Report. on the application of AML/CTF obligations to, and the AML/CTF supervision of. e-money issuers, agents and distributors in Europe.

Transcription

1 JC December 2012 Reprt n the applicatin f AML/CTF bligatins t, and the AML/CTF supervisin f e-mney issuers, agents and distributrs in Eurpe. 1

2 Cntents List f abbreviatins Chapter 1: Executive Summary Chapter 2: Intrductin Chapter 3: Issuers, agents, distributrs natinal cncepts Chapter 4: Issuers, agents, distributrs - AML/CTF legislatin and supervisin Chapter 5: Passprting and Ntificatins Chapter 6: Analysis and next steps Annex 1: questinnaire n electrnic mney and AML/CTF Annex 2: relevant articles f the 2 nd EMD Annex 3: relevant articles f the 3 rd MLD 2

3 List f abbreviatins AML Anti-Mney Laundering AMLC Anti-Mney Laundering Cmmittee f the Jint Cmmittee f EBA, ESMA and EIOPA CDD - Custmer Due Diligence CPMLTF Cmmittee n the Preventin f Mney Laundering and Terrrist Financing CTF Cunter Terrrist Financing EBA- Eurpean Banking Authrity EEA- Eurpean Ecnmic Area EIOPA - Eurpean Insurance and Occupatinal Pensins Authrity E-mney Electrnic Mney E-mney issuers E-mney Institutins and Credit Institutins (accrding t article 2(3) f the Directive 2009/110/EC) ESMA - Eurpean Securities and Markets Authrity EU Eurpean Unin JC Jint Cmmittee f the Eurpean Banking Authrity (EBA), Eurpean Securities and Markets Authrity (ESMA) and Eurpean Insurance and Occupatinal Pensins Authrity (EIOPA) MS Member State f the Eurpean Unin and/r the Eurpean Ecnmic Area (EEA) PSD Directive 2007/64/EC f the Eurpean Parliament and f the Cuncil n payment services in the internal market 3 rd MLD - Third Mney Laundering Directive (2005/60/EC) 2 nd EMD - Secnd E-mney Directive (2009/110/EC) 3

4 Chapter 1: Executive Summary The Jint Cmmittee is a frum fr cperatin that was established n 1st January 2011, with the gal f strengthening cperatin between the Eurpean Banking Authrity, Eurpean Securities and Markets Authrity and Eurpean Insurance and Occupatinal Pensins Authrity, cllectively knwn as the three Eurpean Supervisry Authrities. Thrugh the Jint Cmmittee, the three Eurpean Supervisry Authrities cperate regularly and clsely and ensure cnsistency in their practices. One f the areas the Jint Cmmittee wrks in is regarding measures cmbating mney laundering. This paper prvides an verview f Member States implementatin f Eurpean anti-mney laundering and cunter-terrrist financing requirements in the cntext f the issuing, distributin and redemptin f electrnic mney. It describes Member States appraches t the Anti-Mney Laundering and Cunter Terrrist Financing supervisin f e-mney issuers, their agents and distributrs prviding services n their dmestic territry and/r acrss the Eurpean Unin and identifies areas where differences in the natinal transpsitin f Eurpean legislatin culd affect the integrity f Eurpe s Anti-Mney Laundering regime. The analysis f Member States appraches revealed significant differences in Member States interpretatin f the 2 nd E-Mney Directive and the treatment f e-mney issuers, their agents and distributrs fr Anti-Mney Laundering and Cunter Terrrist Financing purpses. These differences are the result f legal uncertainty, caused by insufficient r ambiguus cnsideratin, in the 2 nd E- Mney Directive and 3 rd Mney Laundering Directive, f cncepts that are key t the understanding and regulatin f the electrnic mney market. These include the definitin f the pint in time where e-mney is issued; the definitin f e-mney agents and distributrs; the applicatin f passprting rules and guidelines t e-mney entities; and the distributin f pwers between hme and hst Anti- Mney Laundering supervisrs. The Jint Cmmittee cnsiders that the Cmmissin shuld take the pprtunity affrded by the nging revisins t the 3 rd Mney Laundering Directive and 2 nd E-Mney Directive t address these issues as a matter f pririty. Chapter 2: Intrductin and Overview E-mney is a cmparatively new retail payment prduct, which is grwing rapidly. Often described as a surrgate fr cash and, increasingly, an alternative t mre traditinal payment services, e-mney appears t have been mst successful where its grwth was spurred by demand fr new payment slutins, such as the nline purchase f gds and services. Since it des nt cnstitute a depsit, issuers f electrnic mney d nt need t be authrised as credit institutins. 2.1 The Jint Cmmittee s Subcmmittee n Anti-Mney Laundering In May 2011, the Jint Cmmittee f the Eurpean Supervisry Authrities Anti-mney Laundering Subcmmittee (AMLC) established a Wrking Grup whse bjective was t identify and assess issues arising frm different natinal AML/CTF supervisry appraches with respect t entities invlved in the electrnic mney distributin chain, in particular e-mney issuers, their agents and distributrs. The AMLC gathered data and sught dialgue with stakehlders t infrm its analysis in three ways: a questinnaire, a seminar fr supervisrs and exchange f infrmatin with the Eurpean Cmmissin. Questinnaire 4

5 In September 2011, the Jint Cmmittee (JC) circulated a questinnaire t its AMLC s Members and bservers 1, requiring detailed infrmatin n their apprach t the AML/CTF supervisin r regulatin f e-mney. Seminar In March 2012, the JC rganised a tw-day seminar n e-mney and AML/CTF, which was attended by ver eighty e-mney and/r AML/CTF supervisrs and plicy experts as well as supervisry staff respnsible fr authrisatins and passprting, FIU representatives and central bank staff. This seminar brught tgether expert speakers frm natinal supervisry agencies and central banks, law enfrcement, industry and the Eurpean Cmmissin t prvide participants with a unique insight int, and understanding f, e-mney, the mney laundering and terrrist financing risks assciated with e- mney and different appraches t mitigating these risks, bth frm a supervisry and industry perspective. Abve all, the seminar prvided a platfrm fr infrmatin exchange amng supervisrs, and amng supervisrs and industry. Wrk with the Eurpean Cmmissin In December 2011, the AMLC submitted an infrmal reprt t the Eurpean Cmmissin, which prvided an verview f its preliminary findings and asked the Cmmissin t clarify the applicatin f certain fundamental aspects f the EU s legal framewrk t e-mney. It als shared the preliminary reprt with the Cmmissin s Cmmittee n the Preventin f Mney Laundering and Terrrist Financing (CPMLTF) in January Since then, a representative f the EC Cmmissin has prvided the AMLC with sme first elements f a respnse t the questins raised. 2.2 Scpe and purpse The reprt analyses MS appraches t the AML/CTF supervisin f e-mney issuers and, where applicable, their agents and distributrs, bth in a natinal and crss-brder cntext. MS are nt named specifically in this reprt. AML/CTF supervisrs, payments experts and law enfrcement pint t the existence f several mney laundering and terrrist financing risk factrs linked t the emergence f electrnic mney, which affect the effective AML/CTF supervisin f this sectr. Reprting difficulties in e-mney mean that infrmatin abut the nature and extent f these risks culd be imprved but n the feedback received: Prduct risk: natinal law enfrcement agencies and internatinal standard-setting bdies, such as the FATF and Mneyval, have pinted t the mney laundering and terrrist financing risk assciated with e-mney, which ffers a rapid and ften annymus payment ptin. Since e-mney prducts are used frequently t effect smaller payments, in particular where the prduct is nn-reladable r benefits frm simplified due diligence threshlds, issuer s ability t understand their custmers and detect unusual transactins can be limited. 2 Firm risk: the ML/TF risk assciated with e-mney prducts can be mitigated, but e-mney prducts are ften issued and distributed by firms with little r n prir expsure t financial services legislatin, regulatin and supervisin. There is therefre, in sme cases, limited 1 The JC based its analysis f the questinnaire and its findings n data submitted by natinal authrities and the infrmatin gathered was updated as f 30 September 2011 (any further natinal legislative develpments have been disregarded). The accuracy f the data remains the respnsibility f these natinal authrities. 2 The identificatin and analysis f mney-laundering and terrrist financing vulnerabilities f e-mney prducts is utside the scpe f this reprt, but see, fr example, the FATF s 2010 typlgies reprt Mney Laundering using New Payments Methds and the Mneyval s 2012 reprt n Criminal mney flws n the Internet: methds, trends and multi-stakehlder cunteractin. 5

6 awareness f AML/CTF risks and cntrls. Since e-mney business mdels ften invlve cmplex netwrks f issuers, agents, distributrs and, in sme cases, ther players that are utside the scpe f legislatin and regulatin, such as prgramme managers, effective versight by firms f thse structures can be challenging. Supervisry risk: the effective AML/CTF supervisin f e-mney issuers and their use f agents and distributrs can be challenging, nt nly due t the nging and rapid emergence f nvel payment slutins, which may be cnducive t a gap in supervisrs understanding f the market they are required t regulate, but als the crss-brder nature f many e-mney business mdels. This challenge is exacerbated by different natinal appraches t the AML/CTF supervisin f e-mney issuers, agents and distributrs as well as legal uncertainty ver supervisry cmpetence and respnsibilities in crss-brder situatins. The bjective f this wrk was t identify issues arising frm the uneven transpsitin f the 2 nd EMD acrss the EU and ways t supprt the effective implementatin f AML/CTF supervisry regimes fr e-mney acrss the EU/EEA, with a view t infrming the EC Cmmissin s review f the 3 rd Mney Laundering Directive and the 2 nd E-Mney Directive Definitins Fr the purpse f this reprt, the JC defined E-mney issuer as: an entity authrized t issue e-mney as per Title II f the 2 nd EMD. E- mney issuers encmpasses credit institutins and e-mney institutins; Agent as: Distributr as: a natural r legal persn wh can prvide payment services as well as distribute and/r redeem e-mney; and a natural r legal persn wh can distribute and/r redeem e-mney, but wh cannt prvide payment services. Distributrs might include crner shps r petrl statins that sell prepaid e-mney prducts. 2.4 The Secnd E-Mney Directive and Third Anti-Mney Laundering Directive The AML/CTF regulatin and supervisin f e-mney issuers is gverned by Eurpean legislatin, in particular the Secnd E-Mney Directive (2 nd EMD) and the Third Anti-Mney Laundering Directive (3 rd MLD). Other legislatin, fr example the Wire Transfer Regulatin, is als relevant in this cntext The 2 nd EMD The 2 nd EMD is a maximum harmnisatin Directive that creates a cmmn Eurpean framewrk fr the regulatin f financial institutins that issue electrnic mney (electrnic mney issuers). It defines electrnic mney as electrnically, including magnetically, stred mnetary value as represented by a claim n the issuer which is issued n receipt f funds fr the purpse f making payment transactins as defined in pint 5 f Article 4 f Directive 2007/64/EC, and which is accepted by a natural r legal persn ther than the electrnic mney issuer (Art 2(2), 2 nd EMD). Prepaid instruments that can be used as a means f payment nly within a limited netwrk f service prviders r fr a limited range f gds and services are exempt frm this definitin. In the EU, e-mney can nly be issued by credit institutins, e-mney institutins, certain pst ffice gir institutins, the Eurpean and natinal central banks when nt acting as a mnetary r ther 6

7 public authrity and public authrities (Art 1(1), 2 nd EMD). Accrding t Art 3 (4) and (5) 2 nd EMD, e- mney can be distributed and redeemed by persns ther than the issuer wh act n the issuer s behalf; and e-mney institutins can prvide payment services thrugh agents in line with Art 17, PSD. T be authrised, e-mney issuers must satisfy their cmpetent authrity that they have put in place rbust internal cntrl mechanisms t cmply with the 3 rd MLD, amng thers. Where e-mney issuers prpse t distribute their prducts in ther Eurpean MS thrugh an establishment r agent, they must demnstrate hw they will cmply with the prvisins f the 3 rd MLD. Where the hme cmpetent authrity has reasnable grunds t believe that the mney laundering/terrrist financing risk assciated with agents is increased, they may refuse t register these agents The 3 rd MLD The 3 rd MLD is a minimum harmnisatin Directive that prvides a cmmn Eurpean basis fr the transpsitin f the FATF s 40 Recmmendatins, which were issued in It intrduces bligatins n persns within its scpe t prevent, detect and reprt mney laundering and terrrist financing. The 3 rd MLD applies t e-mney issuers as it des t ther credit and financial institutins, alngside certain nn-financial persns Exemptins and Threshlds The EU s e-mney regime prvides fr tw exemptins that are relevant in the AML/CTF cntext 3 : The first exemptin cvers pre-paid instruments that may be used t purchase gds and services within a limited netwrk f service prviders r fr a limited range f gds r services. The secnd, ptinal, exemptin cvers situatins where an e-mney prduct s features meet the cnditins fr simplified due diligence. Limited Netwrks, Gds and Services Recital 5, read in cnjunctin with Art 1(4) f the 2 nd EMD, limits the Directive s applicatin t payment service prviders that issue electrnic mney as defined in Art 2(2), 2 nd EMD. This means that mnetary value stred n instruments that may be used fr specific purpses nly can be exempt frm regulatin, including in relatin t AML/CTF. Examples f specific-purpse instruments include prepaid cffee shp cards, public transprt cards and childcare vuchers i.e. instruments that can be used t purchase gds and services nly in r n the issuer s premises, under a cmmercial agreement with the issuer within a limited netwrk f service prviders r fr a limited range f gds r services. The 2 nd EMD des nt specify exactly where a limited netwrk ends and what a limited range f gds and services are. Natinal authrities therefre have t decide n their wn criteria t determine whether such a prepaid instrument is e-mney. Sme natinal authrities have transpsed Art 1(4) f the 2 nd EMD as set ut in the Directive 3 Anther exemptin, in Art 1(5) 2 nd EMD, cncerns the use f telecmmunicatin, digital r IT devices t pay fr sme gds r services that are delivered t and are t be used thrugh a telecmmunicatin, digital r IT device. This exemptin is f limited relevance in the AML/CTF cntext. 7

8 Sme natinal authrities have transpsed Art 1(4) f the 2 nd EMD as set ut in the Directive and have issued guidance n what limited netwrks can be. Sme natinal authrities have transpsed Art 1(4) f the 2 nd EMD and impsed additinal cnditins fr exemptins, such as a maximum lad limit f EUR 250 fr e-mney prducts. Natinal authrities have als pted fr different appraches t granting and allwing firms t cntinue t benefit frm limited netwrk exemptins. Sme natinal authrities require entities benefiting frm this exemptin t demnstrate peridically, fr example nce a year, that they cntinue t meet the criteria set ut in natinal legislatin, regulatin r guidance. Sme natinal authrities expect entities benefiting frm this exemptin t infrm the cmpetent authrity f any changes that might affect their cntinued eligibility fr a limited netwrk exemptin. There is therefre a risk that differences in MS definitin f, and treatment f, limited netwrks mean that the same activities and e-mney prducts are subject t different - r n levels f regulatin and versight, including in relatin t AML/CTF, in different MS; and EU legislatin des nt prhibit the crss-brder prvisin f e-mney prducts benefiting frm this exemptin. Simplified Due Diligence The 3 rd MLD intrduces an ptinal exemptin frm custmer due diligence the bligatin t identify, and verify the identity f, the custmer and, where applicable, the custmer s beneficial wner, t btain infrmatin n the purpse and intended nature f the business relatinship and t mnitr the business relatinship in certain situatins, including where the prduct is e-mney as defined by the 2 nd EMD and subject t the applicatin f specific purse and redemptin limits set ut in Art 11(5)(d), 3 rd MLD as amended by Art 19(2), 2 nd EMD. This article prvides fr the exemptin f e-mney prducts that are either Nn-reladable and whse ttal purse limit des nt exceed 250 (r 500 fr dmestic transactins); r Reladable, cannt transact mre than 2500 in a calendar year and be used t redeem mre than 1000 in that same calendar year. In additin, full Custmer Due Diligence must apply where the issuer suspects mney laundering r terrrist financing (Art 7, 3rd MLD). And where a single sending (debit) electrnic mney transactin exceeds 1,000, Regulatin (EC) 1781/2006 requires that cmplete infrmatin n the payer be btained and verified. 4 Nt all MS have taken advantage f this exemptin. Nine MS have transpsed this exemptin in full; 4 Regulatin (EC) 1781/2006 defines 'cmplete infrmatin n the payer' as cmprising the payer's name, address and accunt number r their name, accunt number and either their date and place f birth, custmer identificatin number r natinal identity number. This requirement applies where the destinatin payment service prvider is lcated in a jurisdictin utside the Eurpean Unin. 8

9 Six MS have transpsed this exemptin in part, either by lwering the threshlds, the purchase f gds and services; r by applying the CDD measures n a reduced level cntrary t a full exemptin. One MS has nt transpsed this exemptin. Mrever, the natinal AML/CTF legislatin f three MS impse that, in case f electrnic funds transfers the cmplete infrmatin abut the payer is verified even belw the 1,000 threshld. A reprt by the Jint Cmmittee, which was published in April 2012, fund that MS had interpreted the 3 rd MLD s Simplified Due Diligence prvisins differently. Simplified Due Diligence meant an exemptin frm custmer identificatin in nearly half f all MS, whereas the beneficial wner and custmer had t be identified in a limited way in ne MS nly. Six MS required firms t verify the custmer s identity and 22 MS did nt exempt firms frm nging mnitring f the business relatinship. 5 In tw MS simplified due diligence prvisins are nt applied in respect f EMIs and prducts. As a result, issuers' ability t take advantage f Simplified Due Diligence varies greatly acrss the EU, as des the extent t which Simplified Due Diligence means a true exemptin frm Custmer Due Diligence. This may create prblems fr issuers wishing t distribute their prducts in ther EU MS, affect the effectiveness f natinal sanctins regimes and undermine natinal authrities' effrts t address the risk they assciate with electrnic mney in a way they cnsider apprpriate where the issuer distributes their prducts under the free prvisin f services. Chapter 3: Issuers, agents and distributrs natinal cncepts E-mney issuers distribute their prducts in different ways, fr example by establishing a direct business relatinship with the custmer, r thrugh distance selling means (such as the internet). E-mney can als be distributed and redeemed by persns ther than the issuer. In additin, agents can prvide payment services n an e-mney institutin s behalf. But althugh agents and distributrs play a central rle in many e-mney business mdels, the cncepts f agents and distributrs and the rle they play in the e-mney distributin chain are nt clearly defined. 6 As a result, MS recgnitin and, where applicable, use f bth terms varies significantly. E-mney issuers The large majrity f MS define e-mney issuers as legal entities r persns authrised r licensed t issue e-mney under relevant legislatin, in accrdance with the 2 nd EMD. One MS des nt define e- mney issuers, nly e-mney institutins, which are financial institutins authrised t issue and redeem e-mney and t settle transactins invlving e-mney. Agents Mst MS bradly define agents as natural r legal persns wh can prvide payment services and act n behalf f an e-mney issuer but cannt issue e-mney. One MS s regulatin states that a payment 5 Reprt n the legal and regulatry prvisins and supervisry expectatins acrss EU Member States f Simplified Due Diligence requirements where the custmers are credit and financial institutins under the Third Mney Laundering Directive [2005/60/EC]: para The Cmmissin cnfirmed in infrmal exchanges with the JC that the term distributr was nt clearly defined in the 2 nd EMD and that the questin whether a definitin was needed was t be cnsidered in the frthcming review f the Directive. 9

10 institutin can cmmissin anther legal persn t execute parts f the activity, but des nt specify which nes. Three MS specified that agents cannt distribute and/r redeem e-mney unless they are als a distributr. In tw MS, the legislatin des nt define agents. Distributrs Fifteen MS d nt define distributrs; f these, tw cnsider agents and distributrs t be the same and therefre d nt prvide a definitin f distributr. A further three prvide that distributin and redemptin f e-mney may be dne by unnamed - natural r legal persns acting n the EMIs behalf. Eleven MS define distributrs as natural r legal persns wh can distribute and/r redeem e-mney n behalf f an EMI, but wh cannt prvide payment services. One MS defines distributrs as persns authrised t distribute and/r redeem e-mney acting n behalf f an EMI. Chapter 4: Issuers, agents, distributrs - AML/CFT legislatin and regulatin Issuers f electrnic mney are credit r financial institutins and therefre within the scpe f the 3 rd MLD. Since the 3 rd MLD des nt recgnise the cncepts f agents and distributrs and the PSD hlds payment institutins and, by implicatin, e-mney institutins, respnsible fr anything their agents r distributrs d n their behalf, MS have sme discretin in the applicatin f AML/CTF legislatin t agents and distributrs. This can create prblems in a crss-brder cntext, which are further exacerbated by legal uncertainty in relatin t the applicatin f AML/CTF bligatins t agents and distributrs based in anther MS. 4.1 Legal cntext Article 2.1 (2) f the 3 rd MLD prvides that the Directive applies t credit and financial institutins, amng thers. Where credit and financial institutins prvide relevant services thrugh branches and subsidiaries in anther Eurpean MS, these branches and subsidiaries will be within scpe f the hst state s legal and regulatry AML regime. The Cmmissin s Interpretative Cmmunicatin SEC(97) 1193 f 20 June 1997 n the "freedm t prvide services and the interest f the general gd in the secnd banking directive" states that intermediaries f banks that have a permanent mandate, are subject t the management and cntrl f the credit institutin they represent and are able t cmmit the credit institutin cnstitute establishments. In line with the 3 rd MLD s territriality principle, these 'establishments' are subject t hst state AML legislatin, regulatin and versight. Hwever, neither this nte, nr the 3 rd themselves credit r financial institutins. MLD, apply t agents r distributrs unless they are Article 25, PSD prvides that payment institutins can prvide payment services in ther MS thrugh agents. The Cmmissin has sught t clarify the extent t which the hst state s AML prvisins will apply t agents in a paper "n Anti-mney laundering supervisin f and reprting by payment institutins in varius crss-brder situatins". 7 In particular, the Cmmissin cnsiders that "if the Payment Institutin maintains a permanent presence in anther MS, even if that presence cnsists merely f an ffice managed by an agent wh is independent but authrised t act n a permanent basis fr the undertaking, it has t be cnsidered as having, thrugh its agents, a frm f establishment in the hst cuntry"; and that a cmbined reading f bth the PSD and 3 rd MLD suggests that PIs have t respect, as regards their branches r agents, the AMLD rules f the hst 7 Cmmissin Staff Wrking Paper SEC(2011) 1178 f 4 Octber

11 cuntry and are subject t the AML supervisin f the hst cuntry perfrmed in clse cperatin with the hme cuntry authrities." This means that payment institutins are respnsible fr ensuring that their agents wh are based in anther MS cmply with, and are subject t, lcal AML legislatin and regulatin. The Cmmissin acknwledged that similar legal questins arise in relatin t agents and distributrs acting n behalf f e-mney issuers in anther MS. It cnsidered that its analysis wuld apply t e- mney agents by analgy but that distributrs d, hwever, give rise t quite different legal questins - ptentially requiring different legal answers - given their legal status vis-à-vis e-mney issuers and the nature f activities that they perfrm. The questin whether distributrs cnstitute establishments fr AML purpses therefre remains unreslved E-mney issuers Eurpean legislatin is clear n the extent t which electrnic mney issuers are within scpe f AML/CTF legislatin and supervisin. Cnsequently, MS fllw a bradly similar apprach in the applicatin f AML/CTF legislatin t dmestic issuers and their supervisin; hwever, sme differences emerge in relatin t MS apprach t the AML/CTF supervisin f issuers wh are based in anther EU/EEA jurisdictin. Legislatin In all MS, dmestic e-mney issuers as well as dmestic branches and subsidiaries f EEA e-mney issuers are directly within scpe f dmestic AML/CFT legislatin. In six MS, e-mney issuers based in anther MS that prvide e-mney services dmestically withut being physically present neither thrugh branches r subsidiaries, nr thrugh agents r, where applicable, distributrs - are als subject t dmestic AML/CFT legislatin. In ne MS, EEA e-mney issuers relying n the free prvisin f services are nt within scpe f dmestic AML/CTF legislatin but are required t file STRs t the dmestic FIU. Supervisin Dmestic e-mney issuers as well as dmestic branches and subsidiaries f e-mney issuers based in anther MS are directly supervised fr cmpliance with their AML/CFT bligatins in all 27 MS that replied t the questinnaire r prvided infrmatin. Supervisrs in five MS have supervisry pwers in relatin t e-mney-issuers based in anther MS wh are prviding services in their jurisdictin thrugh the free prvisin f services, i.e. withut being physically present in their natinal territry. Neither f these distinguish between issuers wh are a credit institutin r an EMI. And, since the Cmmissin Staff Wrking Paper SEC(2011) 1178 cnsidered that the respnsibility fr AML/CTF supervisin is shared between the hme and hst MS, five MS cnsider that they have pwers t supervise, and impse cnditins (such as central cntact pints) n, issuers based in anther MS wh prvide services in their jurisdictin thrugh agents r distributrs Agents Eurpean legislatin is clear that e-mney cannt be issued thrugh agents. But it is nt clear abut the extent t which agents f payment institutins can als distribute and redeem e-mney n the issuer s behalf, nr abut the extent t which agents shuld be directly within scpe f the dmestic AML/CTF regime. There is, therefre, n cmmn apprach t the treatment f dmestic agents f payment institutins fr AML/CTF purpses. 11

12 Legislatin Just ver half f all MS have brught dmestic agents f at least sme e-mney issuers directly within scpe f their AML/CTF legislatin: In twelve MS, all dmestic agents f electrnic mney issuers are within scpe f dmestic AML/CTF legislatin r regulatin, irrespective f where the issuer is based. Of these, ne has brught all agents within scpe f their AML/CTF legislatin, even where the agent is based in anther jurisdictin. A further tw MS have brught dmestic agents f electrnic mney institutins within scpe f dmestic AML/CTF legislatin, but nt dmestic agents f credit institutins. Three MS have nt brught agents directly within scpe f AML/CTF legislatin r regulatin; but in line with the Cmmissin Staff Wrking Paper SEC(2011)1178), these MS require agents t cmply with dmestic AML/CTF legislatin. This bligatin stems nt frm legislatin but finds its surce in the cntract that they have signed with the issuer, wh is respnsible fr the versight f its agents and distributrs. Tw MS d nt recgnise the cncept f agent in the e-mney cntext. Supervisin A highly varied picture emerges in relatin t the AML/CTF supervisin f agents; while nearly half f all MS directly supervise all agents f all issuers fr cmpliance with their AML/CTF bligatins irrespective f where the issuer is based, the majrity either directly supervise nly sme agents, r d nt directly supervise agents at all. Thirteen MS directly supervise all dmestic agents f all issuers, irrespective f where the issuer is based. Of these, ne MS supervise agents f issuers even where the agent prvides services frm its base in anther MS; Three MS directly supervise all agents f issuers based in anther MS, but d nt directly supervise agents f dmestic issuers; One MS indirectly supervises all agents f dmestic issuers, but nt agents f issuers based in anther MS; Tw MS directly supervise all agents f electrnic mney institutins (irrespective f where these are based). One f these MS des nt supervise agents f credit institutins as in their jurisdictin as credit institutins are nt able t prvide services thrugh agents whilst the ther des allw credit institutins t prvide services thrugh agents; and Nine MS d nt directly supervise agents Distributrs EC legislatin des nt define distributrs nr require that anyne distributing r redeeming e-mney n an issuer s behalf be subject t AML/CTF legislatin. Where distributrs are alne in prviding an issuer s e-mney services in anther jurisdictin, legislatin r ther fficial papers d nt discuss the extent t which distributin and redemptin alne qualify distributrs as establishments fr passprting purpses. As a result, there is sme variety in MS appraches t the AML/CTF treatment f distributrs. 12

13 Legislatin Of the eleven MS that recgnise the cncept f distributr in their legislatin, nly tw have brught all dmestic distributrs directly within scpe f AML/CTF legislatin. One MS subjects distributrs t dmestic AML/CFT legislatin even when they are lcated in anther EEA cuntry and prvide services withut being physically present in that MS. Supervisin Since, in the majrity f MS, distributrs are utside the scpe f dmestic AML/CTF legislatin and regulatin, mst d nt supervise distributrs fr AML/CTF purpses. Hwever f the MS that d include distributrs within scpe, Five directly supervise all distributrs fr cmpliance with dmestic AML/CTF legislatin; One directly supervises all dmestic distributrs if they act n behalf f the issuer, irrespective f where the issuer is based One directly supervises distributrs distributing and redeeming e-mney n behalf f e-mney institutins nly, as in their jurisdictin, credit institutins are nt able t prvide services thrugh distributrs; and One directly supervises distributrs distributing and redeeming e-mney n behalf f issuers based in anther MS, but nt distributrs acting n behalf f dmestic issuers. Chapter 5: Passprting / Ntificatins E-mney business mdels frequently invlve the distributin f the prduct in ther MS, either thrugh the free prvisin f services r the freedm f establishment. Legal uncertainty ver the definitin f agents and distributrs, the extent t which these entities cnstitute establishments fr passprting purpses and different expectatins relating t cmpliance with dmestic AML/CTF requirements have created challenges in crss-brder situatins, where cmpetent authrities register, r expect ntificatin f, different entities fr passprting purpses. Ntificatin f Agents/Distributrs f E-Mney Recital 9 f the 2 nd EMD states that a reference in the PSD t a payment institutin needs t be read as a reference t electrnic mney. Article 17 f the PSD sets ut the bligatin f a Payment Institutin t ntify their hme cmpetent authrity when they wish t prvide payment services thrugh an agent but neither the PSD, nr the 2 nd EMD refer t distributrs 8. Payment institutins are bliged t prvide: the name and address f the agent 8 Art 3(4), 2 nd EMD merely refers t issuer s ability t distribute and redeem electrnic mney thrugh natural r legal persns which act n their behalf ; it des nt refer t distributrs. 13

14 a descriptin f the internal cntrl mechanisms that will be used by agents in rder t cmply with the bligatins in relatin t mney laundering and terrrist financing under Directive 2005/60/EC the identity f directrs and persns respnsible fr the management f the agent t be used in the prvisin f payment services and evidence that they are fit and prper persns. Article 25 (per Article 17(5)) f the PSD requires a Payment Institutin, where it will have agents abrad, t ntify the hme cmpetent authrity f: the name and address f the payment institutin the names f thse respnsible fr the management f the branch its rganisatinal structure the kind f payment service it intends t prvide. In additin Article 25(4) bligates cmpetent authrities t prvide each ther with all essential and/r relevant infrmatin. The infrmatin requested abut agents may vary whether it is prvided at initial ntificatin r in the curse f activities. Tw MS d require sme infrmatin but did nt explain what that infrmatin wuld be. Agents Mst MS d nt make a differential whether an agent is based abrad r within the hme MS. One MS stated that an agent based abrad wuld need evidence f cmpliance with 3 rd MLD and the hme legislatin and anther nted that it cannt require anything if the issuer f e-mney is under the supervisin f anther supervisry bdy. Mst MS that d require specific infrmatin abut agents perating in the hme MS r abrad in a hst MS require nly the infrmatin set ut in Article 17(5) in cnjunctin with Article 25(1) f the PSD, althugh ne MS respnded that they nly required a list f agents that is then published n the website. Other MS require infrmatin frm the e-mney issuer planning t prvider services thrugh an agent such as a business plan and AML plicies and prcedures r, if relevant, the plan t establish a central cntact pint. Five MS d nt require the issuer regularly t prvide infrmatin abut agents thrughut the relatinship, thugh sme stressed that agents must still cmply with applicable AML laws. Twelve MS require any changes t infrmatin at initial registratin t be ntified. Of thse three requires an annual reprt n AML/CTF by the dmestic e-mney issuer and anther the amunt f e-mney in questin and STRs filed. Distributrs Six MS d nt require e-mney issuers t ntify f their use f distributrs either in their hme MS r hst MS, althugh in at least sme cases, the applicatin f the Payment Cmmittee s passprting guidelines agreed by Eurpean supervisrs mean that in practice, this infrmatin is gathered. Three MS apply the same infrmatin requirements as fr agents and tw MS requires nly the name and cntact details fr distributrs. Chapter 6: Analysis and next steps 14

15 The analysis f members respnses t the JC s e-mney questinnaires reveals significant differences in MS interpretatin f the 2 nd EMD and the treatment f e-mney issuers, their agents and distributrs fr AML/CTF purpses. Legal uncertainty, including in relatin t key cncepts in the 2 nd EMD, appears t have led t a situatin where different rules apply t different entities in the e- mney distributin chain acrss the EU and where the pssibility f gaps in the AML supervisin f e- mney issuers, agents and distributrs cannt be excluded Findings The JC fund that Mre than half f the MS stated that natinal legislatin r draft legislatin nly defined either agents r distributrs and, in ne case, neither. Hwever a significant number f MS stated that natinal legislatin r draft legislatin defined bth agents and distributers. Nearly half f all MS stated that the issuer alne was directly within scpe f AML/CTF legislatin. But mre than half f all respndents stated that agents were themselves within scpe f dmestic AML/CTF legislatin and nearly a quarter cnsidered distributrs t be within scpe f dmestic AML/CTF legislatin. In just ver half f all MS, nly the issuer is directly supervised fr cmpliance with its AML/CTF bligatins and is held ultimately respnsible fr anything its agents and/r distributrs d n its behalf. But nearly half f all respndents stated their regime als required agents and/r distributrs t be directly supervised fr cmpliance with their AML/CTF bligatins, in sme cases even where they acted n behalf f a dmestic issuer. The questinnaire respnses als pinted t different natinal practices and requirements regarding the ntificatin r registratin f agents and distributrs; mst MS require issuers t register r ntify agents but less than a quarter als required registratin r ntificatin f distributrs. This was despite an e-mney passprting guideline, which appears t suggest that distributrs shuld be ntified. Finally, sme members respnses pinted t an incnsistent interpretatin f the 2EMD s limited netwrk exemptin and the applicatin f Simplified Due Diligence in the e-mney cntext; this mirrred differences in the applicatin f Simplified Due Diligence in relatin t credit and financial institutins, which were highlighted in the JC s 2012 reprt n Simplified Due Diligence. 6.2 Implicatins These findings cnfirm feedback frm AML/CTF supervisrs, law enfrcement and payments experts that pints t the incnsistent applicatin f legal and regulatry rules t e-mney issuers, their agents and distributrs acrss the EU. They suggest that the Cmmissin's aims f fstering the emergence f a single Eurpean e-mney market and preventing mney laundering and terrrist financing may nt have been achieved. 9 This has serius implicatins fr gvernments, supervisrs and the e-mney industry. Implicatins fr the Cmmissin and natinal gvernments: The 2nd EMD's bjective t fster the develpment f a Eurpean e-mney market by reducing barriers t market entry has created gaps in Eurpe's AML/CTF defences and expsed MS t the risk f falling shrt f the FATF's new AML/CTF standards 10. Fr example, where MS have transpsed the 3 rd MLD's simplified due diligence prvisins as amended by the 2 nd EMD, many have created 9 Recitals t 2 nd EMD and 3 rd MLD 10 See, in particular, FATF Recmmendatins 1 and

16 blanket exemptins frm custmer due diligence fr certain e-mney prducts irrespective f the risk assciated with these prducts and in ptential breach f Eurpean r natinal sanctins regimes. 11 Sme legislatrs have sught t address this by enacting legislatin aimed at limiting r eliminating the 3 rd MLD's ptinal SDD threshld fr certain e-mney prducts. Hwever, such unilateral actins have at times cme at the expense f the single market and the level playing field fr e-mney issuers, their agents and distributrs. Implicatins fr supervisrs: Legal uncertainty in relatin t the definitin f, and the applicatin f AML/CTF bligatins t agents and distributrs in the e-mney cntext as well as the absence f unambiguus guidance n the divisin f hme and hst supervisry respnsibility and cmpetence in the crss-brder cntext have led t the develpment f different natinal appraches in relatin t the AML/CTF supervisin f issuers, agents and distributrs bth at the natinal level and in a crss-brder cntext. Effrts t find a cmmn slutin, fr example the adptin f the Payment Cmmittee's 2011 passprting guidelines, have been unable t reslve the underlying issue f incmpatible dmestic appraches and assciated regulatry arbitrage. Shared hme/hst respnsibility has been hampered further by different expectatins n what cnstitute 'reasnable grunds' fr rejecting r reviewing the registratin f agents and, where applicable, distributrs, practical difficulties assciated with assessing an issuer's cmpliance with ther MS' AML/CTF regimes that apply t their agents and distributrs based abrad and uncertainty in relatin t the sharing f csts assciated with jint AML/CFT supervisin. 12 Implicatins fr firms: Firms perating in different MS d nt benefit frm a level playing field since the legal and regulatry AML/CTF bligatins and assciated csts f cmpliance differ significantly amng MS. And since cmpliance with the natinal AML/CTF regime des nt guarantee cmpliance with a hst's AML/CTF regime, e-mney issuers, their agents and distributrs perating in a crss-brder cntext are faced with legal uncertainty in relatin t the applicatin f different MS' AML/CTF regime t their business and a ptentially higher cst f cmpliance than that affecting ther payment services prviders. This is further exacerbated by a passprting regime that applies unevenly acrss the e-mney market, with credit institutins issuing e-mney being subject t ptentially less nerus requirements than e-mney institutins Next Steps The JC therefre cnsiders that, in rder t supprt the successful implementatin f an AML/CTF regime fr the e-mney sectr acrss the EU, three main actins are necessary: The strengthening f supervisry cperatin in the e-mney space thrugh extending the AML Supervisry Cperatin Prtcl between Hme Supervisr and Hst Supervisr(s) f Agents and Branches f Payment Institutins in Hst Member State (hereinafter, the Prtcl), t electrnic mney, while stressing the nn-binding nature f the Prtcl; 11 See Chapter 2.4.3; see als the JC s 2012 Reprt n the legal and regulatry prvisins and supervisry expectatins acrss EU Member States f Simplified Due Diligence requirements where the custmers are credit and financial institutins under the Third Mney Laundering Directive [2005/60/EC]. 12 The cst issue arises where e-mney institutins pay fees in the hme jurisdictin, but distribute and redeem their prducts thrugh establishments in ther MS. These establishments must cmply with lcal AML/CTF legislatin and are supervised fr cmpliance by the hst state s cmpetent authrity withut, hwever, bearing the cst f regulatin in that MS. 13 This is because the Banking Directive (CRD) has nt been amended by the PSD r the 2 nd EMD t require credit institutins t reflect the use f agents and distributrs by credit institutins. Credit institutins therefre d nt have t ntify their cmpetent authrity f such arrangements including in a crss-brder cntext. 16

17 Mapping what different cmpetent authrities cnsider reasnable grunds fr the purpse f Art 17(6), PSD t be; and The review, by the Cmmissin, f the AML/CTF regime applicable t electrnic mney issuers, agents and distributrs with a view t prviding legal certainty fr legislatrs, supervisrs and the industry and bringing it in line with the 2012 FATF standards. The Prtcl The Prtcl can be applied t all situatins where an e-mney issuer prvides payment services. This will be the case fr EMIs using agents fr the perfrmance f payment services (cf. article 3.5 f the PSD). Furthermre, and regardless f any payment services activity, the Prtcl can als be applied in all circumstances where the EMD explicitly refers t the applicability f certain articles f the PSD, i.e. fr the cases mentined in articles 3.1 and 3.4. In such cases, the applicability f the abve mentined articles f the PSD n EMIs stems directly frm the EMD itself. Cnsequently, there is a sufficient legal basis t apply the existing Prtcl t EMIs in all f these cases withut having t mdify the actual text. Hwever, fr the sake f clarity and t avid any misunderstanding, it wuld be better t frmally extent the wrding f the Prtcl t EMIs gverned by said articles. There is, hwever, n legal basis fr applying article 17.6 f the PSD t distributrs. The AMLC will therefre cnsider examining further hw AML/CFT risks can be managed adequately thrugh a clse cllabratin between hme and hst supervisrs based n article 25 f the PSD (cf. see als Guidelines n Electrnic Mney Directive Passprt Ntificatins, Annex 2). The existing Prtcl will be expanded t address this. Mapping reasnable grunds The 2 nd EMD and PSD require hst cmpetent authrities t infrm the cmpetent authrities f the hme MS f instances where the mney-laundering and terrrist financing risk assciated with the (intended) engagement f an agent r ther establishment is increased r has crystallised. But neither the PSD, nr the 2 nd EMD, set ut clearly what cnstitute reasnable grunds. The AMLC will therefre map different cmpetent authrities expectatins and requirements t manage expectatins and facilitate the cperatin f hme and hst authrities in this matter. EC legislatin The analysis f MS practices identified a number f issues where legal uncertainty in relatin t the applicatin f the 2 nd EMD and the 3 rd MLD has jepardized the implementatin f a cherent Eurpean apprach t electrnic mney. The AMLC thus cnsiders that the Cmmissin shuld take the pprtunity affrded by the nging revisins t the 3 rd MLD and 2 nd EMD t address the fllwing issues as a matter f pririty: Clarify the definitin f e-mney as ppsed t that f banking mney, since lighter rules can be applied nly in cases where the risks are lwer, but that equivalent levels f requirement shuld be applied t cmpeting prducts that d nt present significant differences regarding their nature and their levels f risk. Clarify at what pint in time e-mney is issued. There is n unifrm view acrss the EU whether e-mney is issued at pint f purchase r whether it is issued nly when the issuer registers the transactin. 17

18 Sme MS cnsider that Art 6(3) 2 nd EMD, read in cnjunctin with Art 2(2) and 7(1) 2 nd EMD means that e-mney is issued immediately, upn receipt f funds, even where the funds are accepted by a distributr r agent wh acts n behalf f an e-mney issuer and therefre des nt themselves prvide a payment service. Other MS cnsider that because the acceptance f funds cnstitutes a payment service (which distributrs cannt prvide), Art 2(2) 2EMD, read in cnjunctin with Art 6 (3) 2EMD means that e-mney is issued nly when the funds paid by the custmer are received by the issuer. The Cmmissin's answer has imprtant implicatins frm an AML/CTF pint f view, as it will help determine whether distributrs and/r agents carry ut regulated functins that shuld be within scpe f AML/CTF legislatin (see belw); it is als imprtant frm a cnsumer prtectin perspective, as the secnd interpretatin creates a gap between the custmer handing ver funds and the issuance f e-mney where safeguarding requirements d nt apply. Clarify the definitin f the terms agent and distributr and the extent t which agents and distributrs shuld themselves be within scpe f AML legislatin. Agents and distributrs play a central rle in many e-mney business mdels, yet 2 nd EMD des nt define these terms. The analysis f the AMLC s e-mney questinnaire and sme f the Cmmissin s publicatins highlighted significant differences in the use f these terms and, mre significantly, their recgnitin in natinal legislatin r draft legislatin. This suggests that the same activities are nt subject t the same levels f versight in different MS and creates prblems in crss-brder situatins where cmpetent authrities register, r expect ntificatin f, different entities fr passprting purpses (see belw). Clarify wh shuld be the cmpetent authrity fr mnitring AML/CTF cmpliance f e-mney issuers, and, where applicable, agents and distributrs in crss-brder situatins either directly, r indirectly thrugh, fr example, AML/CTF supervisin f the issuer. This wuld include clarifying: whether bth agents and distributrs f e-mney issuers established in anther MS are always t be ntified under Freedm f Establishment as suggested by Eurpean Cmmissin Staff Wrking Paper 1178 in relatin t agents f payment institutins 14 whether a hst state has the right t insist n ntificatin f bth agents and distributrs under Freedm f Establishment (as ppsed t free prvisin f services) as suggested by Cmmissin Staff Wrking Paper 1178 in relatin t agents f payment institutins and by the Guidelines n Electrnic Mney Directive passprt ntificatin; what the status f the three criteria t determine whether an entity is an establishment, which are set ut in the Cmmissin s Interpretative Cmmunicatin SEC(97) 1193, wuld be in this cntext; whether all ntificatins under Freedm f Establishment are subject t hst state AML/CTF requirements; and whse AML/CTF regime applies t issuers and, where applicable, agents and distributrs, whse prducts are available in ther jurisdictin nly nline, and wh is the cmpetent authrity fr supervising cmpliance with AML/CTF bligatins in 14 Cmmissin Staff Wrking Paper 1178 n anti-mney laundering supervisin f and reprting by payment institutins in varius crss-brder situatins; see in particular para 1 (b). 18

19 thse situatins; a minrity f respndents indicated that such prducts and services were within the scpe f their dmestic AML/CTF legislatin r regulatin even if the issuer, agent r distributr had n physical presence in their jurisdictin. In the absence f legal certainty, there is a risk that sme entities might be entirely unsupervised while thers will be supervised by bth hme and hst state authrities fr cmpliance with their respective AML regimes. Cnfirm that it is the FIU f the cuntry where the peratins are cnducted which shuld receive suspicius transactin reprts in crssbrder situatins, as set ut in Cmmissin Staff Wrking Paper Clarify wh is the custmer in e-mney business relatinships; internal discussins revealed that sme, but nt all, members cnsidered that in additin t the hlders f e- mney prducts, merchants accepting an issuer s e-mney prducts as means f payment, are the issuer s custmers and therefre subject t CDD and mnitring bligatins. Clarify, using wrked examples, what a limited netwrk is. Differences in MS definitin f limited netwrks present a risk that the same activities and e-mney prducts are subject t different - r n AML/CTF requirements in different MS. Clarify hw the Cmmissin expects e-mney issuers t cmply with the Eurpean sanctins regime where prducts benefit frm an exemptin frm custmer identificatin and verificatin under Art 11, 3 rd MLD (which, as set ut abve, has been interpreted differently acrss the EU). Clarify the extent t which the Wire Transfers Regulatin applies t e-mney transactins; Clarify which AML/CTF measures MS can require e-mney issuers, agents and distributrs t take while cntinuing t cmply with the 2EMD, which is a maximum harmnisatin directive. Examples include a requirement t create a central cntact pint. The Cmmissin culd usefully clarify t what extent its analysis in the Eurpean Cmmissin Staff Wrking Paper 1178 als applies t e-mney issuers, agents and distributrs, either directly, r indirectly. Cnsider whether a threshld apprach t simplified due diligence remains apprpriate; sme supervisrs were cncerned that a blanket exemptin frm custmer due diligence fr all e-mney prducts belw certain threshlds was nt justifiable in light f the large variety f e-mney prducts currently in circulatin, which present with very different levels f ML/TF risk, r cmpatible with the FATF s renewed fcus n the risk-based apprach. Cnsider the risk assciated with e-mney prducts issued utside the EEA that are available t EC custmers via the internet. Respndents pinted t cases where such prducts were issued by firms utside the scpe f AML/CTF legislatin and benefited frm unlimited threshlds with n, r n meaningful, CDD r mnitring bligatins. 19