ISO 20022 will change sanctions compliance forever

The market infrastructure that supports cross-border payments has scarcely changed since 1977, when SWIFT launched a messaging service with standardized codes and instructions for payment communications between members. However, big developments are coming.

Following the lead of 21st Century disruptors such as AliPay and WeChatPay, uninhibited by legacy systems, comes ISO 20022, a multi-part International Standard prepared by ISO Technical Committee TC68 Financial Services.

ISO 20022 moves beyond the old tools — proprietary messaging formats, protocols, and standards developed decades ago based on local laws and the available technology — that weren’t designed for global interoperability. Instead, it describes a common platform for the development of messages for cross-border payments, setting a flexible infrastructure that facilitates information exchange and helps to harmonize the payments language between old and new technologies. Its focus is on getting the global financial community on the same page and removing the barriers that complicate compliance.

Migration is not mandatory from a regulatory perspective, but those that do not act now risk being excluded from international payment systems. Japan, Switzerland, mainland China, and India are already live with ISO 20022. Major central clearinghouses and SWIFT are planning to switch starting in 2021 with the United States, Canada, UK, and eurozone moving ahead with plans to transition over the next four years, comprising over 80 percent of global high-value clearings.

The benefits are clear. ISO 20022 offers significant enhancements over the proprietary legacy clearing standards that have dominated until today, in a format that is also extendable to allow for adaptability to future business changes.

Perhaps more importantly, the new standard allows banks and payment participants to include significantly more contextually relevant data related to the payment. It provides rich structured party data, extended remittance information, and allows for special characters and expanded character sets.

This represents an enormous change when it comes to sanctions compliance.

Financial crime is often enabled through obscure, false, or incomplete data sets, which hamper screening systems in flagging alerts or recognizing illicit activity. Transaction screening solutions are only as strong as the underlying data that feeds them. Inconsistent formats, omissions, and poor data quality hamper the effectiveness of even the best filtering solutions. The classic MT format of payment transactions contains limited information from counterparties, making it more difficult to validate if a client name matches a sanctioned entity.

By providing more detailed information about all parties involved in a payment, the new message format will speed up payments and increase transparency, improve sanctions screening, and help organizations better detect and prevent financial crime.

The ability to add details and data points to payments messages provides greater transparency and enables financial crime screening solutions to raise more accurate, relevant alerts. In combination with extensibility and richer data, the consistent structure of ISO 20022 messages makes it easier to share information, further supporting an institution’s sanctions screening operations.

In short, ISO 20022 will help to reduce false positives. As a result, despite the exponential increase in payment volumes expected, compliance teams will focus their time and energy on true matches to red flags and high-risk alerts, rather than following false trails.

It won’t however, be a silver bullet. Institutions must remain vigilant to prevent the global financial network from being used as a conduit for money laundering, terrorist financing, and other illicit activities. Screening payment transactions for sanctions is not only good practice but is fundamental for an effective risk-based approach to compliance; they’ll just be relying on much more accurate data.

While it might be tempting to dismiss the shift to ISO 20022 as a tick-box exercise, the reality is that the principles have far-reaching implications for sanctions compliance. It highlights the importance of combining detailed and accurate information with high-quality validation and sets the rails for its application.

These are fundamental principles for any system designed to detect and prevent financial crime. Even if the temptation for illicit activity won’t wane, those in charge of compliance will be better prepared for those wishing to cheat a now extremely robust system.