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RTGS: Real-Time Gross Settlement System

Definition

Real-Time Gross Settlement (RTGS) is a funds transfer mechanism in which interbank and customer transactions are settled individually, on a transaction-by-transaction basis, in real time and on a gross basis. “Real-time” signifies that settlement occurs immediately upon processing, without deferred netting, while “gross settlement” means transactions are settled individually rather than offset against one another.

RTGS systems are typically operated or overseen by central banks and are designed primarily for high-value, time-critical payments.

In the context of AML/CFT, RTGS systems occupy a critical position because they enable rapid, irrevocable movement of large-value funds across the financial system.

While RTGS enhances financial stability and payment certainty, it also introduces heightened exposure to money laundering, sanctions evasion, and predicate crime proceeds if robust controls are not applied at participant level.

Explanation

RTGS systems form the backbone of modern wholesale payment infrastructure.

They are used predominantly for interbank settlements, large corporate payments, government transactions, and financial market operations.

Unlike deferred net settlement systems, RTGS eliminates settlement risk by ensuring that each transaction is final once processed, reducing systemic risk during periods of market stress.

From an operational perspective, RTGS transactions are settled using balances held in participants’ central bank accounts.

Payments are queued, prioritised, and settled based on available liquidity.

Many RTGS platforms operate during defined business hours, though several jurisdictions, including India, have expanded RTGS availability to near-continuous or 24×7 operation.

The irrevocability and speed of RTGS transactions create both efficiency and risk.

Once a transaction is settled, reversal is extremely difficult.

Consequently, AML/CFT controls must be applied pre-settlement, with strong governance around participant access, transaction validation, sanctions screening, and exception handling.

RTGS in AML/CFT Frameworks

RTGS systems are not themselves AML/CFT reporting entities; however, they materially influence AML/CFT outcomes because they define how quickly and conclusively funds can move.

Financial institutions using RTGS remain fully responsible for compliance with customer due diligence, sanctions screening, transaction monitoring, and suspicious transaction reporting obligations.

Key AML/CFT intersections include:

  • High-value transaction risk, as RTGS is commonly used for large and urgent transfers that may involve proceeds of crime.
  • Velocity risk, because real-time settlement limits the window for post-facto intervention.
  • Cross-border exposure, where RTGS systems are linked to correspondent banking or foreign RTGS platforms.
  • Sanctions and proliferation financing risk, as immediate settlement may bypass delayed interdiction mechanisms present in net settlement systems.

Regulators therefore expect enhanced scrutiny of RTGS-originating and RTGS-destination transactions, particularly when they involve high-risk customers, jurisdictions, or complex payment chains.

Key Components of an RTGS System

Core Structural Elements

An RTGS framework typically includes:

  • A central bank-operated settlement engine.
  • Participant accounts maintained at the central bank.
  • Liquidity management tools such as intraday credit or collateralised facilities.
  • Queuing and prioritisation mechanisms for payments.
  • Message standards and interfaces (for example ISO 20022).
  • Operational risk controls, including business continuity and cyber resilience.

Participants and Access Models

Participants generally include:

  • Commercial banks and licensed financial institutions.
  • Central securities depositories and clearing corporations.
  • Government and treasury entities.
  • Designated system operators for market infrastructures.

Indirect participation models may allow smaller institutions to route payments through sponsoring banks, which introduces additional AML/CFT dependencies.

Risks & Red Flags Associated With RTGS Transactions

RTGS-related AML/CFT risks arise primarily from the value, speed, and finality of payments.

Key risk factors include:

  • Large-value transfers inconsistent with customer profile or stated business purpose.
  • Sudden urgency or pressure to execute immediate settlement without documentation.
  • Transactions involving high-risk or sanctioned jurisdictions routed through correspondent chains.
  • Use of RTGS for transactions that could reasonably be executed via lower-risk retail rails.
  • Repeated high-value movements between the same counterparties with limited economic rationale.

Indicative red flags include:

  • Frequent RTGS transfers just below internal escalation thresholds.
  • Back-to-back RTGS payments creating circular fund movements.
  • RTGS payments linked to shell entities, trusts, or opaque ownership structures.
  • Payments accompanied by vague or generic remittance information.
  • RTGS usage spikes following account dormancy.

Common Methods & Techniques for Misuse

Criminals and sanctioned actors may attempt to exploit RTGS systems through several typologies:

  • Rapid integration of illicit proceeds, using RTGS to move funds into ostensibly legitimate counterparties or investments.
  • Layering via correspondent RTGS chains, moving funds across multiple jurisdictions to obscure origin.
  • Trade-based laundering settlement, where manipulated invoices are settled through RTGS to lend legitimacy.
  • Sanctions evasion, routing payments through intermediary banks before final RTGS settlement.
  • Insider-assisted abuse, where operational staff facilitate expedited processing or suppress alerts.

The real-time nature of RTGS means that once these transactions clear, recovery options are severely constrained.

Examples of RTGS Misuse Scenarios

Corporate Layering Through High-Value Transfers

A shell company conducts a series of large RTGS payments to multiple counterparties under the guise of supplier settlements.

The transactions are executed rapidly and settled irreversibly, making post-settlement intervention ineffective.

Cross-Border Correspondent Banking Abuse

Funds originating from a high-risk jurisdiction are routed through multiple correspondent banks and finally settled via RTGS in a low-risk country.

The complexity of the payment chain obscures the original source of funds.

Trade Settlement Manipulation

An importer uses RTGS to settle inflated invoices for capital goods.

The excess value represents laundered proceeds, integrated through formal banking channels with minimal delay.

Urgent Government or Infrastructure Payments

Fraudsters impersonate government contractors and pressure banks to process urgent RTGS payments linked to infrastructure projects, exploiting the perceived legitimacy of large-value public-sector transactions.

Impact on Financial Institutions

RTGS-related AML failures can expose institutions to severe consequences:

  • Regulatory penalties for inadequate pre-settlement controls.
  • Reputational damage arising from association with large-scale laundering or sanctions breaches.
  • Civil or criminal liability where facilitation or wilful blindness is established.
  • Loss of correspondent banking relationships.
  • Increased supervisory scrutiny and mandatory remediation programmes.

Because RTGS is systemically important, failures often attract heightened regulatory response compared to retail payment lapses.

Challenges in Detecting & Preventing RTGS Abuse

Several structural challenges complicate AML/CFT controls in RTGS environments:

  • Limited reaction time due to real-time settlement.
  • High reliance on pre-transaction screening accuracy.
  • Complexity of correspondent banking chains.
  • Inconsistent remittance data quality across jurisdictions.
  • Pressure from customers for immediate execution of time-critical payments.
  • Balancing liquidity management with compliance escalation.

Institutions must therefore prioritise intelligence-led controls rather than purely reactive monitoring.

Regulatory Oversight & Governance

Central banks and supervisors impose stringent expectations on RTGS participants, including:

  • Strong customer due diligence and enhanced due diligence for high-risk users.
  • Sanctions screening prior to RTGS message release.
  • Clear escalation and stop-payment authority for compliance teams.
  • Detailed audit trails and retention of transaction records.
  • Regular stress testing, audits, and compliance reviews.
  • Alignment with FATF standards on wire transfers and transparency.

In India, RTGS operations are governed under the Payment and Settlement Systems Act, with operational oversight by the Reserve Bank of India.

Importance of RTGS Controls in AML/CFT Compliance

Effective AML/CFT governance around RTGS is essential because RTGS transactions represent the point of final value transfer in the financial system.

Strong controls enable institutions to:

  • Prevent irreversible movement of illicit or sanctioned funds.
  • Maintain trust in systemically important payment infrastructure.
  • Meet regulatory expectations for high-value payment oversight.
  • Reduce exposure to enforcement action and systemic risk.
  • Support intelligence-led AML programmes that integrate payment context, behavioural analytics, and risk scoring.

As payment systems evolve toward greater speed and availability, RTGS-related AML/CFT controls must continuously adapt to preserve financial integrity without undermining settlement efficiency.

Related Terms

  • Wire Transfer
  • Correspondent Banking
  • High-Value Payment System (HVPS)
  • Payment and Settlement Systems Act
  • Liquidity Risk
  • Sanctions Screening

References

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