Definition
In Anti-Money Laundering (AML) frameworks, a third-party payment refers to any financial transaction where funds are transferred to or from an account held by one party (the account holder) on behalf of or at the direction of another individual or entity (the third party), who is not the named account owner. This occurs when the beneficiary or originator of the payment differs from the person controlling the account used for the transaction.
This definition is AML-specific, distinguishing it from routine payments by emphasizing the intermediary role of the account holder, which can obscure the true source or destination of funds. Regulators like the Financial Action Task Force (FATF) highlight such arrangements as high-risk for money laundering, as they enable layering—hiding illicit proceeds through disconnected ownership and control. For instance, if Client A instructs their bank to send money from their account to Beneficiary B, but the funds originate from Third Party C deposited into A’s account solely for this purpose, it qualifies as a third-party payment.
Unlike standard wire transfers, third-party payments trigger enhanced scrutiny because they deviate from expected account activity, potentially indicating structuring, trade-based laundering, or terrorist financing.
Purpose and Regulatory Basis
Third-party payments serve legitimate purposes, such as business intermediaries remitting supplier payments or family members handling remittances. However, in AML, they matter because they create opacity, allowing criminals to distance themselves from illicit funds. The core purpose of regulating them is to prevent abuse by requiring financial institutions (FIs) to identify the true underlying parties, thereby disrupting money laundering cycles.
Globally, the FATF Recommendations (updated 2023) form the bedrock. Recommendation 10 mandates customer due diligence (CDD) on the originator and beneficiary for wire transfers, explicitly flagging third-party scenarios. Recommendation 13 requires correspondent banking relationships to include third-party payment controls to mitigate risks.
In the United States, the USA PATRIOT Act (2001), particularly Section 314, empowers information sharing on third-party activities, while FinCEN’s 2016 Geographic Targeting Orders (GTOs) target cash purchases involving third parties. The Bank Secrecy Act (BSA) requires Suspicious Activity Reports (SARs) for transactions over $10,000 exhibiting third-party traits.
The European Union’s 5th and 6th AML Directives (AMLD5/6) classify third-party payments as high-risk, mandating enhanced due diligence (EDD) under Article 18. The 6th AMLD (2020) expands criminal liability for facilitating such payments.
Nationally, in Pakistan (relevant to Faisalabad-based institutions), the Anti-Money Laundering Act 2010 and State Bank of Pakistan (SBP) AML/CFT Regulations 2020 require FIs to monitor third-party flows, with SBP Circular No. 03 of 2021 emphasizing EDD for non-resident third parties.
These regulations matter because non-compliance exposes FIs to fines (e.g., $1.9 billion against HSBC in 2012 for AML lapses involving third-party conduits) and reputational damage.
When and How it Applies
Third-party payments apply whenever transaction records reveal a mismatch between account control, funds source, and beneficiary. Triggers include:
- Sudden large deposits followed by immediate transfers to unrelated parties.
- Frequent small transfers aggregating to high volumes (structuring).
- Payments to high-risk jurisdictions or politically exposed persons (PEPs).
Real-world use cases:
- Remittance Networks: A migrant worker deposits earnings into a relative’s account in Pakistan, who forwards to overseas family—legitimate but flagged if patterns suggest hawala integration.
- Trade Finance Abuse: Importers use nested accounts for over-invoicing, where a shell company’s payment from a third party’s funds settles fictitious trades.
- Corporate Shells: Funds from Drug Cartel X enter Company Y’s account (controlled by Mule Z), then wire to Legitimate Vendor W.
Institutions apply controls via transaction monitoring systems scanning for originator-beneficiary discrepancies, applying FATF’s “travel rule” for wires over €1,000/$1,000.
Types or Variants
Third-party payments manifest in several variants, each with distinct risks:
Inbound Third-Party Payments
Funds deposited by a third party into the account holder’s account for onward transfer. Example: Narcotics proceeds funneled via a business account to pay suppliers.
Outbound Third-Party Payments
Account holder transfers their own or third-party funds to a beneficiary they do not control. Example: A lawyer’s trust account disbursing client funds to unrelated parties.
Nested Third-Party Payments
Multi-layered, where one third-party payment funds another. Example: Funds from Entity A to Individual B’s account, then to Entity C in a sanctions jurisdiction.
Virtual Asset Variants
Crypto exchanges handling third-party fiat-to-crypto ramps, now under FATF’s 2021 guidance requiring VASPs to verify underlying parties.
These classifications guide risk-scoring; nested types warrant immediate EDD.
Procedures and Implementation
FIs must implement robust procedures for compliance:
- Risk Assessment: Conduct enterprise-wide third-party payment risk assessments annually, scoring accounts by transaction volume, geography, and party opacity.
- CDD/EDD Systems: Deploy AI-driven monitoring (e.g., Actimize, NICE) to flag mismatches. Verify third-party identity via passports, beneficial ownership registries.
- Controls and Processes:
- Block or query transactions until third-party verification.
- Maintain 5-year records of inquiries.
- Train staff via annual AML programs.
- Technology Integration: Use blockchain analytics (e.g., Chainalysis) for crypto variants and API integrations with sanctions lists (OFAC, UN).
Implementation involves board-approved policies, independent audits, and SBP/FINCEN reporting alignment.
Impact on Customers/Clients
Customers face rights and restrictions:
- Rights: Access to funds post-verification; right to appeal blocks under fair banking laws (e.g., EU’s PSD2).
- Restrictions: Temporary holds (up to 10 business days per FATF) on suspicious third-party flows; mandatory disclosure of third-party details.
- Interactions: FIs issue notices explaining holds, offer escalation to compliance officers. Legitimate clients experience minimal disruption post-EDD; high-risk ones may face account closure.
This balances customer protection with AML imperatives, fostering transparency.
Duration, Review, and Resolution
- Duration: Initial holds last 24-72 hours for queries; EDD up to 30 days.
- Review Processes: Compliance teams review flags within 24 hours, escalating to MLROs. Automated systems re-review resolved cases quarterly.
- Ongoing Obligations: Perpetual monitoring; annual recertification for high-risk accounts. Resolution requires documented third-party consent or alternative routing.
Timeframes align with SBP’s 7-day SAR filing rule post-review.
Reporting and Compliance Duties
Institutions must:
- File SARs for thresholds ($10,000+ in US; PKR 2 million in Pakistan) or patterns.
- Document all verifications in audit trails.
- Report to regulators (FinCEN, SBP FMU).
Penalties: Fines up to $1 million per violation (BSA), criminal charges under AMLD6, license revocation. Danske Bank’s $2 billion scandal underscores documentation’s role.
Related AML Terms
Third-party payments interconnect with:
- Beneficial Ownership: Requires piercing veils to identify controllers (FATF Rec 24).
- Politically Exposed Persons (PEPs): EDD mandatory if third parties are PEPs.
- Correspondent Banking: Heightened risks in nested payments (FATF Rec 13).
- Structuring/Smurfing: Aggregated third-party micro-transfers.
- Travel Rule: Direct linkage for wire transparency.
These form an ecosystem demanding holistic compliance.
Challenges and Best Practices
Challenges:
- False positives overwhelming teams (up to 90% in legacy systems).
- Cross-border opacity, especially with non-cooperative jurisdictions.
- Crypto anonymity evading traditional controls.
Best Practices:
- Adopt machine learning for 95%+ alert accuracy.
- Partner with fintechs for real-time KYC sharing.
- Conduct red-team simulations; leverage RegTech like ComplyAdvantage.
Proactive tech mitigates 70% of issues per Deloitte studies.
Recent Developments
As of 2026, trends include:
- FATF’s 2025 Crypto Update: Mandates VASPs trace third-party crypto payments via ISPs.
- EU AMLR (2024): Single rulebook with AI-monitored third-party thresholds.
- US FinCEN Proposal (2025): Extends travel rule to domestic wires >$3,000.
- Tech Advances: Quantum-resistant blockchain and AI predictive analytics (e.g., Palantir’s AML suite).
- Pakistan’s SBP 2026 Digital Currency Framework flags third-party stablecoin risks.
Institutions must update policies by Q2 2026.
Third-party payments remain a cornerstone AML vulnerability, demanding vigilant detection, verification, and reporting to safeguard financial integrity. Robust compliance not only averts penalties but fortifies trust in global finance.