Board of Governors of the Federal Reserve System

Introduction

Section 1073(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the Board of Governors of the Federal Reserve System (the Board) to provide biennial reports to the Congress over a 10-year period regarding the Board's work with the Federal Reserve Banks (Reserve Banks) and the U.S. Department of the Treasury (Treasury) to expand the use of the automated clearing house (ACH) system and other payment mechanisms for remittance transfers to foreign countries.¹ Section 1073(b) requires the Board to include in its report an analysis of adoption rates of international ACH transactions (IATs), rules, and formats; the efficacy of increasing adoption rates; and potential recommendations to increase adoption. Pursuant to this statutory requirement, the Board is issuing this fourth biennial report.²

Developments

This section highlights key developments since the Board's third biennial report in 2015, including updates on cross-border payment improvements, changes to laws and regulations pertaining to cross-border payments, and issues relating to economic sanctions and anti-money laundering (AML) requirements.

Cross-Border Payment Improvements

Over the past two years since the 2015 report, there have been several efforts underway to improve cross-border payments. As noted in the Board's 2015 report, the Federal Reserve published Strategies for Improving the U.S. Payment System (Strategies Paper) in January 2015, which outlined five desired outcomes for consumer and business payments, covering speed, security, efficiency, international (cross-border payments), and collaboration. The paper recognized the need for enhancements to cross-border payments, particularly "[b]etter choices for U.S. consumers and businesses to send and receive convenient, cost-effective and timely cross-border payments."³ Several of the strategies outlined in the paper could result in improvements to cross-border payments. One of the strategies was the establishment of a Faster Payments Task Force (task force), which has the mission of identifying effective approaches for implementing a safe, ubiquitous, faster payments capability in the United States.⁴ The task force recognized early on the importance of cross-border payments as part of the overall payments improvement effort. In particular, in January 2016, the task force published its Faster Payments Effectiveness Criteria (effectiveness criteria), which outlines desirable attributes of future faster payment capabilities, including a criterion on cross-border functionality. Specifically, the task force believed it was important that capabilities should "…enable convenient, cost-effective, timely, secure and legal payments to and from other countries."⁵ In early 2016, the task force solicited proposals for faster payment solutions that sought to address the effectiveness criteria. Twenty-two proposals were submitted, and some of those parties responding with submissions may elect to have their proposals released to the public, along with an assessment against the effectiveness criteria, in part two of the task force's final report in mid-2017.⁶ Beyond the proposals submitted through the task force process, the task force believed that, by highlighting cross-border functionality as a desired attribute in its effectiveness criteria, it could encourage further development of cross-border enhancements in the payments market.

The Strategies Paper also included a strategy related to payments efficiency, including efficiency in cross-border payments. As part of this effort, in March 2016 the Reserve Banks and The Clearing House (TCH) announced that they planned to implement the ISO 20022 payment format standard for their domestic and cross-border wire payments systems, Fedwire Funds Service and the Clearing House Interbank Payments System (CHIPS), respectively. The ISO 20022 standard helps cross-border payment efficiency by providing a structured format for remittance information.⁷ This structured format can facilitate cross-border payments by streamlining the exchange of payments information across payment systems that have adopted the ISO 20022 standard in various countries. The Reserve Banks and TCH will coordinate on a multi-year adoption plan. While both announced a preliminary implementation approach and timeline in 2016, detailed planning is underway to refine the implementation strategy, which will be announced to the industry when complete.

SWIFT's global payments innovation (gpi) initiative, which was announced in December 2015, is another effort focused on improving the speed and transparency of cross-border payments in wire-transfer systems.⁸ Domestically, a number of U.S. banks are participating in the initiative. SWIFT identified four areas for improvement in correspondent banking that it seeks to address through the gpi initiative--same-day availability of funds, transparency of fees, payments tracking, and transferable payment information.⁹ A key innovation of the initiative, launched in early 2017, is the gpi Tracker feature, which provides institutions an end-to-end view of the status of their payments, such as confirmation when the payment gets credited to the receiver's account and visibility that remittance information has been transferred unaltered.¹⁰ This improves transparency and traceability of cross-border payments, which has been difficult in the past. In support of the gpi initiative, the Reserve Banks and TCH are also supporting a market practice for Fedwire Funds Service participants and CHIPS participants that are using the SWIFT gpi service to carry gpi-related information in respective wire message formats.¹¹

As described in the 2015 report, the Reserve Banks offer an international ACH service, called FedGlobal ^® ACH Payments (FedGlobal).¹² FedGlobal facilitates remittance transfers and other cross-border payments to a number of countries. In December 2015, the Federal Reserve announced its decision to discontinue the FedGlobal ACH Account-to-Receiver (A2R) service. The A2R function was originally implemented in 2010 for remittance transactions to Latin American countries, allowing for financial institutitions "…to send payments from their customers to unbanked receivers abroad."¹³ Successful financial inclusion efforts in Mexico and limited reach to destinations in Latin America contributed to a lack of consumer demand for the service option, limiting its overall benefit in the market and supporting its discontinuation.

Changes in Rules and Regulations Related to Cross-Border Payments

In 2016 and 2017, NACHA The Electronic Payments Association (NACHA) made and proposed various modifications to its Operating Rules as they relate to cross-border payments.¹⁴ In 2016, NACHA implemented a technical change to record-formatting rules that helps to ensure that a sending (domestic or foreign) institution is identified for outbound IATs. This change provides transparency around the origin of the funds. In early 2017, NACHA requested comment on further technical changes to provide additional information about parties to IAT entries, specifically regarding date of birth and split payments.¹⁵ These proposals are in response to requests from the industry to resolve issues related to financial institutions' ability to fully evaluate IAT entries for compliance with OFAC sanctions policies.

Also, the Consumer Financial Protection Bureau's (CFPB) remittance transfer rule, an amendment to Regulation E, establishes disclosure, error resolution, and other requirements for depository institutions that offer cross-border remittance transfer services.¹⁶ On October 5, 2016, the CFPB issued its final prepaid account rule, also part of Regulation E, which sets out consumer protection rules for prepaid accounts, including prepaid cards used for cross-border payments.¹⁷ The final rule makes several revisions to the rules governing remittance transfers in Regulation E that are intended to continue the current application of those rules to prepaid products. The effective date for the provisions of the prepaid account rule that affect the rules regarding remittances is April 2018 (having been delayed from an original effective date of October 2017).¹⁸ Additionally, as mandated by the Dodd-Frank Act, the CFPB will undertake an assessment of the remittance transfer rule in a report it expects to release by October 2018.¹⁹

Economic Sanctions and Anti-Money Laundering

Still persisting in the marketplace are concerns regarding compliance with economic sanctions and AML requirements, including the Bank Secrecy Act (BSA). Since the last report, much research and guidance highlighted and responded to concerns of different market segments within the remittance industry. A data analysis of SWIFT correspondent payments between 2011 and 2015, a portion of which may be remittance payments, suggests that the volume of payments increased while the value declined. Furthermore, the number of active correspondents declined over the same time period, suggesting increased concentration in correspondent banking activity.²⁰ Researchers have examined the degree to which institutions are reducing or closing correspondent banking relationships due to factors such as regulatory and enforcement concerns.²¹ Institutions also cite other factors, such as profitability, risk appetite, concerns regarding illicit financial risk, potential industry reputational risk, and strategically assessing global footprint as other reasons for closing correspondent banking relationships.²² The decision to open, close, or decline a particular account or relationship is generally made by a bank, without involvement by its supervisor. A number of recent efforts have clarified regulatory expectations in this area, such as the Treasury's joint fact sheet on AML and sanctions enforcement, the Basel Committee on Banking Supervision's update to the guidelines Sound management of risks related to money laundering and terrorist financing, and the Financial Action Task Force's guidance Correspondent Banking Services.²³ Some nonbank payment providers, such as money service businesses (MSBs), have also experienced account closures.²⁴

To provide more clarity on the environment, and in response to the Group of Twenty's (G20) Global Partnership for Financial Inclusion request for a remittance study within the G20 nations, the World Bank conducted a survey to gather comprehensive information on the scope, drivers, and effects of potential challenges faced by money transfer operators (MTOs) in various jurisdications.²⁵ The results were published in October 2015, and touched upon several issues: the recent trend of some global banks withdrawing from correspondent banking relationships or limiting services for MTOs, operational requirements for remittance transfers, supervision of MTOs, the need for continued governmental guidance for the MTO sector for compliance requirements, and additional guidance to banks for providing services to MTOs.²⁶ The results further indicate that many banks do not feel as though they can rely on the supervision of the MTO sector to inform risk-based decisions on opening and maintaining accounts for MTO customers.²⁷ Since this survey, dialogue has continued on these issues, including through the Stakeholder Dialogue on De-Risking Workshop, hosted by the World Bank and the Association of Certified Anti-Money Laundering Specialists (ACAMS) that included a discussion of potential next steps to address issues in the remittance market.²⁸

Adoption Rates

As of December 2016, of the depository institutions completing the Call Report, 3,290 reported offering remittance services to consumers.²⁹ Of those institutions, 471 (14.3 percent) provided the option to send cross-border payments via ACH transfers, which use the IAT format.³⁰ Over the two years since the prev-ious report, commercial IAT volume grew 43.2 percent, while overall ACH volume grew 10.9 percent (as shown in Table 1).³¹ Through FedGlobal, the Reserve Banks processed 0.2 percent of the total commercial IAT volume handled by the ACH operators in 2016.³²

As shown in table 1, between 2014 and 2016, FedGlobal ACH commercial IAT volume increased 34.1 percent.³³ This increase can be primarily attributed to an increase of roughly 30,000 payments exchanged with Europe.³⁴ In value terms (not shown), FedGlobal ACH commercial IAT value increased 111 percent to $4.1 billion between 2014 and 2016. This increase can be attributed to the Europe and Canada Services.³⁵

Table 1. International ACH Transactions (IATs), 2012-16

(number of transactions, except as noted)

Footnotes