Wire Transfers - Risk and Compliance
    • 16 Jan 2024
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    Wire Transfers - Risk and Compliance

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    Article summary


    Wire transfers allows for the electronic movement of money between banks, both domestically and internationally. Wire transfers involve money movement that is close to real-time (but not 24/7) and are irreversible, making it a fast and reliable way for individuals and businesses to transfer money. It is often be an alternative to ACH for larger value transfers due to its speed and finality. They are widely used for large purchases, personal remittances, and business-to-business payments / transactions, among other things.

    Synctera has an Domestic Wires guide here and International Wires guide here that provides more detail on wires in general.

    In the context of risk and compliance, it's essential to understand wire compliance with federal laws, most importantly anti-money laundering / terrorist financing laws due to the generally higher dollar amounts associated with wires. In addition, because wire transactions are irreversible, they are a target payment method for financial scams and a preferred way to fraudulently drain funds from an account takeover. For these reasons, instituting some level of controls is important to protect your company from liability and your customers from fraudulent activity. Note that the below is not legal advice and is general guidance - wire transfers can be subject to various state-level laws and your controls may differ based upon your assessment of legal, financial, and compliance risks.

    Wire Transfer Types

    Wire transfers can be distinguished as incoming (your customer receives funds) or outgoing (your customer sends funds) and domestic (wire is incoming or outgoing within the US) or international.

    Risks and Controls

    When supporting wire transfers for your customers, there are compliance and financial risks to be considered as well as potential controls to mitigate those risks. Your risk and the bank's risk is primarily concentrated on outgoing wires that are initiated via your platform. You are responsible for ensuring proper authorization and controls are in place to mitigate unauthorized wires. Note that operational risks also exist, which relates to broader Operational Resilience topics and controls.

    Finality of wire transfers

    Setting up strong controls for wires is particularly important due to the 'finality' of a transfer. Wires are also generally subject to the Uniform Commercial Code (UCC), a model commercial legal framework that has been adopted either in whole or in part by all 50 U.S. states, which describes how various parties in the transaction may become liable. Once your customer has sent out the wire and it has been processed, successfully recalling funds is very difficult. While your sponsor bank may request a recall on behalf of your customer, the receiving bank has minimal obligation to return the funds especially if those funds have been moved or spent. In addition, it is important to have commercially reasonable security procedures in place to reduce potential liability on you. For this reason, it is often useful to educate or remind your customers of potential wire scams as well as instituting strong controls to mitigate fraud and operational error.

    Risk TypeControls and Mitigants
    Fraud risk - Funds being sent out were unauthorized by the customer; Funds were authorized, but customer was duped from a scam* Set max daily transaction limits and velocity limits
    * Require biometric checks for transactions
    * Require 2FA confirmation for large transactions (generally the authentication should be out-of-band e.g. mobile apps require email confirmation while desktop transactions require mobile / text confirmation)
    * Require callback verification for large transactions by calling the customer at their phone number on file and verifying identity / transaction details
    * Verifying that the customer's profile such as phone number has not changed in the past 30 days to avoid account takeover risk and if so - ensuring verification through other means
    * For business customers allowing for dual verification, e.g. one person at the business initiates wire, another person at the business confirms or approves the wire
    * Create customer reminders or alerts regarding scams
    Operational risk - Customer enters incorrect information resulting in wire being sent to incorrect destination* Receive and record authorization prior to the transaction
    * Require the customer to re-verify / re-enter the account number that the wire is being sent to
    * Customer sees a reminder prior to transaction being sent on the irrecovability of wires
    Credit Risk - Customer does not have sufficient funds for the outgoing wire* Synctera operates on a "good funds" model for outgoing wires - customers must have sufficient funds to initiate a wire and funds are set aside as soon as the customer initiates the transaction

    Additional BSA/AML Compliance

    While your risk to financial loss is primarily driven by outgoing wires, it is your duty to understand why your customers may be sending or receiving large dollar wires as part of BSA/AML rules and regulations.

    Wires can be used as a tool to hide money laundering due to the speed of transfer and the ability to not provide detail on the source of funds for incoming wires. For example, John Smith is laundering his funds through real estate. John buys a house for $100,000 in January and then sells it for $95,000 in February at a loss as his only goal is to make the funds clean. Other examples are car sales, shipping of empty containers, and trade-based money laundering. Money launderers can use wires in these scenarios to "clean" the funds.

    Large wire transfers can often trigger AML alerts requiring further investigation and knowledge of your customer in line with CDD and EDD requirements. Oftentimes, you will need to know the following for large wire transfers:

    • Purpose of the transfer - Examples of this may include a personal transfer, remittance transfer, business transaction / vendor payment, investment, real estate purchase
    • Relationship between sender and receiver - Dependent on the purpose of the transfer, it is important to understand who the other party is in the transaction whether that is a sender or a beneficiary
    • Supporting evidence or documentation - This may include invoices, receipts, or proof of purchase supporting the large transaction

    In addition, OFAC/sanctions screening will be conducted on senders and beneficiaries.

    International wires require additional information being provided to the bank and sanctions / OFAC checks due to the increased risk of money laundering / terrorist financing. This is also known as the FINCEN 'travel rule'. Generally, wire transfers that exceed $3,000 (or foreign currency equivalent) and involve an international sender or recipient are subject to the travel rule. As a result, enabling international wire transfers requires bank approval and additional AML compliance controls.

    Wire Authorization

    Outgoing wires require the customer to provide authorization. Gathering, recording, and retaining payment authorization is an important component of reducing liability.

    Authorization includes the following general items. However, your Sponsor Bank may have more detailed requirements on authorization and disclosures.

    • Explicit Authorization: The language must clearly indicate that the account holder authorizes the outgoing wire transaction from their account.

      • Example: "I (or we) hereby authorize [Company Name] to initiate a wire transfer to [Checking/Savings] account at [Bank Name], Account Number [xxxxxx]"
    • Specific Transaction Details: Include details about the transaction including the amount and the timing regarding the transaction (subject to cut-off times set by your Sponsor Bank). As part of the authorization include:

      • Customer information - name, account number
      • Beneficiary information - name, bank name, bank address, account number, routing number
      • Transaction details - amount, currency, date of transfer
      • Any additional fees or charges associated with the transaction
    • Bank and Account Identification: Clearly state the bank name and account / routing number for confirmation. Incorrect account and routing numbers will result in rejected transactions.

    • Processing Time and Cut-offs: State the cut-off times for wire transfers and that the transfer may be initiated the following business day if after the cut-off time.

    • Disclaimer on Amendments and Cancellations: Remind the account holder that any amendment or cancellation of the wire must be done before it is processed.

      • Example: I/We understand that requests to amend or cancel the wire transfer must be received before the transfer is processed. [Company Name] is not liable for any inability to stop or retrieve a wire transfer once processed."
    • Signature Requirement: For electronic authorizations, ensure compliance with the Electronic Signatures in Global and National Commerce Act (E-Sign Act).

    Security Procedures

    It is expected that you have commercially reasonable security controls in place to ensure your customer has truly authorized the transaction. This includes having minimal 2FA confirmation as an example. These procedures should be outlined in your wire agreement with your customer and may be dictated by your Sponsor Bank.

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