Moving Money - Virtual IBANs

In the previous article we looked at how multi-currency accounts enable the movement of money seamlessly and affordably across payment systems and jurisdictions. We also examined the consequences for financial crime investigations that this layer of abstraction introduces. In this next part of the 'Making Money Move' series we consider another mechanism by which funds can travel between accounts with the inherent risk of masking the true nature and purpose of a transaction.

Let's start with the basics. An IBAN (International Bank Account Number) is a standardized international numbering system for bank accounts. An IBAN begins with a 2 letter country code followed by two check digits, then a bank code and finally an account number:

Payments systems that support the IBAN format, such as SEPA, use the country and bank code to route the funds to the correct financial institution, who then in turn credits the beneficiary's account. So far so straightforward.

A virtual IBAN offers the end customer the ability to have one or more account numbers into which payments can be made without the need to open and juggle multiple accounts. This enables them to organise and track their incoming payments more effectively. Inside the payment platform of their financial institution these virtual account numbers are associated with a single master account.

DE89 3704 0044 0532 0130 00 - Master IBAN

DE89 3704 0044 1111 2222 33 - Virtual IBAN - Customer issues to Client 1

DE89 3704 0044 4444 5555 66 - Virtual IBAN - Customer issues to Client 2

So the customer informs their Client 1 to make payments to IBAN ending 33, and Client 2 to make payments to IBAN ending 66. The balances of these virtual accounts can be kept distinct within the customers cash management platform for accounting purposes. Payments can be 'made' from these VIBAN and those outflows reflected in their respective balances.

Note that both the Master IBAN, and its associated Virtual IBANs, share the same Country and bank code. To both the originator of a payment, and the central payment system, they are indistinguishable from a conventional IBAN. The only difference is that when the beneficiary institution is notified of a credit to a VIBAN it actually associates the funds (i.e. the debt or liability) with the Master IBAN through a simple lookup table.

This redirection introduces the first headache for financial crime investigations. Whilst inbound payments are addressed to VIBANs, outbound payments are typically sent 'from', i.e. associated with, the Master IBAN account number - this is the reference that appears in the payment instruction message. Therefore the same traceability challenge that we saw with virtual multi-currency accounts is present here too. It becomes more difficult to see the association of funds when transactions arrive and depart from different account numbers!

A further layer of complexity is introduced when a payment firm that secures a block of VIBANs from a direct payment system participant then proceeds to sell on the use of one of these VIBANs to its own customers. This nesting of account number associations can make it even less transparent who is actually receiving and/or sending the funds. For example:

DE89 3704 0044 0532 0130 00 - Master IBAN - MyPaymentPal

    Virtual IBAN range issued to MyPaymentPal:

    DE89 3704 0044 1111 2200 00 to

    DE89 3704 0044 4444 2300 00

    MyPaymentPal issues:

        DE89 3704 0044 1111 2200 01 - Virtual IBAN - Acme Imports

Here a Master IBAN and a range of VIBANs are issued to a payments provider MyPaymentPal who in turn sub-issues one of their addresses to their customer Acme Imports. Acme Imports can now receive payments into this virtual account, with the directly accessible funds residing in MyPaymentPal's Master IBAN. In this way the payment provider is acting in a similar manner to a Correspondent Bank, operating a form of POBO (Payment on Behalf Of) account. The ultimate beneficiaries (UBOs) of VIBANs, and their associated risk, may not be known to the source institution who is indirectly holding their funds.

This nesting of VIBAN issuance may of course be repeated several times, further distancing the UBO from the VIBAN originating institution. Indeed the UBO of a VIBAN account may not reside in the same jurisdiction (sometimes deliberately to evade IBAN discrimination). Unless care is taken to transmit the UBO details up the payment instruction chain, so that they are including in an outgoing payment message it may be that the originator information is lost.

In conclusion VIBANs, like multi-currency accounts, use redirection to make things easier for corporate customers to manage their budgets, but with the inherent risk of making it easier to obfuscate the flow of funds through the financial system.