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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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March 15, 2010

Global challenge: Catching crooks while protecting privacy

As I watched the Winter Olympics unfold in Vancouver, I marveled at the stories of athletes who had gained citizenship in other countries in order to pursue their dreams. A Canadian moguls skier moved to Australia (which I kind of get) and a Japanese pairs figure skater fled to Russia (which I don't get). In both cases, their renationalization was rewarded with Olympic medals, and in both cases, I was reminded of how completely we have merged into a one-world family and a one-world economy.

Amidst this clear and widely embraced trend to global industrialization and trade, we find that our payments systems lag miserably behind. Certainly this is not because of the lack of availability of technology to wire us together; in fact, both good guys and bad guys use the Internet to order and ship goods and services, as well as commit fraud, across the globe in minutes. And, certainly, this is not because of trade practices. As I found out from Linda Coven, a senior executive at the Silicon Valley Bank in California, a technology firm born in the Silicon Valley becomes a global firm the minute they put up their Web site. Even a modest-sized bank such as hers can develop the expertise and partnerships to help such companies cope with the financial aspects of worldwide markets.

Tangled web
The fly in the international payments ointment is the complex web of regulatory and law enforcement regimens that quite naturally do not as yet mesh. In fact, this can still be a problem domestically, no less globally. The global version of this dilemma gained center stage on February 2010 when the folks at the European Parliament voted to reject the interim EU-US agreement on the processing and transfer of financial messaging data from the European Union to the United States for the purposes of the Terrorist Finance Tracking Programs (TFTP). These programs were established by the U.S. Treasury in the wake of the September 11, 2001, attacks. The TFTP allows the Treasury law enforcement agencies to issue administrative subpoenas for terrorist-related data, including the records of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the world's largest network for banking transactions. Privacy laws and liabilities were cited as the major stumbling block in this reversal of form from previous agreements. Efforts by SWIFT to implement new technology to separate their databases into geographical segments may still allow some access to data involving a U.S. institution, but the EU ruling could ultimately impede law enforcement activities aimed at catching criminals that make today's global payments world a bit of the wild, wild West.

For those who feel that today's regulatory/law enforcement climate borders on paranoia, I would counter that in the face of global terrorism and money laundering there may be ample reason for paranoia. It is clear that cross-border payments applications deserve greater scrutiny to make sure they are not vehicles for financing dangerous and unsavory organizations. Strong compliance policies and screening practices are even more critical in this environment than they are domestically. Nevertheless, we see once again the incongruent goals of catching criminals and preserving privacy. In cases where cooperation and trust have been established there have been great successes. Internet corporate takeover rings have been stymied and Nigerian-based fraudulent check schemes have been terminated to the benefit of numerous domestic corporations and consumers.

Building a team
At the Retail Payments Risk Forum, we are working with various parties to find ways to synthesize the conflicting goals of privacy and enforcement to create a more directed and timely approach to catching the bad guys. As we progress, we will have to be ever-mindful of the fact that the next step will be to use our domestic examples as templates for solving the same problems internationally. Useful new work groups and task forces have been established here in the United States, such as the Interagency Payments Fraud Working Group under the current co-chairmanship of the Justice Department and the Federal Reserve Board, that are directed at better cooperation between law enforcement and the bank/non-bank regulatory community. Extending such collaboration into the international arena needs to become a priority for our industry if we are truly going to mitigate payments risk and catch offenders. It is no secret that this will be a difficult challenge, but fighting cyber crime is no longer a domestic issue here in the States or anywhere else. While we cast aside old norms in the payments and technology areas to do business across borders, we must also be open and innovative in regulatory and law enforcement circles if we are to have any chance of keeping up with criminals.

By Rich Oliver, executive vice president, FRB Atlanta's Retail Payments Risk Forum