Shaping the future of cross-border transaction compliance

Summary report by Bank for International Settlements following a

roundtable discussion which took place at Elevandi Insights during the Singapore FinTech Festival 2023  

Roundtable discussion: cross-border transaction compliance

Introduction

The session opened with an acknowledgment of the growing complexity in cross-border transaction compliance, highlighting the need for enhanced solutions and collaborative efforts across sectors and regions.

Challenges

A major challenge identified was the increasing intricacy of sanctions screening. Financial institutions (FIs) find it difficult to comply with evolving sanctions, especially given the introduction of counter-sanctions. The uneven implementation of Know Your Customer (KYC)/ Anti-Money Laundering (AML) regulations globally, particularly concerning the travel rule, exacerbates these challenges. 

Divergence in privacy and security regulations worldwide render data flows challenging as is inconsistent legislation on settlement finality, dispute resolution, and prudential licensing rules. Digital identity solutions are disparate and not interoperable across different jurisdictions.

Although most regulations are based on similar principles, in practice, financial institutions are faced with a significant compliance burden stemming from differing regulations across jurisdictions. Banks are increasingly focusing on regulatory reputation and risk management and follow a risk-based approach, particularly in regions like the South Pacific, where the impact is more pronounced.

Another issue are capital flow management measures (CFMs), which are multifaceted due to varying country-specific considerations and can be both qualitative and quantitative in nature. Current systems are highly customised, making standardisation and automation difficult. Decentralised versus centralised data approaches in CFM were discussed, with centralised systems offering easier access to necessary information at the drawback of potential privacy implications.

The audience voted on the biggest compliance challenges for cross border transactions, with suspicious transaction monitoring and sanction screening scoring first and second.

Technological solution approaches

Several technological solutions were suggested, including the use of inline sanction screening for transactions and the potential for digital ID solutions. Compliance-focused machine learning (ML) and artificial intelligence (AI) applications, such as in the AML KYC space for detecting forged documents, were highlighted.

The roundtable also touched on the use of blockchain technology for transaction monitoring and sanction screening, emphasising the importance of regulatory clarity for the effective functioning of digital asset firms. The concept of “compliance by design” was discussed, suggesting the integration of compliance requirements directly into technological solutions.

Additionally, the roundtable explored the possibility of composable regulation enabling machine-readability and executability to facilitate compliance. There is also potential for Large Language Models (LLMs) and other advanced AI techniques in interpreting complex regulatory texts or crowdsourcing of legal interpretations.

Key Takeaways

Key takeaways from the roundtable included the need for greater collaboration between the private and public sectors to address compliance challenges effectively. Emphasis was placed on the importance of developing interoperable and modular technological solutions that can adapt to different regulatory environments and the dynamic nature of technological developments.

The concept of purpose-bound money (PBM), which involves wrapping assets into smart contracts with embedded policy implementations, was discussed as a potential future direction. The session also highlighted the need for privacy-enhancing features in compliance technologies, such as zero-knowledge proofs for verifiable credentials.

Project Mandala by the BIS Innovation Hub and the central banks of Australia, Malaysia, Korea, and Singapore addresses the challenges discussed through a peer-to-peer exchange of compliance requirements and data between financial institutions, combined with cryptographic proofs for verifiable compliance.

In summary, the roundtable underscored the critical nature of cross-border transaction compliance in today's global financial landscape. The discussions pointed towards an evolving compliance environment that necessitates innovative technological solutions, greater collaboration across sectors, and a need for regulatory frameworks that are adaptable and interpretable by advanced technological systems. Stay tuned for updates on Project Mandala, as a proof of concept is being developed to address some of these challenges!