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

• E-money and money laundering risk

• ID requirements for e-money

• Key messages

Financial Services Authority

• UK’s major financial regulator

• statutory objectives

– Market confidence

– Public awareness

– Protection of consumers

– Reduction of financial crime

Principles of Good Regulation

• Efficiency and economy

• Role of management

• Proportionality

• Innovation

• International character

• Competition

What is e-money?

“Monetary value, as represented by a claim on the issuer, which is:

a) stored on an electronic device;

b) issued on receipt of funds; and

c) accepted as a means of payment by persons other than the issuer.”

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

UK AML Framework

PoCA

ML Regulations

FSA Handbook

JMLSG Guidance

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

The UK’s risk-based approach

• Legal framework – subject to EU parameters

• Proportionate supervision

• Principles-based regulation

• Senior management responsibility

Why be risk-based or principles-based?

Risk-based

• Proportionate use of resources

Principles-based

• Uses firms expertise

• Better for customers

• Harder for criminals

Is e-money high risk?

• Depends on:

– The product

– The firm’s systems and controls

– The level of regulation

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

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

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

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)

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

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

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.

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

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.

Further information

• European Commission– http://ec.europa.eu/internal_market/company/financial-crim

e/– http://ec.europa.eu/internal_market/payments/emoney/inde

x_en.htm

• HM Treasury– http://www.hm-treasury.gov.uk

• Financial Services Authority– http://www.fsa.gov.uk

• JMLSG– http://www.jmlsg.org.uk