Ultimate Guide to AML Compliance for Cross-Border Payments and Remittance Providers

Cross-border transactions in Africa involve navigating complex compliance practices, managing risks, implementing internal controls, conducting due diligence, and ensuring continuous monitoring and reporting. 

Despite significant growth in cross-border banking services over the past decade, many African countries still lack the financial infrastructure necessary to support efficient market development and cross-border services. According to Remitscope, Africa remains the most expensive region to send money to, with an average cost of 8.9% to send $200 in Q2 2022.

In this article, we discuss the major challenges of cross-border transactions in Africa and offer practical solutions to help businesses navigate these challenges effectively.

A Brief History of Cross-Border Transactions in Africa

Historically, foreign banks were the primary providers of financial services across Africa. Around a decade ago, African banks began to enter the market and have since grown significantly. For example, the Bank of Africa (Mali) expanded from operating in two countries to thirty-one, Ecobank (Togo) grew from five countries to thirty-nine, and Standard Bank (South Africa) increased its presence from four countries in 1990 to fifty-nine in 2023. The United Bank of Africa (Nigeria) also expanded from two countries to twenty.

The Rise of Fintech

In recent years, the fintech sector has revolutionised cross-border transactions in Africa. Fintech companies like Flutterwave, Chipper Cash, and MFS Africa have emerged as key players, offering innovative solutions that simplify and expedite cross-border payments. These companies have introduced features like real-time payments, reduced processing fees, enhanced security measures, and better interoperability between financial systems. Because they work with the right partners. 

Despite these advancements, the continent still has a long way to go to improve its cross-border payment systems. 

The Current State of Cross-Border Payments in Africa

Cross-border payments in Africa predominantly involve individuals, micro- and small businesses (MSMEs), and small to medium-sized traders. These payments serve various purposes, including e-commerce transactions, border trade, SMB exports, remittances, gig economy payments, and supply chain settlements. These transactions can either involve diaspora inflows or intra-African transfers.

To facilitate successful cross-border payments, businesses, traders, and individuals utilize a variety of channels, such as:

• Bank-to-bank transfers (including card payments)
• Mobile money platforms
• Digital wallets
• Money transfer operators (wire transfers and electronic funds transfers)
• Payment aggregators
• Cash payments (common among border traders)
• Informal channels, which may involve third-party intermediaries in a different country to handle the collection and disbursement of funds

In recent years, Africa has experienced a significant shift from traditional payment methods towards alternative payment solutions for both domestic and cross-border transactions. Several factors have driven this increased demand for cross-border payments:

1. Regulatory and Open Banking Initiatives: 

Regional and global changes in the regulations, such as the Pan-African Payment and Settlement System (PAPSS), have facilitated smoother and more compliant cross-border payments.

2. Rise in Remittances:

In 2022, approximately 40 million Africans living abroad sent around USD 100.1 billion back home. Intra-African remittances amounted to USD 19.4 billion, while sub-Saharan Africa received USD 53 billion.

3. Technological Innovations: 

Advancements in the payment space, including mobile money and digital wallets, have enhanced the efficiency and reach of payment systems.

4. Payment Security: 

Innovations that enhance payment security and protect customer and merchant data have helped mitigate fraud and other security risks.

5. Increased Trade: 

Globalization and the development of regional and global supply chains, along with the emergence of cross-border marketplaces, have boosted inter and intra-African trade.

6. Consumer Demand: 

There is a growing demand for fast, convenient, and transparent cross-border payment solutions that offer competitive foreign exchange rates.

7. Market Expansion Opportunities: 

Merchants are increasingly seeking to enter new markets and increase revenue by establishing customer bases in various countries and regions. 

Compliance Challenges Faced by Financial Institutions

Cross-border compliance challenges arise when companies operate in different regions and must adhere to varying rules, laws, and cultural norms. Here are some common issues businesses face as they expand across Africa:

a. Regulatory Variation: 

Different countries have unique laws on data protection, anti-corruption, labour practices, environment, and product safety. Companies must understand and comply with these variations, which can be time-consuming and complex.

b. Language and Cultural Hurdles: 

Operating across borders means dealing with language barriers and cultural differences. Translating legal documents, understanding local customs, and adapting compliance programs to cultural norms are crucial challenges.

c. Privacy and Security: 

Data protection and privacy rules differ globally, requiring companies to comply with diverse requirements. Ensuring compliance while managing data effectively is challenging, as seen in cases like Facebook facing scrutiny for privacy issues.

d. Compliance Checks: 

Cross-border transactions require comprehensive compliance checks, which can be time-consuming. Varying policies among banks and payment gateways may lead to unnecessary payment refusals, adding complexity.

e. Transaction Rates and Charges: 

High charges, upfront payments, and hidden fees are common challenges in cross-border transactions. Fluctuating currency values pose risks, impacting exchange rates and adding complexity to payment processes.

f. Distinctive Financial Regulations: 

Financial regulations aim to control financial systems, but adherence to international standards can cause delays. Regulations, while protective, may disrupt transactional processes, especially for business-to-business or customer-to-business transactions.

Solutions to Cross-Border Compliance Challenges

Some of the solutions to cross-border compliance challenges include:

i. Comprehensive Risk Assessments: 

Identify potential compliance issues by conducting thorough risk assessments. Consider regulatory differences, cultural factors, and enforcement practices. Develop a comprehensive compliance program based on assessment findings.

ii. Robust Internal Controls: 

Implement monitoring, auditing, and reporting mechanisms. Adapt controls to address specific cross-border compliance issues. Establish a clear incident response plan for prompt violation handling.

iii. Regular Regulatory Monitoring: 

Stay informed about regulatory changes in jurisdictions of operation. Establish a process to track updates and evaluate their impact. Engage local legal counsel and compliance professionals for expertise.

iv. Utilize Technology Solutions: 

Deploy technology to streamline compliance processes. Promote open communication and cooperation with local authorities.

v. Thorough Due Diligence for Third Parties: 

Conduct thorough due diligence on third parties to assess compliance practices. Minimize risk by understanding the compliance structures of partners.

vi. Strong Multifactor Authentication Measures: 

Guard against data breaches by adopting strong multifactor authentication measures. Incorporate biometric payment solutions into payment platforms.

Download our Inaugural Fraud Report, which showcases how fraudsters operate across diverse regions in Africa and ways to stop them.

How Smile ID Can Help Your Cross-Border Compliance Challenges

Smile ID provides the best Africa-focused solutions for real-time digital Know Your Customer (KYC), identity verification, AML checks, and fraud prevention across Africa. Our platform includes SDKs and APIs to help your business stay compliant across multiple markets. Our document verification solution verifies 8500+ documents across 226 countries worldwide. So whatever African country your business is trying to integrate into, we’ve got the perfect tool to help you stay compliant.

“Smile ID has been an invaluable partner in our expansion across the diverse African markets. Unlike a unified country like the United States with 50 states, the African continent is highly fragmented. Each country has its unique data, regulations, and operating environment. So, partnering with Smile ID, which offers a depth of data and API integration capabilities in each country we operate in, has been a game-changer.” - Andrew Bosson | Chief Operating Officer, MarketForce

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