Asset Recovery

How understanding wiretransfers can help trace lost

fundsAsset recovery investigators use many differenttechniques to track and trace money that hasgone missing in the financial system. In this article,Kenneth Barden explains how dissecting wiretransfer instructions can lead to a betterunderstanding of where and how funds weretransferred, providing valuable information to verifyand locate assets.

Popular culture has long held that wire transfers are a goodway to transmit funds from criminal activities into offshoreaccounts where the money trail can quickly grow cold.Numerous films have created the perception that all acriminal had to do was enter a numeric code into somecomputer and magically funds were instantly taken fromone bank account and deposited into one or more foreignaccounts in the blink of an eye. With this magic numberonly the true beneficiary of the receiving account knew ofthe whereabouts of the funds, forever depriving the trueowner of any chance of recovery.But wire transfers have never been quite that simple, andin many cases the actual transfer of funds required asecond set of activities, through correspondent bankingrelationships, which took a little longer than a Ubi ink of aneye. Nevertheless, for many years transfers by wireinstructions could hamper an investigation, primarilybecause of myriad rules regarding how wire transferinstructions were designed and processed.

To combat this perception, And in response to Internationalefforts to combat money Laundering and other abuses ofthe financial system, Changes have been made tostandardize wire transfer instructions on a global basis andto introduce measures of integrity, not only to preventabuses, but also to minimize errors that could result in thedelay of funds being transferred, or worse, misdirecting thefunds to an unintended destination.

Generally, transfers of money by “wire” involve the issuance ofa line of code that contains instructions from the sendingfinancial institution at the request of the party making thetransfer. This line of code details the transaction to beconducted, in terms of dates, amounts, currency, theparties involved, including the beneficiary and the receivingfinancial institution, as well as directions as to how thefunds are to be transferred. In most cases, the actual fundsare then transmitted through a series of settlements madeby financial institutions, enjoying correspondentrelationships, or through third party institutions until thefunds sent by the sending institution are actually depositedto the credit of the beneficiary in the receiving institution.

Until the late 1990s, these instructions could greatly varyfrom jurisdiction to jurisdiction, as each country would oftendevelop its own coding system. The lack of standardization

made the job of an investigator trying to track the flow offunds much more difficult. The investigator needed toconduct a great deal of research to ascertain the meaningand formats of these coded instructions. And by the timethey did, the funds had often already been sent on toanother destination, requiring yet another round ofdetective work.

Since 1997, significant efforts have been undertaken tostandardize these instructions for the transfer of funds,by utilizing regular formats and codes that could easilybe identified as pertaining to specific financialinstitutions or types of transactions.

The IBAN system explainedInitially created as a program to standardize bankinginstructions between member jurisdictions of theEuropean Community, the International Bank AccountNumber (IBAN) system was created to provide a clear andunambiguous means of identifying bank accounts acrossnational borders, while minimizing the risk of errorsproduced in the transcription process. The IBAN systembegan with the European Committee for BankingStandards (ECBS), but has now evolved into aninternational standard recognized by the InternationalOrganization for Standardization (ISO) [ISO 13616,1997and ISO 13616-1:2OO7[. The Society for WorldwideInterbank Financial Telecommunication (SWIFT) is theorganization designated by the ISO as the primaryauthority for IBAN assignment.

The IBAN system establishes a protocol through the use ofa standardized format for account identification, containingvalidation information to avoid errors of transcription. Itconsists of an alpha country code, followed by two checkdigits that are calculated using an algorithm, and a BasicBank Account Number (BBAN) with up to thirtyalphanumeric characters. The BBAN includes the domesticbank account number and routing information needed toget a payment from one bank to another, wherever it maybe. One of the key features of the IBAN system is that anyIBAN will contain check digits, which can be validated inany country according to a single standard procedure.Check digits within the code enable the sending bank (orits customer) to verify the validity of a routing destinationand account number from a single string of data at the timeof data entry. This verification system has virtuallyeliminated routing and account number errors, reducing thenumber of such errors to less than 0.1 % annually.

A wire transfer instruction utilizing the IBAN system willalso contain all the key bank account details such as BankIdentifier Codes, branch codes and account

These can provide an investigator with extremelyvaluable information.

When transmitted electronically, an IBAN is written as onelong line of characters with no spaces; however, whenprinted on paper, the IBAN is generally expressed ingroups of four characters separated by a single space,with the last group being of variable length. An example ofan IBAN for a bank in Greece would be written as: GR160110 1260 0000 0001 2300 625.

Verifying the institution and location

With the use of algorithms, an IBAN can be validated at thepoint of data entry. There are several online validationwebsites (such as http://www.ibancalculator .com/), as wellas a number of software products that can check the IBANto determine whether:

a) The country code is valid

b) The number of characters in the IBAN corresponds tothe number specified for the subject country

c) The format follows the format specified for the subjectcountry

d) The account number, bank code and country codecombination are compatible with the check digits.

Any deviation from the protocol will be a strong indicatorthat either an error has been made in the transcription orthat the information may be other than as intended. Forinstance, an account ledger may indicate that payment wasbeing made to a bank account in London, but the validatorindicates that the instruction is for transfer to a bank inMalta.

Another number than can be assigned to banks foridentification purposes when transferring funds is theBank Identification Code (BIC), which is oftenincorrectly referred to as a SWIFT code (the formernomenclature). The BIC is a string of eightalphanumeric characters representing a series of threecodes used to identify banks, typically the institution inwhich the funds are held.It is identified using a four-letter code, usually associatedwith the initials of the institution, but not always. Next is atwo-letter code representing the country in which theinstitution is located. Finally, a location code defines morespecifically the state, province or time zone of thefinancial institution housing the transaction. It iscomprised of two characters that can be either numeric oralphabetic, or a combination.

Every financial institution globally has an assigned BICnumber, regardless of its affiliation with SWIFT; however,institutions that are not connected with the SWIFT Networkare often distinguished by the addition of an extra digit “1”at the end of the location code

Useful investigation toolsSWIFT provides several online tools to verify whether aBIC is valid, and to decode the name and location of theinstitution to which the BIC is directed. One helpful tool canbe found at http://www.swift.com/bsl/index.faces. Theinvestigator can enter the BIC as well as the name of theinstitution and determine whether there is a match. If theinformation does not match, that may strongly indicate thatthere may have been some irregularities in the transaction.For instance, the account ledger may suggest the transferto one account at a particular bank, but the BIC evidencesa different receiving bank.

Additional information on transactions and parties In light ofinternational efforts to fight money laundering, additionalinformation is now being incorporated into wire transferprocedures. In most jurisdictions, banks and other financialinstitutions are required to obtain certain information aboutthe customer and the amount, source, and purpose of thefunds being transferred, as well as information about thebeneficiary. This information is generally required to bekept and available for investigation should the need arise.

SWIFT has implemented standardized messagingprotocols and formats -special codes for differentiatingbetween information and direction, and encryption toprevent security breaches during data transmission. Toidentify the different types of SWIFT messages, there arenumbers assigned to each of them. For example, if amessage is identified as MT 103," the MT" prefix stands forMessage type," and the three-digit number that followsdenotes a specific SWIFT message type (in this case,"103" means a single customer/credit transfer). Otherexamples include MT800's, which only deal with TravellersCheques, whilst MT300's only deal with Foreign CurrencyExchanges. Within a message type, specific field codes areused to demarcate important information. For example,field 50 (ordering customer) is a key field to focus on fortracing laundered funds because it may include more thanjust the customer name and address.

SWIFT has downloadable tools that Can help theinvestigator understand each of these codes and how theyfit within the format of a transfer Instruction. For instance,codes Applicable to transfers for corporate Accounts canbe downloaded athttp://www.swift.com/solutions/by_customer/corporates/overview/ssmtig.pdf

The next stepIBAN and SWIFT messages although called "wire transfers~do not, in themselves, transfer the money. Instead, theyare instructions from the sending bank as to how the fundsshould be transferred. Correspondent banking relationshipsare then used for the actual transfer of funds. As a result ofthis, there will generally be additional documents that willevidence the actual transmission and receipt of the subjectfunds.Accordingly, understanding the codes used in wire transferinstructions will often lead the investigator to uncoveradditional documentation maintained by each financialinstitution, such as advice statements confirming a wiretransfer and the debit and credit memos sent by banks totheir originating or beneficiary customers. Thesedocuments may be useful in ascertaining account numbersand the identity of the originating and beneficiarycustomers.

"Kenneth Barden is an American attorney, CertifiedAnti-Money Laundering Specialist (CAMS) and CertifiedSpecialist in Asset Recovery (CSAR).For most of the past 15 years, Ken has worked internationallyadvising financial regulators and law enforcement in variouscountries in Asia, Europe and the Middle East on how tofight corruption and money laundering, while building integrityinto their financial systems. Mr. Barden has recently beenselected by the United States Agency for InternationalDevelopment to serve as Senior Anticorruption Advisor atUSAID headquarters in Washington DC.

Asset Recovery

: 20: PAYREF XT78305

: 32A: 091010EUR#1010000#

: 50: [CUSTOMER NAME AND ADDRESS]:59: [BENEFICIARY NAME AND ADDRESS]

Code Interpretation20 Transaction reference number (coded number assigned

by the originating institution to identify the transaction)32A Value date, currency code, and amount of the transaction50 Ordering customer (party ordering the SWIFT transaction)59 Beneficiary (party designated as the ultimate recipient of

the funds)

In addition to the above codes, other codes may include52D Ordering bank (financial institution initiating the SWIFT)53D Sender's correspondent bank54D Receiver's correspondent bank57D the financial institution at which the ordering customer

requests the beneficiary be paid

70 Details of payment

71A Details of charges for the transaction

72 Instructions from the sending bank to the receiving bank

The chart presents an example of what a SWIFT messagelooks like and some common codes used therein. An

Investigator should peruse the SWIFT website(www.swift.com/solutions) where a number of different

formats and code identifiers can be accessed and exploredfurther.