Wire stripping is a term used to describe the deliberate act of removing or altering material information from wire transfers, thus making it difficult to identify and restrict payments to and from sanctioned individuals, entities or countries.
What is Wire Stripping and How Does it Work?
Wire stripping is a technique used by money launderers and sanctions evaders to disguise the origin or destination of their funds. It involves modifying or deleting information from the payment messages that are sent through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, which is the global standard for cross-border payments.
When a wire transfer originates from or is intended for a sanctioned entity or location, such as Iran or North Korea, the sender or the intermediary bank may remove or change any evidence of the nexus with the sanctioned country from the SWIFT message. For example, they may insert false details, use generic terms, or return the message to the customer to resubmit with different information.
In some cases, some financial institutions may even advise or assist their customers in the sanctioned countries on how to format their transfers in a manner that would allow the transactions to avoid detection by the screening systems of the receiving banks or the regulators.
Why is Wire Stripping a Problem?
Wire stripping is a serious problem for several reasons. First, it undermines the effectiveness of the sanctions regimes that are imposed by the international community to prevent or deter illicit activities, such as terrorism, nuclear proliferation, human rights violations, or corruption. By circumventing the sanctions, wire strippers enable the sanctioned parties to access the global financial system and continue their harmful conduct.
Second, wire stripping exposes the financial institutions that are involved or complicit in the process to legal and reputational risks. They may face regulatory fines, penalties, or sanctions for violating the anti-money laundering (AML) and counter-terrorism financing (CTF) laws and regulations, as well as the sanctions laws and regulations of their jurisdictions. They may also lose the trust and confidence of their customers, shareholders, and partners, and damage their reputation in the market.
Third, wire stripping poses a challenge for the law enforcement and intelligence agencies that are tasked with combating money laundering and terrorism financing. By obscuring the true identity and location of the parties involved in the wire transfers, wire strippers make it harder for the authorities to trace, monitor, and disrupt the illicit financial flows and networks.
How to Detect and Prevent Wire Stripping?
Detecting and preventing wire stripping requires a combination of measures and actions from different stakeholders, such as the financial institutions, the regulators, the SWIFT network, and the international organizations.
For the financial institutions, some of the best practices to detect and prevent wire stripping include:
- Implementing robust AML and CTF policies, procedures, and controls, as well as a designated AML compliance officer and an independent audit function.
- Conducting regular and comprehensive risk assessments to identify and mitigate the potential exposure to wire stripping activities.
- Providing ongoing training and awareness programs for the staff on the indicators and red flags of wire stripping, as well as the reporting obligations and procedures.
- Establishing effective customer due diligence (CDD) and know-your-customer (KYC) processes to verify the identity and background of the customers, as well as the purpose and nature of their transactions.
- Applying enhanced due diligence (EDD) measures for high-risk customers, transactions, or jurisdictions, such as those that are subject to sanctions or have weak AML and CTF standards.
- Utilizing advanced technology and tools to screen and monitor the wire transfers for any anomalies or discrepancies, and to flag and investigate any suspicious or unusual activity.
- Reporting any wire stripping incidents or attempts to the relevant authorities, and cooperating with them in any inquiries or investigations.
For the regulators, some of the best practices to detect and prevent wire stripping include:
- Issuing clear and updated guidance and regulations on the AML and CTF obligations and expectations for the financial institutions, especially with regard to the wire transfers and the sanctions compliance.
- Conducting regular and comprehensive supervision and examination of the financial institutions to assess their compliance with the AML and CTF laws and regulations, and to identify and address any gaps or weaknesses.
- Imposing proportionate and dissuasive sanctions and penalties for any violations or breaches of the AML and CTF laws and regulations, as well as the sanctions laws and regulations.
- Enhancing the information sharing and cooperation among the regulators, both domestically and internationally, to exchange best practices, experiences, and intelligence on wire stripping activities and trends.
For the SWIFT network, some of the best practices to detect and prevent wire stripping include:
- Developing and enforcing strict standards and rules for the formatting and content of the SWIFT messages, and requiring the financial institutions to comply with them.
- Implementing robust security and integrity measures to protect the SWIFT network and messages from any unauthorized access, modification, or deletion.
- Providing technical assistance and support to the financial institutions to help them improve their SWIFT message quality and accuracy.
- Collaborating and coordinating with the regulators and the international organizations to monitor and address the wire stripping issues and challenges.
For the international organizations, some of the best practices to detect and prevent wire stripping include:
- Establishing and maintaining a comprehensive and consistent framework and approach for the design and implementation of the sanctions regimes, and ensuring their compliance and enforcement by the member states.
- Providing guidance and assistance to the member states and the financial institutions on the best practices and standards for the AML and CTF, as well as the sanctions compliance.
- Conducting research and analysis on the wire stripping activities and trends, and disseminating the findings and recommendations to the relevant stakeholders.
- Facilitating the information sharing and cooperation among the member states and the financial institutions to enhance the awareness and understanding of the wire stripping risks and challenges, and to foster a coordinated and effective response.
Wire stripping is a serious and complex problem that poses significant threats and challenges to the global financial system and security. It requires a concerted and collaborative effort from all the stakeholders involved, such as the financial institutions, the regulators, the SWIFT network, and the international organizations, to detect and prevent it. By adopting and implementing the best practices and measures outlined above, the stakeholders can enhance their resilience and readiness to combat wire stripping and its associated risks.