Cover Payments

Cover payments are used in correspondent banking, usually to facilitate international transactions. They are payments made through a chain of correspondent banks to settle (“cover”) a credit transfer message that travels a more direct route to the ultimate beneficiary’s bank. 

Although the use of cover payments creates efficiencies for banks, current messaging standards do not ensure full transparency of the ultimate originator and beneficiary involved in the transaction.  As a result, regulators have raised concerns that cover payments could expose intermediary banks involved in the transaction to an increased risk of unknowingly facilitating illicit activities.

In April 2007, the Wolfsberg Group, a group of global banks and The Clearing House Payments Company, partnered to address this problem and developed a set of four payment message standards designed to increase transparency of international payments.  http://www.wolfsberg-principles.com/index.html (Off-site Link)

In October 2007, the Bank for International Settlements (BIS) issued a statement of support for the Wolfsberg Group initiative and an initiative sponsored by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) community to design a solution for improving transparency of international payments. http://www.bis.org/publ/bcbs_nl12.htm (Off-site Link)

To improve the transparency of international transactions, SWIFT will be making enhancements to existing payment messages for cover payments.  The new format will include originator and beneficiary details for cover payment messages.  The new message will also have a maximum length of 10,000 characters, which will make it possible for an originating bank to send a single aggregate cover payment containing payment instructions for multiple underlying individual transactions, potentially with a variety of ultimate originators and/or beneficiaries that happen to use the same banks in a given correspondent banking chain.  SWIFT will implement the new cover payment message in November 2009. 

If you are a SWIFT participant, you can obtain more details about this issue, including the format specifications for the proposed cover payment messages, by emailing the SWIFT U.S. National Group at usngswift@aol.com.

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