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Regulators propose measures to stop global payments fragmenting

By Huw Jones

LONDON (Reuters) - Central bankers proposed changes on Tuesday to stop the global payments system fragmenting as banks scale back cross-border networks, blaming the cost of new regulation.

Banks have long maintained links with other banks across the world, known as correspondent banking, to allow companies to pay bills and people to send money home to their families.

Tougher rules to stop money laundering and other illegal activities have prompted banks to cut links and reduce the cost of stringent checks on who is using their systems, referred to as knowing your customer's customer (KYCC).

Such checks are harder in less developed countries that are perceived as very risky, or not worthwhile when the volume of business is too low to cover compliance costs.

Central bankers worry these trends are fragmenting the global financial system and excluding people or even countries from the benefits of cross-border payments, especially where remittances are a significant portion of a nation's economy.

Barclays has withdrawn banking services from Somalia whose economy depends on an estimated $1.3 billion (856 million pounds) transferred each year from Somalis abroad.

The Committee on Payments and Market Infrastructure (CPMI), made up of central bankers from across the world, published a report on Tuesday setting out possible measures to ease the burden on correspondent banking.

"The working group believes that its recommendations might alleviate some of the costs and concerns connected with correspondent banking activities," the CPMI report said.

However, the recommendations won't dispel uncertainty over how far banks should go in checking the credentials of customers, it added.

Even the measures it proposed should be thoroughly checked to avoid unintended consequences, the committee said.

It proposed greater use of "utilities" for storing basic information on customers for banks to use, and the increased use of unique codes for each banking link in a payment chain.

Authorities and regulators could provide more clarity on the extent to which banks need to know their customer's customer, and technical changes could be considered to improve the electronic messaging system used for processing payments, the committee said.

The committee is putting out the proposed measures to public consultation until December.

The World Economic Forum think-tank said in August that regulators should rethink how rules are applied to stop extremist financing or money laundering, otherwise some emerging market economies risk grinding to a halt.

(Reporting by Huw Jones; editing by Adrian Croft)