SWIFT The global provider of secure financial
messaging services

 

New standards for cover payments

Published on 19 May 2009

Over recent years, regulators and the financial industry, in their fight against money laundering and terrorist funding, have been focusing on possible exploitation of a lack of transparency with cover payments.

Two payment methods, the serial and the cover method, can be used to process payments in cases where the financial institutions of the ordering and beneficiary customer do not have a direct account relationship.

With the serial method, an MT 103 Single Customer Credit Transfer is sent from the ordering customer’s financial institution through the correspondents to the beneficiary customer’s financial institution.

With the cover method, the MT 103 is exchanged directly between the financial institutions that service the customer accounts, as illustrated in the diagram. Due to the lack of a direct account relationship in the currency of the transfer, a separate covering MT 202 General Financial Institution Transfer is sent to clear and settle the payment at the inter-bank level. However, the MT 202 message does not make it possible to convey complete information on all parties involved in the transaction. In other words, the correspondent banks that process the MT 202 do not receive any information about the ordering and beneficiary customers, about any other financial institution prior to the sender or following the receiver of the MT 103 or about parties possibly mentioned in the remittance information.


*The ordering customer may be a customer of Bank A but there may be other banks between Bank A and the ordering customer. Similarly, there may be one or more banks between Bank B and the beneficiary customer.

In the 2009 standards release, the MT 202 COV and MT 205 COV will be introduced as two new variant messages of the MT 202 and MT 205. When the code “COV” is used in field 119, Validation Flag, in the header of an MT 202 or MT 205, it will be mandatory to fill in an additional sequence in the message to include a copy of selected fields from the underlying customer credit transfer sent by cover method.

The enhancement will not be made to the core MT 202 and MT 205. These messages will remain unchanged to avoid impacting those financial institutions and markets that are not involved in cover payments, but that use the MT 202 or MT 205 for other general financial institution transfers.
As illustrated in the diagram, the MT 202 COV will allow for the end-to-end inclusion of full information on customers and financial institutions and enables correspondents involved in the clearing and settlement of the transaction to duly screen payments in line with regulations.



As of 21 November 2009, the MT 202 COV and the MT 205 COV will be the proper messages to send when cover is provided for an underlying customer credit transfer. The messages will be for general usage, which means that all SWIFT users must be able to receive them. At sending side SWIFT cannot validate that a standard is used properly and will therefore not police the use of the MT 202 versus MT 202 COV. It remains the user’s responsibility to use the MT 202 COV when issuing customer credit transfers sent by cover method. Users that issue customer credit transfers in serial method will not have to use the MT 202 COV.

Further documentation & training

  • The Standards Release Guide 2009 provides a complete description of all changes in the 2009 standards release, and is published in the User Handbook Online. The full Standards MT Release 2009 User Handbook will be published on swift.com on 24 July 2009.
  • For more information on the use of the MT 202 COV, please refer to the Payments Market Practice Group website www.pmpg.info where market practice recommendations and frequently asked questions around the use of the MT 202 COV have been documented.