Counsel to the RPO, Federal Reserve Bank of Atlanta Azba Habib Deputy General Counsel, Payward, Inc. (Kraken)

2 Disclaimer The views expressed here are those of the speaker and do not reflect the views of the Board of Governors of the Federal Reserve, the Federal Reserve Bank of Atlanta, Payward or any other entity or person, real or fictitious, living or dead Although the content of this presentation includes legal subject matter, it is offered only for informational purposes and not as legal analysis or advice. 2

3 Agenda 1. Types of Payments Risk 2. Cross Border Risks 3. Current Shape of Cross Border Payments 4. Cross Border Payments Risk 5. Issues for Your Bank to Consider 3

4 Payments Risk General areas of payments risk: Fraud Error Delay Privacy and Data Security Consumer Compliance BSA/AML OFAC FinCEN 4

5 Fraud, Error, Delay Standard payment issues Trickier in international context due to different legal and operational regimes, for example: no such thing as international ACH no international standards, common rules, centralized system settlement times and formats vary by country diff holiday schedules most countries, reversals are not allowed most countries, pay outs must be in local currency Same issues, different context, different solutions 5

6 Privacy, Data Security, and Consumer Compliance Domestic Consumer Protection Statutes Electronic Funds Transfer Act Electronic Funds Availability Act Right to Financial Privacy Act Fair Credit Reporting Act Gramm-Leach Bliley Act State Privacy and Data Security Laws Health Insurance Portability & Accountability Act International Consumer Protection Statutes Similar protections promulgated differently (e.g., different triggers, different disclosures, additional substantive protections, etc.) 6

7 BSA/AML Money Laundering Risk concealing origins of proceeds from illegal activity to make them appear legitimate (placement, layering, integration) E.g: tax evasion, terrorist financing, illegal arms or dugs sales Control All FIs are required to by BSA to establish AML program consisting of: Policies, procedures and controls AML officer Independent audit and testing Ongoing training Compliance officer charged w/ the responsibility to operationalize program 7

8 OFAC Office of Foreign Assets Control (OFAC) Office under US Dept of Treasury Administers and enforces economic and trade sanctions Sanctions are authorized by federal statutes or emergency orders by the President Sanctions address threats to US economy, national security, or foreign policy Objective is to prevent economic support to targeted countries, entities and individuals Maintains the SDN List against which screening is required for all payment transactions Failure to screen and block/reject is an SL offense 8

9 FinCEN Financial Crimes Enforcement Network (FinCEN) Functions as Bureau under Dept. of Treasury Combats ML and safeguards financial system Collects, analyzes and disseminates financial intelligence (e.g. CTRs and SARs) Supports law enforcement community Cooperates with FIU counterparts in other countries on AML/CFT Requires FIs to file SARs and CTRs Moto: Follow the money 9

10 Cross Border Risks Liquidity Risk inability of an institution to meet its obligations (funds or securities) on a short term basis Credit Risk loss arising from an institution being unable to meet its obligations including loss of value and loss of principal Time Gap Risk risk resulting from timing differences Systemic Risk default triggering other defaults Legal risk loss caused by an unexpected application of law, regulation or bankruptcy rules Sovereign Risk a potential restriction of assets imposed by a government 10

11 Current Shape of Cross Border Payments Bank to Bank Wire, ACH, and Cards Traditional walk-up payment service providers MoneyGram and Western Union Borderless network services Paypal and similar; Bitcoin and similar 11

12 Risk Issues Just like domestic in many ways Fraud Error Delay Privacy and Data Security Consumer Compliance BSA/AML OFAC FinCEN 12

13 Risk Issues (Cont d) Just like domestic in many ways only more so Law enforcement concerned with international fraud Difficulty in resolving errors (e.g., cannot retrieve erroneously credited funds without account holder s consent) BSA/AML/OFAC enhanced diligence for international payments 13

14 Qualitatively Different Issues Payment systems and applicable laws and regulations: Bridging across different payment systems and their foundational laws/regs/rules (e.g. US to Europe credit transfers, or Europe to US) requires identification and resolution of gaps and conflicts Example: leg in transactions and SEPA Privacy: Privacy laws differ extremely from one country/region to the next Example: EU payments directive v. US privacy laws Consumer Protection: Risk of different consumer protection laws in foreign countries Example: Dodd Frank 1073 and international remittance requirements unique to the US 14

15 Qualitatively Different Issues (Cont d) Taxation: Payments may be taxed differently Example: incoming credits are taxable as income in certain jurisdictions and may be transaction taxes in others Sovereign Risk: Foreign government takes action affecting movement or value of funds Example: government defaults on debt 15

16 Examples of Specific Issues Sanctions: Sanctions regimes between countries vary Example: e.g., US banks are prohibited from establishing a correspondent account for or on behalf of the Commercial Bank of Syria or VEF (a commercial bank in Latvia). In the United Kingdom, there are no similar corresponding sanctions with respect to these two banks. BSA/AML: Generally similar principles but specific KYC and AML requirements vary Example: specific KYC docs or verification protocols Example: SAR reporting triggered by $ thresholds in US; not true of other jurisdictions (no de minimis exceptions) 16

17 Issues For Your Bank to Consider What is your bank s tolerance for a higher level of indeterminacy in international transactions than in domestic ones? Can your bank outsource international payments services to a provider that assumes the additional risks? If so, is it worth the cost? 17