Review of the regulatory environment relative to Money Transfer services from European countries to OECS

Transcription

1 Review of the regulatory environment relative to Money Transfer services from European countries to OECS 1

2 Implementation of mobile money transfer Regulatory framework Pays Bénéficiaire : /Country (region): St. Kitts West Indies (Caribbean region) Written by François Flouriot Submitted by SOFRECOM The Views expressed in this report do not necessarily reflect the views of the European Commission 2

3 Les opinions exprimées dans ce rapport n engagent que les auteurs et ne reflètent pas nécessairement celles de la Commission Européenne 3

4 Table of contents Executive summary (regulatory) Introduction Money Laundering Regulation (MLR) International regulation: FAFT European Union regulation Third Money Laundering Directive (3 MLD) (Directive 2005/60/EC) European Regulation (EC) N 1781/ UK and Netherlands money laundering regulation UK money laundering regulation The Netherlands money laundering regulation OECS countries money laundering regulation Money transfer regulation European Union regulation Payment Services Directive (PSD) Electronic Money Directive EU regulation on controls of cash entering or leaving the EU UK specific regulation e-money regulation in the UK Money transfer regulation in the UK MSB environment in the UK The Netherlands specific regulation e-money regulation in the Netherlands Money transfer regulation in he Netherlands France specific regulation e-money regulation in France Money transfer regulation in France OECS countries specific regulation OECS countries ECCB Banking regulation in OECS Money transfer regulation in OECS Conclusions

5 Abbreviations AML/CFT ATM CDD EC ECCB ELMIs EU FAFT FIU FSA FT HMRC IMT KYC ML MLRs MSB MTO OECS PSD PSR PSP PI Anti Money Laundering and Combating the Financing of Terrorism Automated Teller Machines Customer Due Diligence European Commission Eastern Caribbean Central Bank Electronic Money Institutions European Union Financial Action Task Force (on Money Laundering) Financial Intelligence Unit The Financial Services Authority (UK) Financing of Terrorism Her Majesty s Revenue and Customs International Money Transfer Know-Your-Customer Money Laundering Money Laundering regulations (UK) Money Service Business Money Transfer Operator Organisation of Eastern Caribbean States Payment Services Directive Payment Services Regulations Payment Service Provider Payment Institution 5

6 Executive summary (regulatory) The project defined aims at facilitating the transfer of funds from the Caribbean Diaspora in the European Union, particularly in UK but also France and the Netherlands, while also reducing the costs of current remittance transfers. This report is identifying the key regulatory requirements for the set-up, by a Caribbeanbased entity (ECIC Holdings), of a mobile remittance service delivered from European Union (most probably UK), and specifically targeting the Caribbean Diaspora (OECS). From sending side (EU), Payment Institution status should be considered Under the new legal framework of the Payment Services Directive (DSP), the status of Payment Institution will be authorized, starting November 2009, from sending side in UK, France and the Netherlands. Payment Institution (PI), which can be a dedicated payment service provider or a bank subsidiary, is therefore offering a new and attractive status for Money Transfer Operator established in UK: Small initial capital is requested ( ) If there is less than 3 million of payment transaction in a month, a light registration procedure is only necessary (UK), corresponding to a status of small Payment institution. (But to be remembered, if there is more than 3 m, then a full license procedure is to be applied). If the transfer of fund is carried out by telephone and if fund transferred is less than 150, then the sender information could be limited : name, address, account number ATM network can be managed Agents are possible (for distribution / point of sales) Payment Institution is able to Passport its services to other EU countries Starting November 2009, the new regulatory regime for Money Transfer Operator (non bank) will be applied in the UK Depending on different criteria (see below), a full licence is necessary or only a simple registration: Payment Institution (Non bank) MTOs doing business in the UK) Money Transfer Operator wishes to passport its services to other EU countries Money Transfer Operator does not wish to passport its services to other EU countries Money Transfer Operator executes less than 3 million on monthly average (including agents) Licence Registration Money Transfer Operator executes more than 3 million on monthly average (including agents) Licence Licence 6

7 Prior registration of MTO to UK Revenues and Customs services (HMRC) is necessary for AML (Money Laundering Regulation 2007 purpose. Once the AML registration is done, FSA (Financial Services Authority) is the regulator for money remittance services (UK sending side), approving MTO licence or registration. Registration regime is to be considered for a starting/trial period The registration regime is covering up to 36 m of fund transferred per year (average of 3 m per month), which should be adequate for a starting/ trial period. The registration procedure is simplifying the authorisation procedure for money transfer business (sending side). In the UK: FSA decision is within 3 months from application. The refusal by the competent authority (FSA) for registration is restricted to limited number of conditions precisely defined by law (such as head office in the UK, none of the PI managers should have been convicted for Money Laundering or financial offenses or crime,..). In case of refusal (registration and licence) a warning notice is given including reasons for refusal and a possibility offered to present a second application within one month. In addition there is a possibility to contest a final refusal through Financial Services and Markets Tribunal, which is an Independent judicial body. If after the starting/ trial period, the threshold of the average of 3 m of fund transferred per month is over passed, then it is possible to adapt the registration status to a licence type through FSA. Different regulation constraints are to be considered by MTO Customer due diligence procedures should be applied at appropriate times on a risk-sensitive basis: Customer identification is generally collected through the presentation and storage of information from a valid ID. A copy of the customer references and identification must be kept for a period of at least five years after the business relationship with the customer has ended. Risk management procedures need to be defined: 7

8 Suspicious transactions must be identified and reported; the beneficial owner should be identified, to the possible extend. Risk management procedures should include a set of measures such as a limitation of the number, types and/or amount of transactions that can be performed. On receiving side (OECS), regulation framework is evolving A Money Service Bill is already approved by three OECS participating territories. Under the bill, a class A licence is necessary for MTO (non bank). A minimum of level of information must be provided for MSB application (non bank): business plan, MTO management organisation, description of system of control, inspection and report, audit of financial statements (each year). It must be pointed out that FAFT regulation is applicable in OECS countries & territories. From an historical perspective, on a worldwide analysis, FAFT regulation tends to be more strictly observed and monitored. Reports on ML/FT are more frequently requested. Customer identification is generally collected in OECS through the presentation and storage of information from a valid ID. A moderate approach: establishing a Payment Institution in the UK Three business approaches have been defined, corresponding to different regulatory approaches (see below). From a corresponding business analysis, the moderate approach has been recommended, thus enforcing the recommendation to start smoothly, establishing a small Payment Institution in the UK, which requires a light registration procedure in sender side (UK). 1 Aggressive approach Boom approach Launch immediately a full m- wallet proposition in the Caribbean Define precisely all services, other than remittances, provided to final customers Establish a firm in the UK with a PI status (or eventually Bank status) 2 Moderate approach Think big, start small Start with traditional m-banking in sending and receiving countries Start smoothly : establish a firm in the UK with small PI status 3 Conservative approach Follower approach Wait for competitor move Identify a PSP as partner with in the UK that can offer the service 8

9 1. Introduction The project defined aims at facilitating the transfer of funds from the Caribbean Diaspora in the UK and Europe to recipients in the Caribbean while also reducing the costs of current transfers. The project addresses the issue of mobile banking across countries and regions. It aims at identifying the key requirements for the set-up by a Caribbean-based entity of a mobile remittance business in European Union (most probably UK), specifically targeting the Caribbean Diaspora (OECS). We are examining on this report the legislative and regulatory requirements for the establishment of a mobile money transfer business in 3 European countries (UK, France, and the Netherlands) and one group of Caribbean countries (OECS). Different aspects of the regulatory environment are examined, especially those related to: anti money laundering (AML), issuance of electronic money, status of international money transfer office, international money transfer business organisation, Know Your Customer (KYC) policies Etc. Regulators involved in International Money Transfer regulation are coping with various objectives: Ensure that Money Laundering regulation is efficiently in place, this means that an appropriate regulation will favour money transfer via formal channels Define an appropriate regulation for money transfer services Ensure that regulation initiatives will favour development of money transfer services based on new technologies (particularly based on mobile) to lower remittances costs. High remittance costs, often in the range of percent of the principal amount being remitted, are a major drain on remittance flows to developing countries. High costs also encourage remittance senders to use informal channels, which often appear to be less expensive. Average remittance costs are typically higher for small amounts of transfers. In this document we are identifying and analysing the regulation constraints. The document is divided in three main parts: The money laundering regulation (Global, EU and OECS) The money transfer regulation (EU, particularly in the UK, NL and France, and OECS) 9

10 A line of conclusions regarding the main regulatory constraints for the project of mobile money transfer from EU to OECS countries and territories. 2. Money Laundering Regulation (MLR) Persons seeking to remit funds or transfer money to another person installed in a different country can use a variety of means. They can utilize the transfer facilities of: banks, post offices, dedicated money-transfer operators like Western Union or Moneygram, or non-bank financial institutions like credit unions, microfinance institutions, and exchange offices. There are also unconventional providers including individual business people, traders, ethnic stores, travel agencies, gas stations, and courier and bus companies. Regardless of whether it is a primary or secondary business or whether the providers are known to the authorities or not, they all provide the same service: they accept funds from the public on the basis that the funds will be paid out in another location. International money transfer and particularly remittance flows are an important source of funds for many countries and particularly within the Caribbean region. Money transfers to countries with a large number of overseas migrants have become the largest component of remittance flows. A large proportion of remittance flows goes through informal remittance systems facing risks of misuse for money laundering (ML) or financing of terrorism (FT) similar to other financial sector activities. 2.1 International regulation: FAFT A) FAFT/GAFI The FATF (Financial Action Task Force on Money Laundering) 1 is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing. It currently has 33 members: 31 countries and governments and two international organisations; and more than 20 observers: five FATF-style regional bodies and more than 15 other international organisations or bodies. 1 GAFI in French (Groupe d Action FInancière sur le blanchiment de capitaux) 10

11 France, UK and the Netherlands as well as the European Commission are FAFT members. The Caribbean Financial Action Task Force (CFATF) is a FAFT Associate member. The CFATF is an organisation of states and territories of the Caribbean basin which have agreed to implement common counter-measures against money laundering. The Task Force was established in the early 1990s. In November 1996, the CFATF entered into a Memorandum of Understanding which now serves as the basis for the goals and the work of the CFATF. In this document, CFATF members agree to adopt and implement the FATF Forty Recommendations and to adopt and implement any other measures for the prevention and control of the laundering of the proceeds of all serious crimes as defined by the laws of each Member. To meet these objectives, the CFATF engages in the following main activities: Self-assessment of the degree of implementation of the FATF and CFATF recommendations Mutual evaluations of members Co-ordination of, and participation in, training and technical assistance programmes Twice-yearly plenary meetings for technical representatives and an annual ministerial council meeting OECS countries are CFATF members: Anguilla, Antigua & Barbuda, Dominica, Grenada, Montserrat, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, British Virgin Islands. Other Caribbean countries are also CFATF members: Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominican Republic, Haiti, Jamaica, Netherland Antilles, Trinidad & Tobago, and Turks & Caicos Islands. Caribbean countries have been listed by OECD for needing to improve their financial transparency standards: Anguilla, Antigua & Barbuda, Barbados, Aruba, Bahamas, Bermuda, British Virgin Islands, Dominica, Grenada, Montserrat, Montserrat, Netherland Antilles, St Kitts and Nevis, St. Lucia, St. Vincent & the Grenadines. International organizations that are FAFT observers are: International Monetary Fund (IMF) World Bank (WB) European Central Bank (ECB) Egmont Group of Financial Intelligence Units Organisation for Economic Co-operation and Development (OECD) World Customs Organization (WCO) 11

12 B) FAFT Recommendations FAFT has issued 40 recommendations. Those Forty original recommendations were drawn up in 1990 as an initiative to combat the misuse of financial systems by persons laundering drug money. In 1996 the Recommendations were revised for the first time to reflect evolving money laundering typologies. The 1996 Forty Recommendations have been endorsed by more than 130 countries and are the international anti-money laundering standard. The FATF Forty and Eight Special Recommendations have been recognised by the International Monetary Fund and the World Bank as the international standards for combating money laundering (ML) and the financing of terrorism (FT). The FAFT recommendations consist in defining measures to be taken by financial institutions and non financial businesses and profession to prevent Money laundering and Terrorist Financing. Financial institutions included in the FAFT regulation means any person or entity who conducts as a business one or more defined activities or operations for or on behalf of a customer. The transfer of money or value (point 4) is clearly defined as FAFT regulated service. This applies to money transfer in both the formal or informal sector e.g. alternative remittance activity. But it does not apply to any natural or legal person that provides financial institutions solely with message or other support systems for transmitting funds. 12

13 C) FAFT most important Recommendations on customer due diligence and record keeping FAFT most important recommendations on ML and FT Type of FAFT FAFT Most important issues recommendations recommendations Customer due diligence and record keeping N 4/5/6/7/8/9/10/ 11/12 And special recommendation VII - Secrecy laws shall not inhibit implementation of the FATF Recommendations. - Anonymous accounts should not be kept - Performs normal due diligence on cross-border correspondent banking and other similar relationships - Countries should take measures to require financial institution and money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain (SR VII). - Above the applicable threshold : identifying the customer and verifying that customer s identity using reliable, independent source documents, data or information for occasional transactions - All necessary records on transactions, both domestic and international, should be kept for at least five years. - Records on transactions must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved if any) - Copies or records of official identification documents like passports, identity cards, driving licenses or similar documents should be kept for at least five years after the business relationship is ended. - Performance of risk management procedures : should include a set of measures such as a limitation of the number, types and/or amount of transactions that can be performed and the monitoring of large or complex transactions being carried out outside of expected norms for that type of relationship - The general rule is that customers must be subject to the full range of KYC measures including the requirement to identify the beneficial owner. - However when adequate checks and controls exist elsewhere in national systems, it is admitted to define simplified or reduced KYC measures when identifying and verifying the identity of the customer and the beneficial owner. 13

14 D) FAFT recommendations applied on Money Transfer and wire transfers FAFT Money or value transfer service definition 2 : Money or value transfer service (MVT service) refers to a financial service that accepts cash, cheques, other monetary instruments or other stores of value in one location and pays a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message, transfer or through a clearing network to which the MVT service belongs. Transactions performed by such services can involve one or more intermediaries and a third party final payment. FAFT has issued special guidance or interpretative notes to its 40 recommendations. Some of them are particularly regarding Money Transfer: Jurisdictions should require licensing or registration of persons (natural or legal) that provide money/value transfer services, including through informal systems; Jurisdictions should ensure that money/value transmission services, including informal systems are subject to applicable FATF Forty Recommendations Jurisdictions should be able to impose sanctions on money/value transfer services, including informal systems, that operate without a license or registration and that fail to comply with relevant FATF Recommendations. Other guidance is particularly regarding Cross-border wire transfers. Cross-border wire transfers should be accompanied by accurate and meaningful originator information. However, countries may adopt a minimum threshold (no higher than USD or EUR 1,000). For cross-border transfers below this threshold: Countries are not obligated to require ordering financial institutions to identify, verify record, or transmit originator information. Countries may nevertheless require that incoming cross-border wire transfers contain full and accurate originator information. Information accompanying qualifying cross-border wire transfers must always contain the name of the originator and where an account exists, the number of that account. In the absence of an account, a unique reference number must be included. This recommendation specifically deals with funds transfers, including those made through MVT services. It should be noted that Special Recommendation VI covers the transmission of value as well as money (FAFT, June 2003). Information accompanying qualifying wire transfers should also contain the address of the originator. However, countries may permit financial institutions to substitute the address with a national identity number, customer identification number, or date and place of birth. 2 International best practices, FAFT, June

15 E) FAFT other important recommendations FAFT other important recommendations on ML and FT Type of FAFT FAFT Most important issues recommendations recommendations Reporting of suspicious transactions and compliance N 13/15/16 - Designated categories of criminal activities are: participation in an organised criminal group and racketeering; terrorism, including terrorist financing; trafficking in human beings and migrant smuggling; sexual exploitation, illicit trafficking in narcotic drugs and psychotropic substances; illicit arms trafficking; illicit trafficking in stolen and other goods; corruption and bribery; fraud; counterfeiting currency; smuggling; extortion; forgery; - Suspected funds that have reasonable grounds to proceeds of a criminal activity are required by law or regulation, to be reported promptly to dedicated financial intelligence unit Other measures N 17/18/19/20 - Countries should ensure that effective, proportionate and dissuasive sanctions, whether criminal, civil against persons failing to comply with FAFT recommendations - It is recommended that banks and other financial institutions and intermediaries would report all domestic and international currency transactions above a fixed amount, to a national central agency Measures to be taken with respect to countries that do not or insufficiently comply with FAFT recommendations N 21/22 - Special attention to transactions with persons, and financial institutions, from countries which do not or insufficiently apply FATF Recommendations. Regulation and supervision N 23/24/25 - Non financial institutions (ex Money Transfer operator) should be licensed or registered and appropriately regulated, and subject to supervision or oversight for anti-money laundering purposes - International cooperation: competent authorities should be able to conduct inquiries; and where possible, investigations; on behalf of foreign counterparts. - Countries should not invoke laws that require financial institutions to maintain secrecy or confidentiality as a ground for refusing to provide co-operation. F) FAFT recommendations applied on international money transfer (IMT) Anonymous transactions, weak record keeping, non-transparent settlement systems, and the absence of regulatory oversight make remittance systems (especially informal ones) attractive vehicles for illicit activities. To address the ML/FT risks, FAFT issued a special 15

16 recommendation that countries put in place a regulatory framework by licensing or registering money or value transfer providers and impose anti-money laundering and combating the financing of terrorism (AML/CFT) requirements on those providers. However FAFT is advocating flexibility and having a suitable regulatory framework to bring the informal remittance providers into the formal arena. FAFT officially considers that to be effective in addressing the problem of MVT services, regulations should not be overly restrictive. Regulation must allow for those who abuse these systems to be found and stopped, but it should not be so burdensome that it in effect causes the systems to go underground, making it even harder to uncover money laundering and terrorist financing through alternative remittance 3. One approach used by some authorities is to require money remitters to obtain a banking license with the accompanying prudential conditions such as relatively high capital requirements. This approach on international money transfer flows and its effectiveness in keeping money transfer flows within the formal sector are unclear at this time and will require further research 4. Other approach is the guidelines proposed by IMF (International Monetary Fund) that consist in implementing in each country a minimum regulation framework: an appropriate and proportionate regulatory system for money transfer seems not to require elements of a prudential regime generally applied to banks and other traditional financial institutions. countries may choose between a registration or licensing regime depending on domestic circumstances; the registration or licensing requirements should be based on consultations with money transfer providers before regulations are enacted; the AML/CFT requirements consist of minimum customer identification, tailored record keeping and reporting of suspicious activity; the regulatory framework should include background checks on Money transfer operators, on- and offsite monitoring, AML/CFT preventive programs and sanctions for noncompliance; The choice of regime seems to reflect the characteristics of national financial systems as well as national approaches to financial regulation: Registration systems have been adopted in countries with large numbers of informal remittance providers where the primary concern has been identifying remittance providers. Licensing systems have generally been adopted in countries with smaller informal remittance systems and where priority has been given to safeguarding the integrity of the financial system. 3 Best practices FAFT, June Approach to a regulatory Framework for Formal and Informal Remittance Systems, IMF 2005, p 13 s.24 16

17 There are advantages to both the registration and licensing regimes: The advantage of a registration system is its simplicity for identifying money remittance providers without imposing substantial upfront overhead costs on the authorities and the money remitters; especially when the pre-screening process for entering the business is minimal. Registration systems require an active follow-up to ensure compliance with the supervisory and AML/CFT requirements. The licensing system, in contrast, generally includes as part of the approval process a due diligence on the integrity and capacity of the applicant to conduct a remittance business. It filters participation at the application stage to ensure that the remittance providers are suitable; this can reduce the level of compliance oversight afterwards. Because licensing puts more of the emphasis on the application phase, the initial requirements can result in fewer providers signing up. Summary of Registration an Licensing requirements Registration Licensing Regulatory regime Supervisory requirements: Background checks Internal procedures / business plan Compliance Monitoring AML/CFT requirements: The key objective is to encourage remittance providers to identify themselves and to commit to comply with AML/CFT requirements. This regulatory regime requires all remittance providers to register To identify providers, no consequences attached AML/CFT preventive measures Basic reporting requirements and risk-based inspections Only remittance providers that can demonstrate their ability ex-ante to comply with regulatory directives, including AML/CFT requirements, are permitted to operate legally Full fit-and-proper test. This generally includes an examination for criminal records Detailed business plan, including AML/CFT preventive procedures Basic reporting requirements and regular onsite inspections Customer identification Required Required Record keeping Required Required Suspicious transactions reporting Required Required 17

18 Remittance providers are subject to two separate requirements: the supervisory instructions and AML/CFT requirements with respect to their customers. FAFT Requirements Supervisory Money transfer provider Registration Business plan / procedures Compliance Monitoring AML/CFT requirements: Customer identification Record keeping Suspicious transactions reporting Regulatory implications - Fill registration form - Identification of managers (passport) - Issuance of certificate by regulator (renewable each year) - Name and addresses of agents or franchises - Name and address of any depository institution with which the Money transfer provider maintains a transaction account - Examination of criminal backgrounds - Planned business - Organizational structure - Internal controls - AML/CFT compliance procedures - Bank reference and a letter of guarantee - Information on all transactions (in and out) - Includes name of customers, nationality, passport number, amount transferred, beneficiary s name and country - On site inspection for risk analysis (annual basis) - Reporting of annual turnover - Under FATF, as a minimum, remittance providers must verify the identity of customers for transactions above a threshold of 1,000 /$ when conducting wire transfers. - FATF recommendation 5 requires customer identification, including for occasional transactions. - Many remittances are issuing regular customers a loyalty card following the fulfilment of the initial identification requirements. This card is part of a system that has embedded in it all the identity details of the customer, his address and designated beneficiaries. The benefits of this loyalty card to the customer include not having to go through the identification process for subsequent remittances and other financial transactions. Frequent use of the card also attracts bonuses; for instance, the 5th remittance may be free of charge. - Period generally varies from 5 to 10 years - It is advised to impose a format - The standard requirement of AML/CFT regulation for suspicious transaction reporting is applicable to international money transfer providers. - What is constituting suspicious activity for the purposes of reporting remains unclear; - Determining a suspicious transaction with regards to an occasional customer is difficult to apply. 18

19 On a case by case basis, countries assign a variety of government agencies to supervise the providers, such as customs and tax authorities, financial intelligence unit (FIU), central bank or local authorities. Comments on Customer identification Appropriate documentation to identify customers is a strict regulatory requirement for all activities in the financial sector, including for users of remittance services. This requirement poses an especially difficult problem for customers of remittance providers because many of them are migrant workers, including undocumented or illegal workers. FAFT precisely stated that according to its recommendation, it has been made clear that institution (Money transfer operator) should be identifying the customer and verifying that customer s identity using reliable, independent source documents, data or information. FAFT stated that the documents commonly acknowledged and accepted for identification purposes are identity card, passport, drivers license or social security card. According to FAFT, it is important for the credibility of the system that failure to produce an acceptable form of identification will mean that a client will be rejected, the transaction will not be conducted and, under specific circumstances a suspicious transaction report will be made. Countries have used several ways to address the need for appropriate identification 5. One practice is to set the cash threshold above which identification is needed at a level higher than average remittance amounts. This requires knowledge of the remittance market on the part of regulators. However, in case of suspicions of money laundering or terrorist financing, the full identification of the customer in question is needed regardless of the transaction amount. 2.2 European Union regulation Third Money Laundering Directive (3 MLD) (Directive 2005/60/EC) 1 MLD and 2 MLD The two predecessors of 3 MLD established the money laundering which pressed into service banks and financial institutions in the fight against money laundering. The First Money Laundering Directive was passed in 2001 ( 1 MLD ) 6. This established the money laundering prevention regime. It applied, in the main, to banks (and other credit institutions), investment firms, insurance undertakings and bureaux de change. It imposed an obligation on institutions to establish the identity of their customers and to report suspicious transactions. It also imposed a duty on institutions to maintain records of client identity and transactions. The focus of 1 MLD was the prevention of laundering the proceeds of drug trafficking. 1 MLD was based on recommendations of the Financial Action Task Force (FAFT). The Second Money Laundering Directive ( 2 MLD ) 7 extended the scope of the anti-money laundering regime by expanding the range of crimes the proceeds of which were covered by 5 Approach to a regulatory Framework for Formal and Informal Remittance Systems, IMF Directive 91/308/EC. 7 Directive 2001/97/EC. 19

20 the regime, and expanding also the range of professions on whom compliance obligations were imposed. These included lawyers, auditors, accountants, notaries and estate agents. In the wake of the rise in international terrorism, and in particular the attacks in the USA on 9th September 2001, it has become quickly apparent that the financial system had been used to enable terrorists to obtain funds to directly finance the preparation and perpetration of the crime, and generally as a means of support. Accordingly, there have been a series of directions from the European Commission to enable Member States to procure financial institutions to freeze accounts suspected of providing mechanisms for the financing of terrorist activities. Accordingly, clean money may be utilised to provide the finance for acts of terrorism. Money laundering is, therefore, focused on financial transactions post-dating the crime. 1 MLD and 2 MLD proceeded on the basis that the activities sought to be controlled were the disposal of the proceeds after the offence was committed namely to prevent the criminal and his accomplices from enjoying the fruits of the crime. However, the United Nations Declaration on Terrorism Finance has proceeded on the basis that what is required in the context of international organised terrorism is a regime which strikes at the channelling of finance before the crime is committed. The drivers behind 3 MLD include recommendations of FATF, and the rise in international terrorism. In this regard, therefore, there has been a focus on the processing of money before the commission of the offence, as opposed to its disposal after its commission 3 MLD A) Context of 3 MLD After the 9/11 terrorist attacks, the Financial Action Task Force (FATF) undertook the revision of the international standards on the fight against money laundering, extending them to terrorist financing. This revision led to the 2003 Forty Recommendations and the Special Recommendations on terrorist financing. Although in pure legal terms the FATF recommendations are not legally binding, members to the FATF made a commitment to incorporate this (global) standard into their legislation. Since the FATF Recommendations were substantially revised and expanded in 2003, main MLD 3 objective is to be in line with that new international standard. MLD 3 focuses on the preventive measures to avoid the misuse of the financial system in the EU by money launderers and terrorist financiers. Similarly to the previous legislation, the third directive is a minimal harmonisation directive. On the one hand, in accordance with Article 5 8, Member States may adopt stricter provisions in the field covered by the directive. In accordance with Article 4 9, Member States should extend the scope of the preventive measures contained in the directive to other professions and categories of undertakings that although not included in the directive, engage in activities which are particularly likely to be used for money laundering or terrorist financing purposes. 8 Article 15 of the first directive 9 Article 12 of the first directive 20

21 B) Concerned professions Professions concerned by 3 MLD are: credit institutions (article 2) financial institutions (article 2) : this includes (Article 3 1a) the activities of currency exchange offices (Bureaux de change) and of money transmission or remittance offices; more extensively to professions and to categories of undertakings, which engage in activities which are particularly likely to be used for money laundering or terrorist financing purposes (article 4) C) Transaction scope for customer due diligence Transaction scope Customer due diligence is necessary if: There is transaction amounting to EUR or more (single operation or several linked operations) or more (Article 7). In addition 3 MLD apply when there is a suspicion of money laundering or terrorist financing, regardless of any derogation, exemption or threshold (Article 7). Scope including explicitly Internet 3 MLD apply to those activities of the institutions and persons covered which are performed on the Internet (Recital 14). D) Customer due diligence (CDD) scope Customer due diligence scope on a regular basis Two situations should be distinguished: As regards new customers, CDD is to be conducted before the establishment of a business, professional or commercial relation or the execution of transaction. CDD procedures may however take place during the establishment of such relation if needed not to interrupt the normal conduct of business and provided there is little risk of money laundering or terrorist financing 10. As regards existing customers, CDD procedures are to be conducted at any moment, on a risk sensitive basis. It should be recalled that ongoing monitoring of the business, professional and commercial relation is to be conducted at any moment in time and also forms part of the CDD obligations. 10 See Article 9 paragraphs 1 and 2, respectively. 21

22 Customer due diligence procedures should be applied at appropriate times on a risk-sensitive basis. (article 9, 6). Customer identification Customer due diligence measures shall comprise (Article 8 1a): identifying the customer and verifying the customer's identity on the basis of documents, data or information obtained from a reliable and independent source; There are no specific requirements on what type of document is mandatory. A copy or the customer references and identification must be kept for a period of at least five years after the business relationship with their customer has ended (Article 30). As well, the supporting evidence and records of transactions (original documents or valid copies) must be kept for a period of at least five years following the carrying-out of the transactions (Article 30). It must be pointed out that it is specifically mentioned that currency exchange offices and money transmission or remittance offices/providers must comply with this obligation (Article 15 2). Where an institution or person covered by 3 MLD relies on a third party, the ultimate responsibility for the customer due diligence procedure remains with the institution or person to whom the customer is introduced (Recital 27). Beneficial owner The question of the beneficial owner is dealt with in much more detail in the new directive compared to the first MLD. According to the third directive 11, the beneficial owner should be identified while the verification of the identity is to be performed only to the extent possible, by taking risk-based and adequate measures: Customer due diligence measures shall comprise: identifying, where applicable, the beneficial owner and taking risk-based and adequate measures to verify his identity so that the institution or person covered by this Directive knows who the beneficial owner is Indeed, it is left to Money transfer providers whether they make use of public records of beneficial owners, ask their clients for relevant data or get the information otherwise, taking into account that the extent of such customer due diligence measures relates to the risk of money laundering and terrorist financing, which itself depends on the type of customer or transaction. In this context, 3 MLD contains a (complex) definition of beneficial owner in its Article 3 6. This definition provides in the first place a general catch-all clause stating that the beneficial owner means the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. Identifying a beneficial owner is not always easy. This is particularly so when individual beneficiaries are yet to be determined and it is therefore impossible to identify an individual 11 See Article 8(1)(b). 22

23 as the beneficial owner. In those cases, it would suffice to identify the class of persons who are intended to be the beneficiaries. The directive also clarifies that the obligation to identify the beneficial owner does not apply in the cases when trust relationships are widely used in commercial products as an internationally recognized feature of the comprehensively supervised wholesale financial markets 12. The question of the beneficial owner is very much linked to the issue of the transparency of legal entities. The European Commission is currently conducting further work on this issue. Enhanced customer due diligence On a risk-sensitive basis, enhanced customer due diligence measures are required (Article 13 1). The general principle set out in Article 24 is to refrain Money transfer provider from carrying out transactions with customer or beneficial known or suspected to be related to money laundering or terrorist financing until they have reported their suspicions to the competent authority. The directive foresees in this case that, in conformity with national legislation, instructions may be given by a competent authority not to execute the transaction. However, as a derogation from the general prohibition to carry out suspected transactions, the entities subject to this directive may execute suspected transactions before informing the competent authorities where refraining from the execution is impossible : Money transfer providers are refrained from carrying out transactions which they know or suspect to be related to money laundering or terrorist financing until they have completed enhanced customer and/or transaction verifications (Article 24). If refraining a suspicious transaction is impossible for a technical reason or whatever reason, Money transfer providers must immediately inform the dedicated official Financial Intelligent Unit. Special measures to be taken when customer has not been physically present for identification purposes When the customer has not been physically present for identification purposes, adequate measures have to be taken to compensate for the higher risk: for example by ensuring that the customer's identity is established by additional documents, data or information; or by requiring confirmatory certification by a credit or financial institution 12 See Recital

24 3 MLD risk based approach CDD procedures should be conducted following a risk based approach. Indeed, the risk of money laundering and terrorist financing is not the same in every case and persons can therefore adapt the extent of the measures to apply depending on the type of customer, business relationship, product or transaction. In any event, legal entities subject to the directive should be in a position to demonstrate to the authorities that the measures taken are appropriate in view of the risks faced. The risk based approach is a key aspect of the 3 MLD and is facilitating its smooth application. E) Simplified customer due diligence Possibility to adapt implementing measures on low risk situation Although it has to go through a complicated process, the European Commission is empowered to adopt implementing measures, such as certain criteria for identifying low risk situations in which simplified due diligence could suffice, provided that they do not modify the essential elements of the Directive. Repeated customer identification procedures can be avoided In order to avoid repeated customer identification procedures, leading to delays and inefficiency in business, it is appropriate, subject to suitable safeguards, to allow customers to be introduced whose identification has been carried out elsewhere (point 27). e-money transfer not submitted to customer due diligence Electronic money, as defined in Article 1 3b of Directive 2000/46/EC are not submitted to customer due diligence to the following conditions (article 11 5d): if the device cannot be recharged, the maximum amount stored in the device is no more than EUR 150, if the device can be recharged, a limit of EUR 2500 is imposed on the total amount transacted in a calendar year, except when an amount of EUR 1000 or more is redeemed in that same calendar year by the bearer as referred in Article 3 of e-money Directive F) Third party performance on CDD In order to avoid repeated customer identification procedures, leading to delays and inefficiency in international business, 3 MLD allows financial institutions to rely on a third party for performing the customer due diligence procedure. The third party, or introducer, shall be a person subject to 3 MLD (or to equivalent requirements if from a third country). In those cases where a person relies on a third party, the ultimate responsibility for the customer due diligence procedure remains with the person to whom the customer is introduced (i.e. the Money transfer provider). Indeed, he also retains his own responsibility for all the requirements in the directive to the extent that he has a relationship with the customer that is covered by the directive, including the requirement to report suspicious transactions and maintain records See recital

25 The third party performance is important, in particular in cross-border situations. However, its effective application depends of the willingness of Member States during the implementation process, as Member States are not obliged to allow these procedures, which are optional. G) Extension of 3 MLD obligations outside of EU It is required that Money remittance provider (either bank or non bank) must require their branches and majority-owned subsidiaries located in third countries to apply measures at least equivalent to those laid down in 3 MLD with regard to customer due diligence and record keeping. However in case the legislation of the third country does not permit application of such equivalent measures, the competent authorities of the country, where the headquarter is located, must be informed and coordinated action should be taken to pursue a solution (article 31 2). In this case the Money remittance provider must take additional measures to effectively handle the risk of money laundering or terrorist financing. This means that in any circumstances and in any country of doing its business, the Money remittance provider is responsible to take appropriate measure regarding customer due diligence and record keeping (article 31 3). This constraint imposed on Money remittance provider based in EU and having branches or subsidiaries outside of EU is important to take into consideration, because if the provider does not comply with 3 MLD, there is a risk it may loose its license for its EU activities. H) Money remittance supervision Money remittance provider shall be licensed or registered in order to operate their business legally (article 36 1). Licensing implies that a supervisory body has inspected and sanctioned the particular Money transfer operator to conduct its business, based on standards or criteria set for it. National authorities have the power to refuse a license to those who failed a fit and proper test. I) Role of Financial Intelligence Unit (FIU) 3 MLD confirms the growing importance of the FIUs in the fight against money laundering and terrorist financing. This is showed by the specific request contained in the directive to have an FIU as central national unit in place with adequate resources and able to have access, either directly or indirectly, to the necessary information, whether financial, administrative or related to law enforcement that it needs to properly function European Regulation (EC) N 1781/2006 A) Context of the regulation Recognizing the importance of taking action to combat the financing of terrorism, the Financial Action Task Force (FATF) has set the basic framework to detect, prevent, and 14 See Article

26 suppress the financing of terrorism and terrorist acts. FATF member states, and their financial institutions throughout the world, are obliged to provide information on the parties involved in payment orders. Regulation (EC) N 1781/2006 is an EU regulation of 15 November 2006 on information on the payer accompanying transfers of funds. The Regulation 1781 entered into force on 1 January 2007 and is directly applicable to all natural and legal persons within the territory of the European Community whose business includes the provision of transfer of fund services. Since 1 January 2007, Regulation (EC) 1781/2006 has required the declaration of name, address and account number of the sender of any funds transferred to a financial institution (Money Transfer provider) that has its registered office in the EU. As a result, cross-border payment orders which do not contain this information may no longer be executed by banks in the EU. The regulation has been modified to implement the special recommendation VII (SRV II) of the FATF into EU law and is part of the EU plan of action to combat terrorism. B) Regulation scope In order to ensure the transmission of information on the payer throughout the payment chain, Regulation 1781 is imposing the obligation on Payment Service Providers (PSP) 15 to have transfers of funds accompanied by accurate and meaningful information on the payer. Regulation 1781 lays down the rules on the information that has to accompany transfers of funds, concerning the payers of those funds, for the purpose of the prevention, investigation and detection of money laundering and terrorist financing. This means that the PSPs send out payer information to payee PSPs, and check payer information from sending PSPs according to the rules of the Regulation. They shall only hand over such information if a request is received from their relevant national money laundering and terrorist financing authorities which relates to one of these concerns. When the payment service provider of the payer is located outside EU, enhanced customer due diligence should be applied. The payment service provider of the payee should exercise special vigilance, assessing the risks, when it becomes aware that information on the payer is missing or incomplete, and should report suspicious transactions to the competent authorities. Regulation 1781 applies to transfers of funds, in any currency, which are sent or received by a PSP established in the EU (Article 3 1). Complete information on the sender (payer) (Article 4) Payment service providers shall ensure that transfers of funds are accompanied by complete information on the sender. This especially applies when the PSP of the receiver (payee) is located outside of the EU (Article7 1). Complete information on the sender consists of his name, address and account number: The address may be substituted with the date and place of birth of the sender, his customer identification number or national identity number. 15 PSP = Payment Services Provider as defined by Payment Services Directive (PSD). PSP means a natural or legal person whose business includes the provision of transfer of funds services 26