Cross-Border Compliance: Financial, Payments & Regulation – Full Guide

Cross-border compliance is constantly evolving. Pre-globalization, simple trade regulations and customs compliance were enough to cover the limited cross-border activities. But during the Globalization era, floods in cross-border trade and investments necessitated stricter regulations. Now, we’re in the Digital Transformation era where companies often swiftly redefine compliance against emerging e-commerce and fintech technologies. In this era, cross-border compliance is a highly complex system of global laws and regulations that protect consumers and national interests and ensure fair competition.

What is the meaning of cross-border compliance?

Specifically, cross-border compliance is the adherence of the laws and regulations that govern international trade, investment, and business operations across different jurisdictions. These mandatory regulations include:

Anti-Money Laundering (AML) and Know Your Customer (KYC)

AML is a set of laws and guidelines that combat financial, money laundering, terrorist financing, and threats to the US financial system. The US first established AML laws in 1970 as part of the Bank Secrecy Act (BSA) which requires businesses and financial institutions to report cash deposits exceeding $10,000, register foreign bank accounts, and take measures to combat money laundering. To comply with AML regulations, financial institutions must conduct due diligence on their customers.

The OECD’s Base Erosion and Profit Shifting (BEPS)

The Organization for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) is a collaboration between 145+ countries and jurisdictions. The OECD regulations address issues when multinationals use BEPS to minimize their tax liabilities in multiple countries. With BEPS, multinationals can pay less tax overall, reducing the tax revenue governments receive in higher-tax countries. To address BEPS concerns, countries and OECD developed guidelines that create fairer tax systems, prevent treaty abuse, limit base erosions, and require taxpayers to disclose aggressive tax planning arrangements so multinationals pay a fair share of taxes as they generate profits.

General Data Protection Regulation (GDPR)

GDPR is a European Union (EU) law created in May 2018. GDPR governs the way businesses use, process, and store the personal data of all EU citizens, making data transfer within the EU more transparent. EU citizens also have more control over their data and can demand subject access to their personal information and prevent the businesses from keeping their personal data. Businesses with EU clients or those that operate within the EU must only acquire data they strictly need, and maintain integrity, confidentiality, and accountability towards customer data.

California Consumer Privacy Act (CCPA)

The California Consumer Privacy Act of 2018 (CCPA) gives consumers more control over the personal information that businesses collect about them. CCPA gives California consumers: the right to know about how businesses collect, use, and share their personal data, the right to delete personal information businesses collect from them, the right to opt out of sharing their personal information, and the right to non-discrimination when exercising their CCPA rights.

Why is cross-border regulatory compliance important?

Cross-border compliance is critical for financial institutions and businesses that are expanding to other jurisdictions or operating internationally because it:

• Protects their reputation
• Diversifies risks
• Grants them a competitive advantage
• Provides financial stability by avoiding fines and penalties
• Builds strategic partnerships
• Promotes an ethical workplace culture

Failing to comply with regulations guarantees more than a strict warning. Non-compliance has severe consequences, such as:

• Steep fines and penalties
• Economic consequences
• Reputational damage
• Legal action
• Loss of customers and market share

Key challenges in cross-border compliance

When making transactions across countries, compliance is mandatory for a thriving business. But it’s important to note the challenges of cross-border payments that can come up, which include:

• Constantly evolving regulatory frameworks

Each country creates regulatory requirements and frameworks that are subject to change based on technological advancements, market shifts, societal trends, employment laws, and emerging risks. Keeping up with and following regulatory compliance requirements can be time-consuming and complex for businesses and financial institutions.

• Language, cultural, and ethical differences

Businesses and financial institutions can misunderstand official regulatory documents over cultural, language, and ethical differences. From there, companies or financial institutions, and regulatory authorities can miscommunicate, resulting in misinterpretation of legal documents, reputational damage, legal issues, and noncompliance.

• Cybersecurity

Global companies and financial institutions must comply with data protection regulations, such as the GDPR. Financial institutions and enterprises can struggle to stay ahead of evolving data privacy and cybersecurity laws, which may also lead to conflicts or errors across different jurisdictions.

• Resource constraints

Compliance requires dedicated resources. Many financial institutions or businesses may not be able to divert enough resources toward following evolving cross-border regulatory requirements.

Is cross-border compliance the same as cross-border regulation?

Though related, cross-border compliance is the act of following countries’ laws and regulations when operating globally. Cross-border regulations are the laws and regulations regarding cross-border activities. So, while compliance is the act of abiding by the regulations, the regulations are what companies need to follow.

What is the cross-border payment regulation?

Cross-border payments regulations cover risks from money laundering to data compliance. Each country follows a regulatory framework for financial transactions, including AML, counter-terrorism financing (CTF) standards, and KYC.
Businesses trading foreign currencies and making international payments must follow the foreign exchange compliance rules, screen for sanctions, and check whether individuals or entities on global sanctions lists have participated in any transactions with the company.

Finally, businesses need to follow all requirements for each payment method. Even alternatives to SWIFT payments like digital payment platforms, blockchain networks, and regional clearing systems have their own distinct compliance requirements that must be carefully navigated.

For example, KYC checks and sanctions screening are necessary for all wire transfers to ensure legality and accuracy. ACH payments have their own requirements, including AML/KYC checks and sanctions screening.

Credit and debit card payments use additional verification processes, such as fraud detection services, and mobile payments often require two-factor authentication (2FA) and biometric authentication to protect against risks.

How should cross-border payments compliance be handled?

To ensure compliance, organizations need a strategy consisting of several best practices:

1. Start with risk assessment: Identify potential risks with international money transfers and create strategies to reduce them.
2. Create compliance protocols: Implement well-defined compliance protocols to ensure the company follows all relevant laws and regulations. This can include KYC and verifying transactions.
3. Leverage compliance software: Automated payment tools with built-in compliance help businesses abide by legislation without compromising payroll processes. Modern platforms using AI to facilitate cross-border payroll payments can automatically adapt to regulatory changes, flag compliance risks before they occur, and ensure adherence to local laws across multiple jurisdictions simultaneously.
4. Work with experts: Specialized managed service providers (MSPs) have the expertise needed to manage cross-border payments securely and efficiently.
5. Create internal controls: limit who can access payment information to only those necessary to limit risk.
6. Audit frequently: Regularly perform internal and external audits to adhere to local and international laws.
7. Train your employees: Educate your team about the latest Anti-Money Laundering (AML) regulations and how to identify potential issues.
8. Keep records: Store detailed records of all transactions for at least five years, as mandated by most jurisdictions.

What is cross-border invoicing compliance?

International payments are often facilitated through invoices. Beyond detailing the products and services delivered and their cost, invoices set the payment terms, schedule, discounts, and applicable taxes. For companies working with independent contractors internationally, understanding how to manage global freelancer payments includes mastering invoicing compliance, proper worker classification, and tax withholding requirements.

Businesses that create compliant cross-border invoices factor in these considerations:

• Regional, country-specific, and local requirements, such as invoice format, language, and so on
• Currency option
• Payment methods and their compliance requirements
• Checking that they’re sending or receiving the correct documentation for US tax purposes
• How to receive payment in a timely and accurate manner
• How to best avoid short pay from dynamic FX rates and hidden fees
• How cost-effective the transaction is for both parties
• Transaction security and compliance with applicable security and privacy laws and regulations
• How to reconcile the transaction in the accounting system

Papaya Global cross-border payment compliance

Cross-border payment compliance has never been more critical in a constantly growing international market. By leveraging J.P. Morgan’s local payment rails and ensuring that all transactions are secure, compliant, and widely trusted around the globe, Papaya Global is at the forefront of payment compliance. Automated payment workflows meticulously integrate with HR, ERP, and finance systems, facilitating seamless corporate payments and invoice compliance every time. Empower your organization to expand further while maintaining regulatory adherence with Papaya.

Papaya Global’s payment services are offered through Azimo, Papaya’s licensed payments arm. Azimo is a payment services provider regulated in five Tier-1 jurisdictions. These licenses allow Papaya, together with its partners, to provide workforce payments worldwide. For further information on Azimo’s licences worldwide, check our licensing page