By John Sandman
Will greater disclosure of customer data make the financial services industry more stable at the cost of privacy breaches? In a climate where regulators are expected to demand increasing information on transactions, that question could become more pressing. And for financial firms, the investment needed for systems changes is daunting.
The sheer quantity of differing data-disclosure statutes raises the potential for conflict. In the European Union, 27 member states have privacy statutes on disclosure of information, as do Norway, Russia, Switzerland and 20 others in the region.
"There is tension between international privacy laws and compliance mandates in the U.S.," said L. Richard Fischer, a partner at Morrison & Foerster in Washington, D.C., at a recent conference on money laundering. He pointed to Belgium-based messaging cooperative Swift's handover of customer data to the U.S. Treasury Department in 2005 as a shot across the bow in the data privacy struggle. In Europe, he said, "The existence of legal requirements in another country is not enough to force you to provide identifying information to a government authority."
Difficulties arise as business crosses borders, said Pamela Johnson, Citigroup's global head of anti-money-laundering (AML) compliance, at the Hollywood, Fla. conference. "Citigroup is in a number of different regions," she noted, "but all it takes is to be in more than one country for you to have challenges. There's operational risk in funds transfers when the existing laws are not only at odds but ambiguous."
Some data-disclosure initiatives have been withering on the vine. For example, the Financial Action Task Force, an intergovernmental body that develops AML standards, recommended in 2002 that the beneficial owner of an account be identified in a funds transfer. However, Swift's forthcoming messaging format for cover payments--a part of the global payments system that can disguise the source and destination of a transfer--may represent a tipping point for disclosure.
Swift's new message type, which is designed to bring transparency to the originator and beneficiary of a wire transfer, is slated to go live in November. Firms have pushed back against that date to no avail, although the industry's slashed IT budgets may yet prove persuasive. "Not only do we have to make systems changes, but we have to do them on time while short-staffed," said Johnson.
Meanwhile, there's the danger that the additional disclosure will increase exposure for customers and their accounts. "The intention is good," said Johnson, "but the application is going to be tough on risk management. By satisfying the data-sharing requirement, you lose control of the data."
"It would be a mistake to focus on changes to Swift standards without additional focus on know-your-customer standards," said Ron King, chief AML officer at Scotiabank in Toronto, in an interview. "The idea of transparency is a good one and any additional information in a cover payment is useful, but my concern is that we're just announcing to the rest of the world what we're looking at."
Transparency requires that everyone plays by the same rules. Wolfsberg Group, an association of global banks that promotes AML standards, and Swift have been working to make cover payment rules mandatory, "but how many banks worldwide are members of Swift?" said King. "It only takes one bank to put the whole thing at risk. The behavior we're seeing among counterparties, both in sanctioned countries and in places where they're dealing with sanctioned countries, is to run payments through a friendly third party so you never really know who the final beneficiary is."
When a bank that's willing to conceal information and an intermediary that doesn't know the difference can thwart the industry's best efforts, jurisdictional and budgetary concerns take a backseat to risk.
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