In the last several years, there have been many high profile cases where the U.S. government fined major financial institutions for outrageous compliance failures in their payment businesses.
In the nine years following the global financial crisis, U.S. and European banks have paid $273 billion in fines related to bad behavior. Clearly, these fines demonstrate the seriousness of money laundering and signal to the market, including accounts payable (AP) professionals, that compliance is critical and that laws are enforced. It’s important for AP professionals to be familiar with all of the compliance issues surrounding AP payments so processing is efficient.
Payments flowing through the United States are constantly monitored to ensure compliance with all relevant laws. Banks and other financial institutions use a variety of manual and automated tools to monitor client payments on a real-time basis to comply with applicable regulations. Understanding how and why financial institutions meet their payment compliance requirements enables AP professionals to be more informed and effective in their day-to-day operating roles. In addition, this understanding ensures that the business relationship between a company and its financial institution functions smoothly.
Complying with Payment Restrictions
Payment monitoring and reporting is required by law under the Bank Secrecy Act, an act of Congress passed in 1970 to address money laundering. Recent laws like the Patriot Act cover use of the financial system for terrorist financing and have extensive “Know Your Client” provisions. In order for financial institutions to effectively monitor payments, various prohibited lists are provided by a wide array of domestic and international government agencies.
Information content and software companies offer financial institutions tools to integrate the prohibited lists directly into their operational payment flows to facilitate monitoring. Payments are matched against these prohibited lists, and then flagged transactions are assessed on a real-time basis.
Examples of prohibited lists include the FBI’s Ten Most Wanted and Interpol’s Most Wanted. Multi-national groups such as the European Union, Financial Action Task Force (FATF), the United Nations, and the World Bank also issue their own lists. Politicians have their own restricted list known as the Politically Exposed Persons (PEP) list.
In the United States, the Office of Foreign Assets Control (OFAC) is part of the U.S. Department of the Treasury and has a specific mission defined on the Treasury’s website:
“OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. OFAC acts under Presidential national emergency powers to impose controls on transactions and freeze assets under U.S. jurisdiction.”
As part of its enforcement mandate, OFAC produces and regularly updates a prohibited list of individuals and organizations called Specially Designated Nationals or SDNs that all U.S. financial institutions are prohibited from paying.
Course of Action for Prohibited Payments
If a financial institution receives instructions from your company to pay an individual or an organization that it determines is on the SDN list, that payment will be frozen as stipulated by law. Your financial institution must hold the payment and seek direction from OFAC on how to proceed. If a U.S. financial institution makes a payment to an SDN name, it is a very serious infraction of U.S. law and can result in major penalties, including fines and criminal prosecution. The payment cannot be canceled, recalled, or refunded to you once an SDN “hit” is verified.
In the normal course of payment processing, your financial institution may contact you to ask for specific information about a payment such as the date and place of birth of the recipient. You should provide the information quickly and accurately because the details you provide will help your financial partner determine if the particular name is a true hit or if it is a “false positive.”
Cooperation is important so that your financial provider can make these determinations quickly and efficiently. If you delay providing the requested information, your time-sensitive payment will be delayed. Additionally, your financial institution may interpret your non-responsiveness as suspicious.
Most payments researched are “false positives” and can be processed to the final recipient. Be aware that if a payment recipient is on a restricted list, such as OFAC’s or other prohibited lists, your financial institution may also file a Suspicious Activity Report (SAR). However, you will not be advised that an SAR was filed. Disclosure of SAR filings is prohibited because law enforcement uses SARs in ongoing criminal and civil investigations and don’t want anyone tipped off and possibly undermine a sensitive investigation.
It’s important that your organization work with a knowledgeable financial institution that understands and complies with all payment compliance regulations so that your payments are properly and quickly processed. AP professionals can do their part in this process by providing accurate information in a timely manner when requested by financial institution providers.