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E-money and financial crime: EU requirements and the UK’s risk-based approach

E-money and financial crime: EU requirements and the UK’s risk-based approach. Hannah Lynes, Financial Crime Policy Unit, UK Financial Services Authority Ankara, Turkey, 19-20 March 2007. Contents. FSA – who we are What is e-money? EU and UK legal framework UK risk-based approach

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E-money and financial crime: EU requirements and the UK’s risk-based approach

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  1. E-money and financial crime:EU requirements and the UK’s risk-based approach Hannah Lynes, Financial Crime Policy Unit, UK Financial Services Authority Ankara, Turkey, 19-20 March 2007

  2. Contents • FSA – who we are • What is e-money? • EU and UK legal framework • UK risk-based approach • E-money and money laundering risk • ID requirements for e-money • Key messages

  3. Financial Services Authority • UK’s major financial regulator • statutory objectives • Market confidence • Public awareness • Protection of consumers • Reduction of financial crime

  4. Principles of Good Regulation • Efficiency and economy • Role of management • Proportionality • Innovation • International character • Competition

  5. What is e-money? “Monetary value, as represented by a claim on the issuer, which is: • stored on an electronic device; • issued on receipt of funds; and • accepted as a means of payment by persons other than the issuer.”

  6. EU requirements • Electronic Money Directives 2000 • No 2000/46/EC • No 2000/28/EC • Money Laundering Directive 2001 • Money Laundering Directive 2005 • Payments Regulation 2006

  7. UK AML Framework

  8. JMLSG Guidance • Joint Money Laundering Steering Group • 17 trade associations (financial services) • Producing guidance since 1990 • Guidance approved by HM Treasury • Courts and FSA take into account

  9. The UK’s risk-based approach • Legal framework – subject to EU parameters • Proportionate supervision • Principles-based regulation • Senior management responsibility

  10. Why be risk-based or principles-based? Risk-based • Proportionate use of resources Principles-based • Uses firms expertise • Better for customers • Harder for criminals

  11. Is e-money high risk? • Depends on: • The product • The firm’s systems and controls • The level of regulation

  12. What affects the risk level? • Value and frequency of transactions • Cross-border transactions • What is purchased e.g. betting, gaming • Funding of purses using cash • No upfront ID • Non face-to-face • Outsourcing of AML controls

  13. What affects the risk level? (continued) • Size of customer base • Size of acceptance network • Ability of non-verified 3rd parties to use the product • Multiple cards or accounts per consumer • Cash refunds for purchases

  14. Mitigating the risk • Product design • Systems and controls • ID checks • Transaction monitoring • Suspicious transaction reporting • Ability to freeze or close accounts • Money Laundering Reporting Officer • Senior management involvement • Staff training • Record keeping

  15. Differentiating e-money issuers • Electronic Money Directive 2000 -derogation for small e-money issuers • UK • Banks and building societies (FSA) • Specialist e-money issuers (FSA) • Small e-money issuers (HM Revenue and Customs)

  16. ID requirements – 3rd ML Directive • Check ID when • Establishing a business relationship • Single or linked transactions of 15000 euros or more • Suspicion of Money Laundering/Terrorist Financing (ML/TF) • Doubts about previously obtained customer ID data

  17. E-money derogation • ID not required if: • non-rechargeable device with purse size no more than 150 Euros • Rechargeable device with • annual cumulative transaction limit of 2500 Euros • Redemption limit of 1000 Euros • Except where ML/TF suspected • Ongoing monitoring is required

  18. Payments Regulation 2006 • Transfers of funds to be accompanied by complete information on the payer • Transfer of funds = through a payment service provider by electronic means • E-money derogation for transactions up to 1000 Euros, where Member State applies 3MLD derogation.

  19. UK ID requirements for e-money • UK already allows e-money issuers not to check ID in certain conditions • UK will use the e-money derogations • But will expect firms to take a risk-based approach • JMLSG Guidance describes good practice

  20. Key messages • Different e-money products present different levels of risk • Risk can be reduced through: • product design, • firms’ systems and controls • regulation • Risk-based and principles-based regulation can be more effective and proportionate.

  21. Further information • European Commission • http://ec.europa.eu/internal_market/company/financial-crime/ • http://ec.europa.eu/internal_market/payments/emoney/index_en.htm • HM Treasury • http://www.hm-treasury.gov.uk • Financial Services Authority • http://www.fsa.gov.uk • JMLSG • http://www.jmlsg.org.uk

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