Cross border financial transactions: Roadblocks and legal challenges

As the digital metamorphosis of our world unfolds, we discover a new world order where ease has been infused into our transactions. From our most basic daily activities to complex business operations, everything is now at our fingertips, easily malleable to our wishes. Technology has now come to represent that decisive catalyst of transformation, modifying industries, reimagining business models, as well as operational strategies.

The financial industry has undergone a significant transformation, shifting from traditional operations to thriving on digital platforms. This change has revolutionised the culture of financial transactions, prioritising accessibility, flexibility, and efficiency. Physical legal tenders are no longer the sole defining factors of transactions; virtual currencies now coexist, paving the way for a future where transactions occur solely on virtual platforms. Consequently, cross-border transactions have become possible, necessitating unified financial structures to guide this new world.

Cross-border financial transactions refer to retail and wholesale financial transactions that occur in at least two distinct countries, involving individuals, companies, banks, or settlement institutions. They can be categorised into types, depending on the transacting parties, to wit: Business to Business, Business to Consumer, Consumer to Business and Consumer to Consumer.

Examining the road-blocks prevalent in cross-border financial transactions

In the realm of global finance, cross-border transactions are well-established as growth catalysts for facilitating international trade. Understanding the mechanics and economic benefits they provide to businesses, consumers, and financial institutions is crucial. Nevertheless, the numerous challenges undermining the efficiency of these transactions, despite being a vital source of economic financial growth, have raised concerns. Through this discussion, we will examine these challenges, gaining insights into their impact on the global financial landscape and exploring strategies to overcome them.

1. Slow transaction processes
The payment procedure that encumbers international financial transactions has been identified as the major factor inhibiting its growth across the world. The process of cross-border transactions is usually convoluted and protracted, as well as susceptible to abrupt halts, friction, and delays, creating unsatisfactory experiences. This predicament often results from many decisive factors such as inaccurate payment information, stringent anti-money laundering checks, and other complementary fraud screening procedures. The problem becomes even more perplexing when problems arise. Its lack of automation and regulation keep funds in limbo for lengthy periods of time.

2. Legal impediments
Cross-border financial transactions face risks in the economic ecosystem due to varying legal jurisdictions. The fundamental questions of “Which law applies?” and “How to interpret it?” are constant causes of concern. Despite most industrialised nations having civil law, interpreting it remains a global concern. This leads to divergent interpretations of important documents like merger agreements and B2B (Business to Business) agreements.

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3. Data security
Most nations have laws governing the distribution of data, as divergent as the content of these laws may be, but not all are efficient. The primary aim of these laws is to protect the data of stakeholders in the field. For instance, banks are not permitted to divulge clients’ information, whether it be private, or business related. In Nigeria, any business or financial institution processing the personal data of Nigerian individuals has a legal duty to comply with the Nigeria Data Protection Act 2023, which steps up from the General Data Protection Regulation (GDPR) of the UK and EU, to comprehensively provide for the protection of the data of all stakeholders. It significantly affects the kind of data that can or cannot be exchanged. In contrast to the USA, for instance, the UK, Japan, and EU member nations have rigorous data privacy laws, and the illegal gathering or disclosure of personal information is punishable by harsh fines.

4. Tax matters
Taxation, much like legal frameworks, exhibits variation across different nations. Double taxation, the multiple taxation of the same goods in different countries, is one of the major challenges attributed to taxation globally. Consequently, both stakeholders must carefully take into consideration the applicable taxes in destination countries, to ascertain the feasibility and profitability of their transactions. Although tax treaties have been developed to mitigate the risks of double taxation over the years, it is however important to note that these treatises are often tailored to specific countries, leaving beneficiaries or payees potentially ineligible for complete exemption under identical terms.

5. Compliance checks
Cross-border transactions pose numerous hazards, necessitating comprehensive compliance checks. Unfortunately, these checks often take a considerable amount of time to implement. Moreover, individual banks and payment gateways may have distinct policies, leading to unwarranted payment refusals for trivial reasons, like sharing a name with someone with a financial criminal history. Payments going through various domestic bank systems may also face additional systematic checks depending on the jurisdiction, further complicating the process.

6. Transaction rates and charges
Cross-border transactions present several challenges, including exorbitant charge rates, upfront payment requirements, and hidden charges. Charges and exchange rates for these transactions are generally higher than domestic ones. The number of entities involved in the transaction can also impact bank rates. Moreover, servicing platforms often demand upfront provision of funds to initiate such transactions. Fluctuations in currency value also create risks for both buyers and sellers, leading retailers to offer payment processors with favourable exchange rates.

7. Distinctive financial regulations
Financial regulations are in place to control the financial systems of nations, with the paramount goal of putting an end to money laundering and transactions that support terrorism. As a result, the senders of the majority of business-to-business (B2B) or customer-to-business (C2B) transactions must adhere to international financial standards. Financial institutions, for instance, must report oversea transfers that surpass specified thresholds. Although these regulations exist to protect key players, it can also be disruptive, causing significant and burdensome delays in transactional processes.

8. Lengthy transaction processing
The long processing time it takes to complete cross-border financial transactions presents another challenge in the financial sector. Although important for the adequate protection of both the receiver and sender’s funds, it also happens to be inconvenient on both ends. Different payment methods also contribute to processing time variations. Many banks require customers to wait over 24 hours for transaction completion. These timeframes pose risks and may hinder business opportunities for customers.

9. Security risks
Companies and financial institutions seek secure digital cross-border payments. However, our current digital world exposes operational systems to hacking. Even the most efficient and protected systems have fallen victim to this menace. There is no guarantee that each of the countries engaged in the transaction would utilise the same security standards, especially as each country’s security laws differ. As a result, parties find themselves at the constant risk of losing resources.

Antidotes to the challenges of cross-border financial transactions

1. Protection against fraud
Compared to domestic transactions, international transactions are more likely to be the target of cyberattacks and digital payment fraud since it cuts across multiple digital networks as well as involves more parties. Firms that provide cross-border transactional services may address security issues and guard against the possibility of fraud by utilising high-level security standards such as the ISO 27001 Certificate, complicated passwords, two-factor authentication, as well as monitor, alert, and block functions.

2. Maintaining compliance with regulations and industry standards
Businesses must put in place an operational system that ensures the regular evaluation of policies and procedures of the country it exists in. This ultimately builds in clients’ trust for the business and helps businesses avoid liability. It is also pertinent to ensure a system is in place for alerting the appropriate authorities about fraudulent activities.

3. Assuring a high level of transparency
The high number of intermediaries involved in cross-border transactions, make it difficult to obtain accurate and transparent information on the vital elements of the transaction such as payments, time, costs, and payments. This lack of transparency results in a system where clients bear additional costs without even realising. Many financial platforms have however evolved over time, offering transparency through high tech operating software systems that track payments and history.

4. Adopting strong cybersecurity measures
To guard against cyberattacks and data breaches, businesses and consumers who accept foreign payments should adopt strong cybersecurity measures. For instance, biometric payment solutions can be instituted, blockchains and artificial intelligence can also be incorporated into payment platforms.

5. Creating data protection policies and procedures
Protecting customer data with policies and procedures is crucial. To combat the growing menace of commercial data sale, stringent measures are necessary. These policies should encompass data gathering, storage, transmission, processing, and penalties. Companies should also invest in capacity development for management and staff to prevent data breaches effectively.

Conclusion
Cross-border transactions are crucial for the growth and functioning of the contemporary global economy. Key stakeholders — individual consumers, businesses, legal practitioners, policymakers, and financial institutions — must collaborate to facilitate this growth. Its inherent challenges therefore require careful examination and innovative solutions. In the meantime, implementing the solutions provided above will lead to smoother, efficient, and secure cross-border financial transactions.

Amala Umeike is a Partner at Stren & Blan Partners and supervises the Firm’s Financial Services Sector. Adenike Oguntoye is an Associate in the Tax, Real Estate, and Industrial Relations Practice Group of the Firm, while Stanley Chuka-Umeora is an Associate in the Firm’s Financial Services Sector.

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