Cross-border payments: fraud mitigation strategies

March 2024  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

March 2024 Issue

Businesses today looking to expand globally face myriad challenges, including social and cultural gaps, communication barriers, time zone differences, politics, increased competition, establishment costs, supply chain disruptions, and tax and legal compliance.

Also a key challenge for businesses, and one of no less consequence, is cross-border payments. An essential component of the global economy, cross-border payments, as defined by Integrated Research, are transactions involving individuals, companies, banks or settlement institutions operating in at least two different countries and are international transactions.

Moreover, competition in the cross-border payments market is rapidly increasing and forecast to reach $250 trillion by 2027, according to Citigroup’s 2023 ‘Future of cross-border payments: who will be moving $250 trillion in the next five years?’ report.

“Cross-border payments allow businesses to transfer money across borders and conduct transactions with partners and customers around the world,” states the 2023 Flagright analysis ‘Preventing and Stopping Fraud in Cross-Border Payments’. “The increasing complexity of the cross-border payment landscape has also created challenges for businesses in preventing and stopping fraud.”

However, while businesses will be familiar with fraud scenarios in their home market, new territories present new obstacles. Payment paths may be difficult to manage and could become a weak spot, opening the door to fraudsters. Typical of the fraudulent activities facing businesses involved in cross-border payments are money laundering, terrorist financing and cyber crime, to name but a few.

In its ‘Tackling fraudulent activity in cross-border payments’ analysis, J.P. Morgan notes that cyber criminal groups specifically target cross-border transactions because the process is opaque and convoluted, with little standardisation. Moreover, it is estimated that there are 26,000 global rules that affect cross-border payments, with no single regulatory body as each country’s banking system has its own regulations and security policies.

As a consequence, organised criminals can target vulnerabilities at certain banks in certain countries and use them to access wider networks. They can then re-route transactions to different beneficiaries, spread around the world, confident that there will be little chance of recovering the funds.

Key challenges

For large multinational corporations, and small and medium-sized enterprises (SMEs) in particular, the challenges involved in transferring money across borders and conducting transactions with partners and customers around the world are significant – with SMEs the entities most likely to be unfamiliar with fraud obstacles in new territories.

“Historically, cross-border payments were hampered by high levels of complexity and risk,” concurs Macro Global in its 2022 ‘How to overcome the challenges of cross-border payments’ analysis. As examples, the reports cites frequent fluctuations in exchange rates, as well as instances of payment providers’ money failing to reach its destination due to human error. In some cases, businesses have had to wait weeks or months for payment for goods via international transactions.

“In terms of cost, speed, access and transparency, cross-border payments lag behind domestic payments,” the analysis continues. “Making a payment from one country to another is typically more difficult than making a similar payment within the same country. A cross-border payment can take several days and cost up to ten times more than a domestic payment in some cases.”

As noted by Macro Global, essentially, cross-border payment systems face the same key challenges. First, cross-border payments are extremely expensive due to the numerous intermediaries involved in transferring money from one country to another, each of whom charges a fee for their services. Second, transactions are slow due to multiple intermediaries. Cross-border payments via traditional bank transfer typically taking two to five days to process which is a long time when compared to instant online domestic payments. Third, there are security issues involved. Businesses want to know that their money is secure when making international transactions, as there is no guarantee that a bank will be able to recover stolen funds. Finally, there is a lack of transparency. Increased transparency benefits all types of businesses, allowing them to provide better services as well as understand and improve errors that impact their profitability.

“Fraudsters have become increasingly sophisticated in their tactics, exploiting weaknesses in know your customer (KYC) and know your business (KYB) procedures, using third-party payment processors as well as virtual currencies to evade detection,” adds Flagright. “These types of fraudulent activities not only have economic consequences, but also legal and regulatory consequences that can significantly impact the reputations of businesses and financial institutions involved in cross-border payments.”

Fraud mitigation measures

To combat the risk of fraudulent activity when making cross-border payments, businesses need to understand the inherent nature of fraud and the different tactics utilised by fraudsters. Best practices should be adopted, including transaction monitoring tools incorporating artificial intelligence (AI) and machine learning technologies.

Flagright points to a number of best practices that can help businesses mitigate cross-border payment fraud, as outlined below.

First, implementing multi-layered security controls can help prevent fraudulent activities. This can include implementing strong authentication measures, such as two-factor authentication, and using fraud detection and prevention tools to detect and prevent anomalous transactions.

Second, conducting regular risk assessments can help businesses to identify vulnerabilities in their systems and processes. Businesses can identify areas that require improvement and implement appropriate controls to prevent fraudulent activities.

Third, establishing robust KYC and KYB processes is critical for preventing cross-border payment fraud. By verifying the identity of customers and businesses, screening against sanctions lists and conducting risk assessments, businesses can reduce the risk of fraudulent activities.

Fourth, monitoring transactions in real-time can help detect and prevent fraudulent activities as they occur. By using machine learning algorithms and AI, businesses can detect anomalous transactions and flag them for further investigation.

Fifth, implementing anti-fraud controls can help prevent fraudulent activities. This can include using fraud detection and prevention tools, conducting regular audits and inspections and implementing compliance monitoring processes to ensure compliance with regulations.

Sixth, staying up to date with the latest regulations is essential for preventing cross-border payment fraud. Businesses must stay informed about the latest regulatory requirements and ensure that their processes and procedures are in compliance.

Lastly, providing training and education is essential for preventing cross-border payment fraud. In this way, businesses can ensure that employees understand the risks associated with cross-border payments and are equipped to prevent fraudulent activities.

“Ultimately, preventing and stopping cross-border payment fraud requires a comprehensive and proactive approach,” states Flagright. “By implementing effective measures and remaining vigilant, businesses and financial institutions can protect their customers, reputation, and bottom line from the devastating consequences of fraud.”

Cross-border payments regulations

Payment regulations will differ depending on the location and payment method of a transaction. Clearly, the more jurisdictions a business operates in, the more regulations it must consider when protecting itself and its customers from fraud, while also avoiding fines and lawsuits.

Major regulatory categories in cross-border payments include the items listed below, according to Macro Global.

The first is policies governing payment networks. This includes any rules, regulations, guidelines or specifications established by payment networks, such as electronic fund transfer networks and credit card associations. Payment networks can penalise and fine businesses that do not adhere to established policies.

The second category is data privacy. Different regions have different regulations concerning the handling of data. These regulations cover the rights granted to data subjects to the data stored, such as the right to prior notification of what the data will be used for, how the data will be handled and when it will be deleted.

The third is security. Because new payment technology necessitates new payment security, various regions have enacted regulations to safeguard consumers against fraud and theft. For example, the Revised Directive on Payment Services (PSD2), enacted by the European Parliament to better protect consumers when they pay online, is one of the more significant security measures.

The fourth is payment card industry data security standards. A data security standard (DSS) is a set of standards established by major card companies to ensure that all businesses that process, store or transfer credit and debit card details maintain a secure infrastructure.

The fifth is tax collection. Tax obligations for businesses are determined by several factors, including sales revenue, transaction volume and location of sales. Aside from the specific local tax laws, the payment a business uses will have an impact.

The final category is IT security. The threat of cyber attacks and data breaches puts businesses at risk of costly damage from data theft, ransomware attacks and reputational damage. Cyber security regulations have been drafted to cover elements such as data centre redundancy, data storage, data recovery and other security investments to ensure businesses are protected from hackers.

Shaping the future of payments

With the fraud challenges associated with cross-border payments likely to persist, particularly in light of increasingly sophisticated fraud-enabling technologies, efforts to tackle the issue are ramping up globally.

According to the Financial Stability Board’s (FSB’s) ‘G20 Roadmap for Enhancing Cross-border Payments: Consolidated progress report for 2023’, its cross-border payments programme has now moved into the next phase of action and practical improvements.

As noted in the report, for the first time, the FSB has the data to measure how far national financial authorities and international standard-setting bodies need to go to achieve the 2027 targets that G20 leaders have endorsed for material improvements in the speed, cost, accessibility and transparency of payments across borders.

“Reducing the complexity and risk of cross-border payments is critical for increasing global trade and facilitating economic recovery,” concludes Macro Global. “The payments industry should prioritise reducing the complexity of sending and receiving payments across borders and providing assurance that transactions will be processed quickly and reliably in all markets. Transparency on upfront costs and greater predictability for fund delivery are the vital elements for success.”

© Financier Worldwide

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Fraser Tennant