Relief Without a Mechanism: Net Settlement in FATF's Draft R16 Guidance

The Financial Action Task Force (FATF) settled the treatment of net settlement in June 2025. Where a net settlement results from payments carried out on behalf of customers, information about the underlying transactions need not accompany it. The requirements of Recommendation 16 (R16) continue to apply to those underlying transactions. The first half of that proposition is easy to read as a concession. The second half is where the work sits.

On 24 June 2026 the FATF published the draft guidance explaining how the revised standard is to be implemented, and opened it for comment until 21 August. Section 4.3, beginning on page 17, covers net settlement systems alongside bulk and batch transactions, and its heading describes both as duties for the institutions involved. Read against the batch provision that closes the same section, it reveals something more awkward than a concession.

The guidance is candid about what it is. Section 1.2 states that it is non-binding and that it "does not create new obligations or change existing obligations established in the FATF Standards". Its illustrations, it adds, "are not prescriptive and may not apply in all circumstances". A document written to those principles will not hand firms a mechanism, and should not be expected to. It can still illustrate one, which is what section 1.2 says the guidance is for.

Batch relief is precisely drawn

The comparison sits inside the same section. A batch transfer, the guidance explains, involves multiple payments from a single originator to multiple beneficiaries bundled into a single file. Its example is a government paying pensions to recipients in a foreign country. The relief is then stated with precision. The batch transfer need include only the originator's account number or a unique transaction reference number. That holds provided the batch file carries all applicable originator and beneficiary information for each individual transfer, and provided the beneficiary information is fully traceable within the beneficiary jurisdiction.

The FATF gives its reason as improving efficiency for high-volume originators by removing the need to duplicate originator information for every transfer. That is three conditions and a stated rationale. A compliance officer can build to it, and an assessor can test it.

Net settlement lacks an R16 method

The section opens by separating two things the industry often treats as one. Transfers or settlements between institutions, where both parties act on their own behalf, fall outside the information requirements of R16 altogether, and the guidance describes this as interbank netting to offset debits and credits and manage liquidity exposures. Customer-driven net settlement is a different case. There the settlement message is relieved, and nothing else is.

The passage restates the June 2025 position and then extends it in one direction only. Each individual underlying transaction settled by way of net settlement must, in the FATF's words, independently satisfy the information requirements of R16 in the same way as if each transaction were settled as a standalone transaction. Netting earns no discount of its own. The underlying transactions keep every flexibility R16 already gives them, from the de minimis threshold to the fallbacks permitting year of birth in place of full date of birth.

The section also draws the exception's outer edge. Net settlement treatment does not extend to cover payments as defined in the Interpretive Note to R16. A cover message carries the data elements of the underlying customer payment; a net settlement message does not. That is a consequence of the standard rather than an addition to it, since R16 applies to cover payments by name. A firm that has grouped cover payments with netting under a general heading of interbank settlement has drawn the boundary in the wrong place.

What the section never addresses is how a settlement is recognised as a settlement in the first place.

The test skips the middle

The most interesting drafting in section 4.3 sits under the heading "Possible misuse of net settlement arrangements". Supervisors, ordering institutions and beneficiary institutions should consider the actual nature of payments or value transfers in practice, the FATF says, and not simply the message format used. The stated purpose is to help ensure that netting is not being misused for payments made on behalf of underlying customers. The paragraph then adds that there is no expectation that intermediary institutions will unbundle net settlement payments.

Note the register. "Should consider" is not "must". The intermediary point is not new either; the FATF confirmed in its June 2025 explanatory note that no unbundling by intermediary institutions is required. Their own R16 duties to retain information, identify transfers lacking it and apply risk-based execute, reject or suspend policies are expressly unchanged, and sanctions screening obligations sit under other Recommendations entirely.

What section 4.3 adds is the addressee list. A substance-over-form expectation is directed at supervisors and at the two ends of the payment chain. The institution in the middle, with the clearest view of the aggregate flow, sits outside it. That is defensible on its own terms, because the intermediary cannot see the underlying customers and the ends can.

It nonetheless shifts the assessment question from what a message said to what an arrangement was doing, and asks institutions to answer it about a counterparty. Chapter 3, meanwhile, warns against disproportionate application, naming among its examples the tendency to require information or verification beyond what R16 specifies. Neither instruction comes with a benchmark.

Flexibility cuts against the test

Section 4.5 records that under some money or value transfer services the ordering or beneficiary provider does not directly receive or exercise control of the funds. Settlement happens instead through offsetting arrangements, which the guidance labels in a parenthesis as net settlement. The services it names are hawala and similar providers such as hundi and fei-chen. The same section asks countries to ensure sufficient flexibility around the structuring of data, to reflect the diversity of business models these providers use and to reinforce financial inclusion. Many, particularly those in small networks, may use formats other than ISO 20022.

Both positions are reasonable, and they pull against each other. A test of actual nature is easiest to apply where data is structured and hardest where it is not. The FATF has preserved format flexibility in some of the places where netting is the settlement model rather than the exception. What it does not offer is any indication of how a supervisor working with unstructured data should conduct that test. The tension is real and it is unresolved.

The only mechanism is a caption

One sentence in the draft comes closer than any other, and its location matters. Illustrating a netting arrangement between two money or value transfer services, the guidance states that the instructing provider is required to ensure that the bank receiving the instruction is aware that the transfer constitutes a net settlement between financial institutions. That sentence appears once, inside a box headed "Example of a net settlement arrangement between two MVTS".

It should not carry the weight the exemption places on it. The same construction appears in the appendix, where an intermediary provider "is required, as an intermediary institution, to ensure that Bank D is aware that the transfer is a cross-border payment or value transfer". The formula is the drafters' idiom for worked examples rather than a rule of general application. Whether the expectation reaches any institution beyond the instructing provider in that picture is never addressed. The draft simply does not say.

The likely intended answer is relationship-level. A bank whose customer is a money transfer business can establish through onboarding and account documentation that certain flows are settlements, and that reading is probably right. It is also unwritten, and knowing that a customer nets is not the same as knowing, transfer by transfer, which payments are settlements.

The alternative is the message itself. ISO 20022 already separates institution-to-institution credit transfers from customer credit transfers, and the choice of message type would be the natural signal. The draft does not take that route. It refers to message formats elsewhere but nowhere connects message type to net settlement treatment, and the misuse paragraph has already cautioned that more than the format matters. Format alone will not do it.

The consultation did not ask

Chapter 4 attracted two of the thirteen questions on which the FATF said it would particularly welcome views. One concerned the payment chain principles, the other models in which a payment market infrastructure holds required information away from the message. Neither was directed at section 4.3, and the executive summary's description of Chapter 4 does not mention net settlement at all. Comments were not confined to the listed questions, but the questions signalled where challenge was expected, and this was not signposted. The window closed on 21 August, and on the evidence of the consultation package the gap is likely to survive into the final text.

Conclusion: Permission is not instruction

The difference between the two reliefs in section 4.3 is not one of obligation. Net settlement is not permissive. Every transaction beneath it must still satisfy R16 in full, and someone must make the receiving bank aware.

The difference is method. Batch relief arrived with a testable way of discharging it, and net settlement arrived with none. When full implementation falls due at the end of 2030, that will be the difference between demonstrating compliance and arguing for it.

Do you know how your firm identifies a net settlement, and what it holds on file to justify the treatment?

At OpusDatum, we test whether traceability, monitoring and record-keeping hold across netted and bundled flows rather than only at the points where a payment message is visible. Our focus is control effectiveness rather than control existence, and the evidence a supervisor will accept when it asks how a firm satisfied itself about a counterparty's settlement arrangements.

If you can't answer this question, contact us.