Guest Writer Sunil Landge: Impact of ISO 20022 on Compliance

Sunil is a QA Engineer at Globalpoint.

Our guest writer this week is Sunil Landge 🟢 , who is an expert in ISO 20022 which aims to be the global standard in the exchange of data between financial institutions. Sunil has 14 years of experience in banking in the USA and India. He has been in various roles including as a credit officer, branch manager, and IT manager. Sunil is currently working on a bank’s cross-border payment system for ISO implementation. Before that, he worked on Fiserv’s Zelle payments. He has also worked in SBI New York as Manager (Systems) looking after Payments, Compliance and AML applications. He implemented a new wire processing solution for the bank which catered to all domestic (22000 branches) and foreign branches. Prior to this, he worked as a Manager in the State Bank of India and rolled out 250 digital branches including managing their support. Particularly with FedNow going live last year and leveraging ISO 20022, this takes on heightened importance and we’re glad to have Sunil with us to make sense of it all. Take it away, Sunil:

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Introduction

Banks all over the world send and receive payments through messages. The most common form of messages is SWIFT (Society for Worldwide Interbank Financial Telecommunications). There are many proprietary message formats used within countries, like Fedwire in USA, which has its own message format. Banks across the world manage multiple message formats for their domestic and international payments. This has introduced the need of payment systems or engines which can read different message formats and process them. Banks also use these messages for sanction screening as in the case of OFAC. They also use this data (in the messages) for their AML (Anti Money Laundering) screening.

Background

SWIFT is a network in more than 200 countries and is the de facto messaging system for international payments. It uses a proprietary message format which is called the MT format. This is a legacy format which defines fields based on numbers. The current MT format has less fields, is not structured (compared to ISO) and not machine readable.

To solve these issues, SWIFT has started implementation of new format which is called the MX format, commonly known as ISO 20022 format. It brings a common standard, machine readable format (XML) which is rich in data. Since this change will impact the entire world and the banks need time to make changes and adopt, SWIFT has given a transitionary period from Mar 2023 to Nov 2025 for this change. During this phase, banks will be able to use both message formats. This transition has brought a new set of challenges, although we will not discuss them here.

Due to the benefits of the ISO format, many payment infrastructures across the world are also migrating by dropping their proprietary formats. Some of them are – CHAPS (UK), Target2 (Euro), CHATS (Hong Kong), Fedwire and CHIPS in USA. CHIPS (largest clearing house in the world) has just migrated to the ISO format on April 08, 2024.

Examples of enriched data

The structure and richness of data in the ISO 20022 format helps banks to efficiently manage their Compliance functions. The following are a few examples which are impacting compliance:

1) Structured name and address

The name and address fields are structured in the ISO format. They are represented by various tags. The legacy format is represented by numbers. The old format of a message has the following name and address field:

:59/123456789

Cuba Bar and Lounge

4323 Main Street

10011 LV

The number 59 represents that this is a beneficiary. The first row above represents the account number of the beneficiary, and the below fields represent the name with address. The current sanction system will show it as a false positive for Cuba.

Now look at how the ISO 20022 message format structure helps here which is given below:

<Cdtr>

<Nm> Cuba Bar and Lounge </Nm>

<PstlAdr>

<StrtNm> Main Street </StrtNm>

<BldgNb>4323</BldgNb>

<PstCd>10011</PstCd>

<TwnNm>Las Vegas</TwnNm>

<CtrySubDvsn>NV</ CtrySubDvsn >

<Ctry>US</Ctry>

</PstlAdr>

It should be noted that the country name is defined through a specific tag <Ctry> and hence the sanction filter will not consider the country as Cuba reducing false positive. Moreover, this structured data will be helpful from an AML or data analytics perspective as the name of the party will be correctly mapped for all the transactions.

The above example is also applicable for originator/sender.

2) Purpose code

A Purpose code helps Compliance teams know the exact reason of a cross border payment. They are issued by the central bank of a country and mostly mandatory in cross border payments. Currently they are part of Field 70 of Swift legacy messages. However, in ISO format, it is more structured. Also, it is being used as a four-letter code to indicate the category of payment. One example is given below:

<Purp>EDUC</Purp>

It represents that the payment is made for education. The ISO format also allows for enhanced remittance information with a new tag of <RmtInf>. It provides more information about the payment. This can help the Compliance team as well as regulators to identify the exact nature of payment.

3) New elements

The ISO 20022 format has introduced new elements like ultimate debtor and ultimate creditor. The Ultimate debtor is the party that owes an amount of money to the (ultimate) creditor. The Ultimate creditor is the party to which an amount of money is due. This will help the Compliance team to understand who the ultimate party in the transaction is and run sanctions screening against the same. This is currently not available and hence the ISO format will help Compliance teams to safeguard the bank’s interest.

4) Unique identification

The current system is not structured to manage unique identifiers like LEI (Legal Entity Identifier), BIC (Bank Identification Code) or even national ID number or passport number. This enriched data supported by the specific tags will help AML tools to identify and link the entities thereby giving a comprehensive picture of entities’ transactions.

Conclusion

The ISO 20022 format which is machine readable, enriched, and structured will transform payment systems of the world. However, the impact of payments will be felt across other divisions of the banks, mainly sanctions screening and AML. Compliance teams need to be aware of these changes and ensure that they are not missing any data during this transition period (through Nov 2025). Also, they need to test if their systems are capable of handling ISO format data. The importance of Sanctions or AML need not be emphasized as they impact the very existence of the banks. However, being aware of these changes and performing timely upgrades of systems will ensure no regulatory violations.