What is Method of Payment in Anti-Money Laundering?

Definition

In Anti-Money Laundering (AML) frameworks, “Method of Payment” refers to the specific mechanism, channel, or instrument used to transfer, receive, or settle funds in a financial transaction. This includes details such as cash deposits, wire transfers, credit/debit card payments, cheques, electronic funds transfers (EFTs), cryptocurrencies, or third-party payment processors.

AML-specific scrutiny of the Method of Payment focuses on its transparency, traceability, and vulnerability to illicit use. Regulators emphasize documenting and verifying these methods to detect layering (obscuring fund origins), structuring (breaking transactions to evade thresholds), or integration (legitimizing dirty money). Unlike general payment processing, AML views it as a critical data point for risk profiling, ensuring the method aligns with the customer’s profile, transaction purpose, and expected behavior.

Purpose and Regulatory Basis

The Method of Payment serves as a frontline defense in AML by revealing potential red flags in transaction flows. It matters because criminals exploit diverse payment methods to anonymize funds—cash for untraceability, digital wallets for speed, or hawala for off-grid transfers. Scrutinizing it enables institutions to assess risk, prevent money laundering, terrorist financing (ML/TF), and sanctions evasion.

Globally, the Financial Action Task Force (FATF) Recommendations 10 and 15 mandate Customer Due Diligence (CDD) that includes verifying payment methods to understand fund flows. FATF’s 2023 updates stress “payment transparency” in virtual assets.

In the US, the USA PATRIOT Act (Section 314) and Bank Secrecy Act (BSA) require financial institutions to monitor methods like wires under FinCEN’s Priority Alert criteria. The 2021 Infrastructure Investment and Jobs Act expands this to non-fungible tokens (NFTs) and mixers.

EU’s Anti-Money Laundering Directives (AMLD5 and AMLD6) under the 5th and 6th packages demand “payment method risk assessment” in Article 18, with PSD2 integrating it into payment services. Nationally, Pakistan’s Federal Investigation Agency (FIA) and State Bank of Pakistan (SBP) AML Regulations 2020 require SBP-approved methods for high-value transactions.

These regulations underscore its role: mismatched methods (e.g., high-value wire from a low-risk cash-based client) trigger enhanced due diligence (EDD).

When and How it Applies

Method of Payment scrutiny applies during onboarding, transaction monitoring, and suspicious activity reporting (SAR). Triggers include:

• Transactions exceeding thresholds (e.g., $10,000 in US BSA, PKR 2.5 million in Pakistan).
• Unusual patterns, like rapid cash-to-crypto conversions.
• High-risk jurisdictions or politically exposed persons (PEPs).

Real-world use cases:

• A business imports goods via wire from a high-risk country; mismatched method (e.g., multiple small wires) flags structuring.
• Remittances: FATF notes hawala or mobile money in corridors like Pakistan-UAE prompts EDD on sender/receiver methods.
• Example: In 2022, HSBC flagged a UK client’s repeated Binance crypto deposits as inconsistent with their salary-based profile, leading to SAR filing.

Institutions apply it via transaction monitoring systems (TMS) scanning metadata like SWIFT codes, IBANs, or blockchain addresses.

Types or Variants

Methods classify by risk, traceability, and medium:

Cash-Based Methods

• Physical deposits/withdrawals. High-risk due to anonymity (e.g., FATF-identified in trade-based laundering).

Electronic Transfers

• Wires (SWIFT/ACH), EFTs. Medium-risk; trackable but layerable via mules.

Card and Digital Payments

• Credit/debit cards, PayPal, Apple Pay. Low-risk for retail but high for bulk prepaid card loading.

Emerging Variants

• Cryptocurrencies (Bitcoin tumblers), stablecoins. FATF’s Travel Rule (Recommendation 16) requires originator/beneficiary info.
• Alternative methods: Hawala, barter trades, or NFTs as disguised payments.

Examples: A low-risk client’s sudden shift to Monero (privacy coin) elevates risk score.

Procedures and Implementation

Institutions implement via robust controls:

1. Policy Development: Integrate into AML program; define risk tiers (low: domestic EFT; high: crypto).
2. CDD/EDD Integration: Collect method details in KYC forms (e.g., “Source of funds payment method”).
3. Technology Deployment: Use AI-driven TMS (e.g., NICE Actimize) for real-time scanning of method anomalies.
4. Staff Training: Annual sessions on red flags like “smurfing” via multiple cards.
5. Controls: Dual authorization for high-risk methods; blockchain analytics (e.g., Chainalysis) for crypto.

Step-by-step compliance process:

Step	Action	Tools/Output
1. Transaction Intake	Log method (e.g., MT103 SWIFT)	TMS alert if mismatch
2. Risk Scoring	Assign score (1-5) based on FATF lists	Automated dashboard
3. Verification	Confirm via APIs (e.g., Swift GPI)	Audit trail
4. EDD if Triggered	Source of funds proof	Case file
5. Ongoing Monitoring	Quarterly reviews	SAR if unresolved

Impact on Customers/Clients

Customers face enhanced verification but retain rights. Legitimate users provide method proofs (e.g., invoices for wires) without undue delays under FATF’s proportionality principle.

Restrictions: High-risk methods may block accounts (e.g., unverified crypto wallets). Interactions include:

• Transparent notifications: “Please confirm wire originator.”
• Rights: Appeal delays via ombudsman (e.g., SBP Banking Mohtasib).
• Positive: Low-risk methods speed processing.

Duration, Review, and Resolution

Initial review: 24-72 hours for triggers. EDD: Up to 30 days (extendable). Ongoing: Annual for high-risk, event-driven for changes.

Review process: Compliance team assesses; escalates to MLRO. Resolution: Approve, restrict, or report SAR within 30 days (FinCEN rule). Obligations persist via periodic TMS scans.

Reporting and Compliance Duties

Institutions must document all method analyses in audit-ready files. Report SARs detailing method (e.g., FinCEN Form 111 threshold filings).

Duties: Retain records 5-10 years; annual AML audits. Penalties: Fines (e.g., $1.9B Danske Bank 2018 for lax wire monitoring), license revocation. Pakistan’s AML Act 2010 imposes PKR 50M fines.

Related AML Terms

• Source of Funds/Wealth (SoF/SoW): Method verifies legitimacy (e.g., salary via EFT).
• Transaction Monitoring: Core to method anomaly detection.
• Beneficial Ownership: Ensures payment aligns with true owners.
• Sanctions Screening: Blocks methods to listed entities.
• Travel Rule: Mandates method data sharing for VASPs.

Challenges and Best Practices

Challenges:

• Cross-border opacity (e.g., non-SWIFT corridors).
• Crypto anonymity; volume overload in TMS.
• False positives straining resources.

Best Practices:

• Adopt RegTech (e.g., Elliptic for crypto).
• Consortium data sharing (e.g., FinCEN 314(b)).
• Scenario-based testing; AI for predictive analytics.
• Collaborate with regulators via public-private partnerships.

Recent Developments

Post-2023, FATF’s virtual asset updates mandate method traceability in DeFi. US FinCEN’s 2024 mixer ban targets obfuscation tools. EU’s AMLR (2024) integrates AI monitoring for payment methods under MiCA.

Tech trends: Blockchain forensics (e.g., TRM Labs) and ISO 20022 for richer SWIFT data. Pakistan’s SBP 2025 RAAPI framework enhances digital method oversight. Expect quantum-resistant encryption by 2027 for high-value wires.

Method of Payment is indispensable in AML, bridging transaction mechanics with risk intelligence. By embedding it in CDD, monitoring, and reporting, institutions fortify defenses against laundering, ensuring compliance and trust. Prioritizing it amid evolving tech safeguards the financial system’s integrity.