This pilot has reported that “a common multi-CBDC platform can improve cross-border payment speed and efficiency, reduce settlement risks and support the use of local currencies in international payments”. Another study on CBDC’s suggests costs can be reduced by as much as 80%.

AML/CTF/Sanctions & Use of CBDC’s

From an AML/CTF/Sanctions perspective, mBridge provides the following clarity on roles and responsibilities in this regard as follows: “Each commercial bank participant on the mBridge platform is obliged to comply with applicable laws and regulations in relation to AML/CTF/sanctions. To ensure the commercial participant has taken the necessary steps, the platform enables transaction-specific certification. This certification is provided after an off-bridge process, the result of which is translated into a pass/fail output and attached to the transaction itself.”

This is insufficient and needs much more thought. Whilst participant banks will be able to sign off on their own customers as they do today, both from an AML/CTF/Sanctions perspective, the fundamental change in the nature of the relationships where today commercial banks have bilateral relations to those in the future in mbridge where the central bank is the one with commercial relationships has profound consequences and serious implications.

In replacing the correspondent banking network, with a network of central banks, the central banks will need to take responsibility not only for their domestic banks  but responsibility for connecting those foreign central banks and the commercial banks of that foreign country, in the same way that correspondent banks are expected to take responsibility for the foreign respondent banks today which drives a significant amount of compliance costs in the industry today and leads to numerous forms of friction. Whilst a central bank may be in a position to monitor its domestic banks and receive certificates of compliance for transactions, their is an inherent conflict of interest involved which would incentivise central banks to approve transactions from their domestic banks, even when they have information for example about AML/CTF/Sanctions weaknesses at a particular Bank. Further, large money centre central banks will be expected to police the system and become actively involved in third countries central bank, regulatory and commercial bank compliance.

Whilst speed cost and transparency may be compelling using mbridge, if you factor in the costs from the commercial banks and transfer these to mbridge, the benefits become much less compelling AND are in any event unlikely to be accepted. Having transferred AML/CTF/Sanctions risk largely to the private sector, its unthinkable the public sector will want this back.

Focus on improving the Current System

Unless these fundamental challenges are addressed we need to continue to focus our efforts on fixing the current system as best we can. One area where real friction exists and is growing is sanctions, with no actions yet identified and tagged to FSBs 19 building blocks.

Friction from Sanctions

All Banks involved in the payment chain from the ordering customer’s bank through intermediary correspondent banks to the receiving bank are all required and or expected to carry out sanctions compliance checks before the payment can be credited to the account. This is an additional compliance requirement that doesn’t apply to domestic payments. Whilst there are good reasons for doing this, it is largely a preventative control that is highly inefficient, not least due to the nature of how payments are made through sequential banks who all have to carry out the same pre checks. Each Bank is required to screen cross border message data against prescribed lists which are different for each country albeit there are also common names often included. Increasingly large Correspondent Banks are encouraged to screen not only against required mandated lists of names but against lists globally issued by the home country as well as others, including UN, USA, EU, UK, Canada & Australia. Banks are also expected to identify for themselves related companies and persons to those listed and add them as well as other names to so called additional and private lists for sanction screening purposes.

Whilst a necessary preventative control the use of sanctions as a tool is becoming ever more popular and complex for in particular but not only for correspondent banks. Prior to the Russian invasion of Ukraine in 2022 list inflation was already rising at 15% a year and cross border payments volume at 5-6% a year. Thousands of additional names have been added to major lists which have increased the level of sanctions screening across the industry. With stop and check rates depending upon the market corridors between 5-15% and false positive rates after checking above 99.5% this process that was already generating significant friction in terms of cost and speed is not getting better but rather deteriorating. Whilst the answer isn’t going to be to stop using and supporting sanctions, where this is appropriate, action does need to be taken to address the concerns and the serious unintended consequences.

Sanctions Screening must be improved through redesign & industry collaboration

More than 40 Banks and other industry players have identified an opportunity to help co create a new platform, (GSS) where high standards for carrying out sanctions screening & other related activities have been agreed. This breakthrough enables participating banks to avoid duplication inherent in the current system, and by using proven state of the art technologies on alert generation, automating much of the alert disposition process and by embracing information sharing with safeguards GSS can significantly improve both the overall effectiveness and efficiency of sanctions screening. This innovative approach to be delivered through a platform is being made available to all FIs which should attack the friction in terms of costs and speed generated by sanctions screening carried out individually and this will translate positively into helping achieve FSB targets on cross border payments. No legal or regulatory changes are needed in order to achieve these goals, though regulatory and other support is welcome as changes in core compliance activities and those involving cross border payment markets are of course highly sensitive and must be risk managed to a very high degree. With the introduction of ISO20022 message data standards these will in time also play their part.