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European Commission DG Internal Market and Services (DG MARKT) Additional research to assess the impact

European Commission DG Internal Market and Services (DG MARKT)

Additional research to assess the impact of potentially changing the scope (Art. 3) of the Regulation on information accompanying transfers of funds

28 th February 2013 FINAL REPORT

scope (Art. 3) of the Regulation on information accompanying transfers of funds 28 t h February
scope (Art. 3) of the Regulation on information accompanying transfers of funds 28 t h February

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

Contents

1.0

Introduction

6

2.0

Study Scope and Methodology

7

2.1

Study Objectives and Design

7

2.2

Study Methodology

7

2.2.1

Desk Research

7

2.2.2

Telephone Interviews

8

2.3

Risks and challenges

8

3.0

Problem Identification

9

3.1

Typology of E-money and New Payment Methods

9

3.1.1

Card-based Payment Services

10

3.1.2

Internet-based Payment Services

11

3.1.3

Mobile Payment Services

11

3.1.4

Size and Trends of the E-money Market

12

3.2

The Fund Transfers Regulation and E-money

13

3.2.1

Recent Changes to the FATF Recommendations related to Transfers of E-

Money 14

4.0 Analysis of the Findings

15

4.1 Impacts of a potential change to Article 3 FTR

15

4.2 Differentiation between Intra-EU and Extra-EU Transfers

16

4.3 Unique Transaction Reference Number

17

4.4 Person to Person Transfers

18

4.5 Technical Means to Ensure Compliance

19

5.0

Conclusions and Recommendations

20

6.0

Annexes

21

6.1 Bibliography

22

6.2 Discussion Guide for Interviews

23

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

List of Tables

Table 1: E-money Typology by

9

Table 2: Member States which have applied the derogation foreseen in Article 3(3) of the FTR

13

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

Abbreviations

Abbreviation

Legislative Acts

3 rd EMD

The Third E-Money Directive

FTR

Fund Transfers Regulation

PSD

Payment Services Directive

3 rd AMLD

Third Anti Money Laundering Directive

4 th AMLD

Fourth Anti Money Laundering Directive

SRVII

Special Recommendation VII

RXVI

FATF Recommendation 16

Abbreviation

Technical Terms

AML

Anti-Money Laundering

CTF

Counter Terrorist Financing

CDD

Customer Due Diligence

FATF

Financial Action Task Force

NPM

New Payment Methods

P2P

Person to Person

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

1.0

Introduction

This document contains the Final Report of the additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfers of funds (Regulation EC No. 1781/2006), submitted by Matrix and Transcrime.

The aim of this study is to estimate the likely impact of a potential change to the Fund Transfers Regulation’s (FTR) Article 3 with regard to products using e-money and new payment methods (NPM).

The Final Report consists of the following main sections:

Section 2 summarises the study scope and methodology. It presents the study objectives and design, including an overview of the different methods and tools applied as well as the main risks and challenges.

Section 3 presents the problem identification, outlining a typology for e-money products and recent developments in the context of the European Union and the FATF’s anti-money laundering / counter terrorist financing (AML/CTF) framework.

Section 4 presents the findings of the study in response to the five key research questions. This includes an assessment of the likely impact of the suggested changes to Article 3 of the FTR to its suppliers and users.

Section 5 presents the conclusions and recommendations of the study.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

2.0 Study Scope and Methodology

The following section provides an outline of the study objectives and design as well as the methodological tools used in the study.

2.1 Study Objectives and Design

It is our understanding that DG MARKT seeks answers to the following research questions:

1. What are the likely impacts of a potential change to the Fund Transfers Regulation’s (EC/1781/2006) Article 3 in the light of the recent changes to the FATF recommendations with respect to any new payment products which currently do not identify the payer or the payee of the transaction?

2. For payment products using e-money and NPM which can be used for P2P transfers, or where no card or unique transaction reference number accompanies the transaction, would it be possible to differentiate in practice between intra-EU and extra-EU transfers?

3. Would all transfers using e-money or NPM carry unique information which would at least allow identification of the specific transaction (e.g. a card number, a unique transaction reference number) e.g. so as to allow monitoring of all transactions within the system?

4. Which are the products (using e-money and new payment technologies) which allow Person- to-Person fund transfers? Can such products function across borders (either intra EU or to outside the EU)? If so, are they common?

5. Is it possible to prevent new payment methods from being used as a means to effect a person-to-person transfer of funds? Do technical means exist to ensure such compliance, and if so, is it possible to estimate their costs?

2.2 Study Methodology

In order to provide answers to the research questions as well as to make meaningful conclusions and recommendations, this study used a range of tools and methods which are described in detail below.

2.2.1 Desk Research

The research team dedicated the first phase of the project to undertaking desk research in order to better understand the services that are covered by this study as well as to identify the most relevant actors in the field of e-money and other NPMs. This included the identification and assessment of, where possible, the relevance (if any) of the wire-transfer activity in the e-money sector (including mobile telephony).

The study team conducted a review of the main available documentation with regard to the existing evidence on the market for products using e-money and NPMs. The studies reviewed included the following:

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

Joint Committee (EBA, ESMA, EIOPA) December 2012. Report on the application of AML/CTF obligations to, and the AML/CTF supervision of e-money issuers, agents and distributors in Europe.

Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.

FATF-GAFI. 2010. Money Laundering using New Payment Methods

ECB. 2008. Electronic Money Institutions, current trends, regulatory issues and future prospects. Legal Working Paper Series No 7 / July 2008

FATF-GAFI. 2006. Report on New Payment Methods

2.2.2

Telephone Interviews

Telephone interviews were conducted with seven stakeholders, each representing a different segment of the market. The interview with the European E-Money Association (EMA) was used as a pilot and provided a background understanding of the subject matter, which then informed the focus and approach of the subsequent interviews. The interview with EMA was also used to validate the reasoning for our choice of consulted stakeholders. EMA also circulated the questions among their members to ensure maximum level of input.

In order to ensure a balanced response to this research, the study team also consulted stakeholders from the policy and regulation side. Italy was chosen for this purpose based on the leading role it has in the use of prepaid cards in Europe (see section 3.2.1) and because of the criticalities already expressed and reported in a recent study on the application of the FTR conducted by Matrix and Transcrime (see page 117 of the Final Study Report) 1 . This choice was further supported by the interview with EMA, which pointed to the existence of a particular prepaid card type in Italy, which could be affected by the potential revision of the FTR’s Art. 3.

2.3 Risks and challenges

The main challenge of this study was to ensure representativeness of the main segments of the e- money market, given the relatively small sample of interviewees. While a wide range of products are represented by the stakeholders interviewed, there is a risk that unidentified products have not been fully covered. Related to this was the challenge of the limited timeframe for the desk research, which means a full literature review was not possible. This challenge was addressed by using EMA as the starting point for our interview programme, as it represents several different types of businesses offering e-money products.

Finally, it was challenging to retrieve meaningful answers from stakeholders regarding the impacts of a potential change to the scope of the Regulation, which could not be disclosed in its entirety. In this study the research team therefore first of all focused on the potential impact of making the distinction between products with person-to-person (P2P) capabilities (i.e. transfers between natural persons 2 ) and products used for the purchase of goods and services as the basis for determining applicability of the FTR. Secondly, the focus was set on the relevance of the existing € 1,000 threshold in relation to e-money products provided in Article 3(3) of the FTR. Thirdly, the interviews focused on the existence of unique identifiers and the possibilities for cross-border transfers.

1 Matrix. 2012. Study on the application of the Regulation on information accompanying transfers of funds. Research conducted for the European Commission DG MARKT 2 A precise definition of this concept is not provided in the FATF recommendations.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

3.0 Problem Identification

The following section provides a definition of e-money and an outline of the main growth trends within different platforms (i.e. internet-based, card-based, and mobile-based). The last section provides a short overview of the relevance of e-money to the FTR and the FATF Recommendation 16.

3.1 Typology of E-money and New Payment Methods

The following section sets out a definition of e-money. Electronic money (e-money) can be described as a digital equivalent of cash, stored on an electronic device or remotely on a server. The E-money Directive (2009/110/EC) uses three criteria to distinguish e-money from other financial payment systems:

1. Stored on an electronic device;

2. Issued on receipt of funds of an amount not less in value than the monetary value issued;

3. Accepted as means of payment by other parties than the issuer 3 .

However, for the purpose of this study it is useful to draw on the typology established in an FATF report from 2006 4 . E-money and NPMs are concepts which can be used interchangeably referring to the same type of products. It is important to note here that many seemingly “new” payment products are mere extensions of the “traditional” and already regulated banking system. This includes for example the ability to make wire transfers from one bank account to another using a computer or a mobile phone. Many other products such as internet payments not directly based on a bank account are linked to accounts or payment cards in the banking sector, thus constituting little more than a digital version of a prepaid card. The table below illustrates the main distinctions for e-money between i) card-based, ii) mobile-based, and iii) internet-based.

Table 1: E-money Typology by Platform.

New non-traditional Retail Electronic Payment Systems

Card-based Payment Services

Mobile phone or device- based payment services

Internet-based Payment Services

Prepaid payment cards

Mobile payments not based directly on bank account

Internet payments not based directly on bank account Digital Currency

Source: FATF 2006 adapted by Matrix.

The following sections outline the different types of NPM products by platform, i.e. card, mobile, internet, based on a 2006 FATF report 5 . It is, however, important to stress that this distinction is becoming increasingly unclear with mobile phones potentially acting as credit cards (the so-called NFC technology used in Google Wallet tm , where smartphones can be used to make credit or debit

3 Article 2, EC Directive 2009/110/EC

4 FATF-GAFI. 2006. Report on New Payment Methods

5 FATF-GAFI. 2006. Report on New Payment Methods

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

card payments in shops) or platforms for internet payments. Some payment card providers are also beginning to offer wire transfers between payment cards executed by means of mobile phones. 6

3.1.1 Card-based Payment Services

Prepaid payment cards provide access to monetary funds that are paid in advance by the cardholder. There may be an account for each card that is issued or, alternatively, there may be a pooled account that holds the funds prepaid for all cards issued.

Prepaid cards can be divided into two main groups:

Limited purpose or closed-system cards;

Multiple purposes or open-system cards.

Limited-purpose or closed system prepaid cards can be used for only a limited number of well-defined purposes and their use is often restricted to specific points of sale or for specific services. Examples include merchant-issued gift cards, prepaid long distance service, and mass transit system cards, such as the Oyster Card in London or the Navigo in Paris. The issuer of the card or its service provider typically operates the network on which the cards can be used. The value on the cards is generally linked to a prepaid account established by the issuer or service provider. Transactions are processed in a similar fashion to transactions involving debit or credit cards.

Multipurpose or open-system prepaid cards can be used across a broader range of locations for a wider range of purposes. Such cards may be used on a national or international scale but may sometimes be restricted to a certain geographical area. Multipurpose cards may be used by the person who purchased the card or by someone else. Examples include payroll cards and general purpose “cash cards” for individuals without bank accounts or a credit card. These cards are usually associated with a card payment network, such as Visa, Maestro, or MasterCard, which permits them to be used in the same manner as a debit card to make purchases or to get cash from an automated teller machine (ATM).

The US market size for prepaid cards was estimated to be $ 120.2bn in 2009, in a study commissioned by MasterCard Inc. and conducted by Boston Consulting Group (BCG) 7 . The BCG study also forecast that the US will account for 53% of the global prepaid card market in 2017, and that UK and Italy will remain the largest markets for prepaid cards in Europe. The BCG study largely supported the findings of a 2009 survey sponsored by the international payments processing firm First Data, which found that Italy was the “most advanced prepaid market in Europe”, while the UK market was described as “established”, and the markets in Germany and Austria were described as “embryonic”. 8 However, the use and spread of prepaid cards have grown in recent years. According to the Basel Committee on Payment and Settlement Services 9 , the number of issued cards with an e- money function has grown from 107,6 million in 2004 to 275,28 million in 2008 in selected countries 10 .

6

8 FATF-GAFI. 2010. Money Laundering using New Payment Methods

9 2012 Moneyval 10 Belgium, France, Germany, Italy, Japan, Netherlands, Singapore and Switzerland.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

3.1.2 Internet-based Payment Services

Internet payment services generally cover the following two product types:

Prepaid internet payment products;

Digital currencies.

The prepaid internet payment products are provided by firms who may not be credit institutions. They allow customers to send or receive funds through a virtual prepaid account, accessed via the Internet (i.e. PayPal).

Digital currency or precious metals can either be exchanged between account holders of the same service or exchanged against real currencies and withdrawn.

According to a new report published by Innopay, a consultancy specialised in payments and related services, virtual goods have been driving revenues for the online gaming industry in Asia and Europe for years. These include items bought in virtual gaming worlds but they also include items bought on popular Facebook games 11 . Virtual goods are characterised by very low prices which lead to the need for other payment methods than credit and debit cards. For micro-transactions, a pricing model with a base fixed fee would result in a too high cost for merchants. For this reason, many start-ups in the area of micro-transactions attempted to tackle the problem by providing a variable fee-pricing scheme. Examples of these start-ups include the successful case of Zong (now acquired by PayPal) 12 .

3.1.3 Mobile Payment Services

The final category includes mobile payment services:

Mobile payment services;

Mobile money services.

Mobile payment services allow non-bank and non-securities account holders to make payments with mobile phones.

Mobile money service subscribers are able to store actual value on their mobile phone. They may use phone credits or airtime as tender for payment.

Despite a predicted increase in the use and spread of mobile payments, only a few providers have managed to run a successful and profitable business model in the long term so far 13 . According to the 2011 VISA Annual Report, one of the key components of the future of payments is a new infrastructure which supports both contactless payment cards and Near Field Communication (NFC)- enabled mobile devices. By the end of 2011, around 50 European members of VISA had issued more than 26 million contactless Visa cards, and 175,000 acceptance terminals had been installed –

11 Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.

12 Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.

13 FATF-GAFI. 2010. Money Laundering using New Payment Methods

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

enabling quick, secure electronic payments in locations where cash-use is deeply entrenched 14 . Google has also engaged in a partnership with Mastercard to provide NFC payment services to its user. The Google.Wallet offer appears, however, not to have taken off yet 15 and there are disagreements in the industry over how this technology will develop in the coming years. In a blog post entitled "Looking Ahead to 2013", PayPal president David Marcus sets out his predictions for 2013 and at the top of the four-point list he states that "NFC will fail to gain mass adoption" 16 . The fact that the new Iphone5 did not contain the NFC technology is another indication that the technology may not gain mass traction at least for the foreseeable future 17 .

3.1.4 Size and Trends of the E-money Market

Although Italy cannot be representative for all other EU Member States, taking it as an example is useful as an indicator of the size and trend of the e-money market as a whole. In the section below, a general overview of the market for e-money products in Italy is provided.

In Italy the number of payments executed in 2011 by means of e-money constituted 3.7% of the total amount of non-cash transactions 18 . At the same time this only constituted 0.1% of the amount of non- cash transaction measured in value 19 . This indicates that e-money transactions are on average significantly lower than transactions with other non-cash means of payments.

In 2011, the growth of transactions using e-money payment instruments was 28.4%, compared to a 3.9% increase in transactions using non-cash payment instruments as a whole. This indicates that e- money is growing rapidly in proportion not only to cash-based transactions, but also to traditional payment products such as debit and credit cards.

http://www.guardian.co.uk/technology/2012/sep/14/apple-iphone-5-near-field-communication-nfc

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

3.2 The Fund Transfers Regulation and E-money

E-money is currently mentioned in Article 3(3) of the FTR. According to this Article: “Where a Member State chooses to apply the derogation set out in Article 11(5)(d) of Directive 2005/60/EC, this Regulation shall not apply to transfers of funds using electronic money covered by that derogation, except where the amount transferred exceeds EUR 1,000.” 20

This article entails that money or value transfers made in all Member States, which have not made use of the derogation, are included within the scope of the Regulation. The same is the case for all transfers exceeding € 1,000.

The mentioned Article 11(5)(d) in the 3 rd AMLD provides for a derogation from customer due diligence (CDD) requirements: the obligation to identify, and verify the identity of the customer and, where applicable, the customer’s beneficial owner. It also includes obtaining information on the purpose and intended nature of the business relationship and to monitor the business relationship – in certain situations, including where the product is e-money as defined by the 2 nd E-Money Directive (2 nd EMD). This Article provides for the exemption from CDD of e-money products that are either 21 :

Non-reloadable and whose total purse limit does not exceed €250 (or €500 for domestic transactions); or

Reloadable, cannot transact more than €2500 in a calendar year and be used to redeem more than €1000 in that same calendar year.

As demonstrated in a recent study on the application of the FTR undertaken by Matrix and Transcrime, not all EU Member States have taken advantage of this derogation 22 .

Table 2: Member States which have applied the derogation foreseen in Article 3(3) of the FTR

Member States have applied the derogation

Total of 16: AT, BE, CY, CZ, DE, FR, EL, HU, IE, IT, LT, NL, PT, SK, SE, and UK

Member States have not applied the derogation

Total of 6: BG, EE, FI, DE, SI, and ES

20 Funds Transfer Regulation

21 Joint Committee (EBA, ESMA, EIOPA) December 2012. Report on the application of AML/CTF obligations to, and the AML/CTF supervision of e-money issuers, agents and distributors in Europe.

22 Matrix. 2012. Study on the application of the Regulation on information accompanying transfers of funds. Research conducted for the European Commission DG MARKT

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

3.2.1 Recent Changes to the FATF Recommendations related to Transfers of E- Money

The European Commission is currently reviewing the FTR in the light of the recent changes to the international AML/CTF standards set by FATF. The provisions covering wire transfers of the former Special Recommendation VII have now been revised in the new Recommendation 16. The main changes with relevance to this study are the following.

The applicable exemptions have been clarified in the new Recommendation 16. The former Recommendation VII allowed for the exemption of transactions carried out using credit or debit cards as long as the credit or debit card number accompanied all transfers flowing from the transaction. In the new Recommendation 16 this has been specified to include prepaid cards but only to be the case when the transaction is conducted for the purchase of goods and services. When such cards are used to carry out P2P wire transfers they now fall within the scope of the recommendation.

The de-minimis threshold of USD/EUR 1,000 has been retained in the new Recommendation; however, the new Recommendation spells out clearly what information is still required for international wire transfers under this threshold. This includes the names of the originator and the beneficiary as well as the account number of both parties. The latter can be replaced by a unique transaction reference number. The address/national ID number/customer ID number/date and place of birth are no longer required. The accuracy of the information need only be verified in the case of suspicion of money laundering.

The objective of recommendation 16 remains the prevention of terrorist and other criminals from having unfettered access to wire transfers for moving their funds as was the case for the former Recommendation VII. A direct reference to United Nationals Security Council resolutions 1267 (1999) and its successor resolution 1373 (2001) relating to the prevention and suppression of terrorism and terrorist financing has been included in the new Recommendation 16. This constitutes a clarification of the requirements in relation to the former recommendation SRVII.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

4.0 Analysis of the Findings

The following section is based on information and feedback received during the telephone interviews carried out as part of this study.

4.1 Impacts of a potential change to Article 3 FTR

Q1: What are the likely impacts of a potential change to the Fund Transfers Regulation’s (EC/1781/2006) Article 3 in the light of the recent changes to the FATF recommendations with respect to any new payment products which currently do not identify the payer or the payee of the transaction?

It appears from the interviews conducted for this study that only niche products such as 4-party payment card systems are likely to be affected by the majority of suggested changes. However, a change to the € 1,000 transaction threshold for e-money in Article 3(3) should, according to one stakeholder, take into account potential implications for the related Article 11(5)(d) of the 3 rd AMLD. In addition, products offering card2card payment facilities could also be affected by a potential change.

A large online prepaid payment facility provider interviewed expects to remain unaffected by the potential changes to Article 3 of the FTR. The company interviewed offers one single product which can be used for P2P transactions (although only 98% is currently used for the purchase of goods and services). To take part in a transaction, a customer must sign up by providing name, account or credit card details, place of residence and in some cases date of birth. A verification process of this information is required if a user transacts more the € 2,500 in one year or if more than € 1,000 is redeemed from the account. This is in accordance with Article 11(5)(d) of the 3 rd AMLD.

Members of the European E-Money Association (EMA) stressed the importance of the € 1,000 threshold for e-money transfers which is currently provided for in Article 3(3) of the FTR. If this threshold is removed, members of EMA see a risk that the provisions of the FTR could conflict with those of the 3 rd AMLD (and potentially the 4 th AMLD). In particular, a potential conflict could be envisaged between Article 11 of the 3 rd AMLD (Simplified Customer Due Diligence) and Article 5(2) of the FTR (verification of information on the payer). In the current legislation, both the FTR and the 3 rd AMLD provide for monetary thresholds 23 under which e-money products are exempted from including and verifying customer information. These thresholds are, according to EMA members, important in order to maintain a risk-based approach to the system of transfers.

Wire transfers falling within the scope of the FTR must be accompanied by information about the payer (Article 4 of the FTR). This information must, according to its Article 5, as a general rule, be verified. In the context of an ordinary wire transfer between two bank accounts, this obligation is straightforward as credit institutions are obliged as per Article 8 of the 3 rd AMLD to conduct CDD on their customers, which according to Article 5(3) of the FTR qualifies as verification. However, customers of e-money providers who are exempted from CDD requirements in accordance with the above mentioned Article (11(5)(d) of the 3 rd AMLD, are not by law subject to full CDD. This means that for them to collect verified information on the payer they would need to request documentation about the identity of the payer. In that sense it would weaken the derogation for e-money providers in

23 The exemptions for E-money in the 3 rd AMLD are discussed in section 3.3.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

the 3 rd AMLD as the providers would need to conduct CDD-like verification 24 of the customer’s identity for them to execute any transaction.

Members of EMA and an Italian public authority representative highlighted the difference between 3- party and 4-party prepaid cards. In the case of 3-party pre-paid cards, both payer and payee are known to the e-money provider whereby identification becomes straightforward. In the case of 4-party payment system, two cards are issued for the same account (bank account or e-money account). One card will be kept by the account holder, while the other card can be given to another individual who remains anonymous to the card issuer. The anonymous third party will be able to make purchases from a fourth party. Interviewees therefore argued that the status of this product would need to be clarified for a revision of the FTR. An Italian provider of this card stressed that it is currently a niche product. It has been introduced in Italy just a few years ago and the largest provider is estimated to have just 100,000 cards on offer.

Two large payment card providers interviewed for this study offer wire transfer services between payment cards among other things through the use of mobile phones. This capability is intended for P2P transactions, so the products may be affected by a revision of Article 3 of the FTR. One of these products takes the form of an ‘app’, which can be downloaded to a smart phone. The product is not distributed by the card provider itself but by retail banks to their account holders. By means of this ‘app’, payments can be made with a card to a holder of another card of the same provider. All payments are associated with specific transaction codes which can trace whether the transaction was P2P or made for the purchase of a good or a service. An Italian retail bank distributing this kind of prepaid card was interviewed for this study. In their case the prepaid card is linked to an online account. Payments can be made to all other cards distributed by the bank either online (mobile or internet) or by means of cash or payment card in a branch of the bank. Whenever a person purchases such a card, KYC checks are carried out. If a third party wishes to make a cash payment onto a card of another person, (s)he can do so in any branch subject to the provision of identity documentation.

4.2 Differentiation between Intra-EU and Extra-EU Transfers

Q2: For payment products using e-money and NPM which can be used for P2P transfers, or where no card or unique transaction reference number accompanies the transaction, would it be possible to differentiate in practice between intra-EU and extra-EU transfers?

It appears from the interviews conducted for this study that such a differentiation is possible for all products based on the location of the customer.

For the online prepaid payment provider interviewed for this study, it is possible to differentiate between domestic e-money transfers, intra-EU and extra-EU transfers. As all of the offered accounts are linked to a payment card or a bank account registered in a country, the interviewed provider will automatically register the country of payee and payer.

For P2P capable products offered by two payment card companies it is also possible to trace whether payments go to other countries or remain within a jurisdiction. An Italian retail bank

24 Although there are similarities between Verification of the information of the payer (article 5 of the FTR) and verification of the identity of the customer within (article 8 of the 3 rd AMLD) in the sense that both require the provision of documents, data or information obtained from a reliable and independent source to allow verification, the two concepts are not identical. In the context of the FTR it concerns verification of the information attached to a fund transfer. In the context of the 3 rd AMLD it concerns the verification of the identity of the customer, and assumes a particular importance especially when the customer is a company or a legal person. In this latter case, when applicable and on a risk-based approach, the verification would entail also the identification of the beneficial owner of the customer as set by Art. 8 of the Directive.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

interviewed for this study distributes such cards, however, stated that it is only possible to carry out transfers to other payment cards issued by that bank. As all cardholders currently are Italian residents, the transfer option is effectively limited to domestic transactions. As of December 2012, the bank is licensed to offer the product to non-Italian residents. The feasibility of this option is currently being considered. Still, payments for goods and services as well as cash withdrawals are possible in all countries. Under any circumstances the bank is able to trace the destination of all transfers and payments made with these cards.

EMA members, too, believe that such a distinction is possible for its members based on the location of the customer.

4-party payment card products offered by a bank interviewed for this study can be used in ATMs around the world. The bank issuing the card can geographically trace all the uses of the card. The stakeholder interviewed indicated that it may be technically possible to restrict ATM use and/or match it only to merchants registered in one country. This, however, would be in contrast with the very logic of a card issued on an international basis.

4.3 Unique Transaction Reference Number

Q3: Would all transfers using e-money or NPM carry unique information which would at least allow identification of the specific transaction (e.g. a card number, a unique transaction reference number) e.g. so as to allow monitoring of all transactions within the system?

Based on the interviews conducted for this study it appears that all products falling under the scope of the FTR would carry unique information which would allow identification of the specific transaction. However, stakeholders disagree whether to adopt a flexible approach as to the specifics of a unique identifier to avoid unnecessary administrative burdens or to introduce a common standard in order to ensure consistency and accuracy of information.

For an online prepaid payment provider interviewed for this study, all payments are linked to membership accounts which in turn link back to registered payment cards and bank accounts. There would in addition also be an identification number for the specific transaction.

According to EMA members, transactions may be recorded according to amount, time and parties involved for 3-party payment systems, rather than having a unique identification number. Introducing an identification number where this is not part of the system may be problematic and costly. Contrary to this view, the Italian supervisory authority 25 recommended a standardisation of transaction numbers. Alternatively it saw a risk that inaccurate or misleading information could accompany the transfers. A consulted retail bank argued that this would only be needed if e-money transfers were to become possible between different providers.

With 4-party models, a unique ID is, according to EMA, likely to be attached. This is further confirmed by an Italian bank offering this product.

Both industry stakeholders issuing and distributing payment cards stated during the interviews for this study that payments from their products will always be associated with a unique identifier. One payment card provider stressed that the collection and administration of this data lies with the

25 Representatives from Banca d’Italia were interviewed for this study. Banca d’Italia is the financial supervisory authority of Italy. The Italian FIU is also established within Banca d’Italia.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

financial institutions which distribute the cards. So in practice the card provider does not have the means to monitor to which extent it is being done. An Italian bank issuing cards with a card2card payment capability stated that all payments are associated with a unique identifier.

4.4 Person to Person Transfers

Q4: Which are the products (using e-money and new payment technologies) which allow Person-to- Person fund transfers? Can such products function across borders (either intra EU or to outside the EU)? If so, are they common?

According to EMA, there are four types of relevant products. This was further confirmed in the subsequent interviews:

1. Internet-based

a. PayPal is a case in point here, as they offer a three-party pre-paid payment system where all payers and payees are customers of the provider.

2. Card-based

a. Prepaid cards (3-party systems) can always be passed on to anonymous third persons. As these products are comparable to (albeit more traceable than) cash, they are considered by EMA members to be outside the scope of the Recommendation.

b. Prepaid cards (4-party systems) are prepaid cards designed to be passed on to a person anonymous to the card provider.

3. Card-based combined with mobile or internet

a. Some card providers offer money transfers between payment cards. These cards are distributed by retail banks.

According to an online prepaid payment provider interviewed for this study, 2% of all its payments are P2P. The company currently has a 30% annual growth in transaction value.

One interviewed card provider reported offering a product which enables money transfers between payment cards. For one of the companies this product dates back to 2003. The other company reported the product to be used at a very limited rate in Europe at the moment. One of the payment card providers stated that it is anticipated that these products may fall within the scope of the FATF Recommendation 16 and thus a potential revised version of the FTR. This provider also reported that the use of the product is growing although the exact figures are kept confidential for competition reasons. Among some EMA members this technology is under development although not currently offered. One Italian bank consulted reported to offer this kind of card; however, in this case the transfer capability was restricted to other cards issued by that bank. This effectively ensured that the retail bank always has full information on both payer and payee. One stakeholder also reported that in Italy there are more than 10 million of these cards in circulation. However, the P2P capability of the product does not seem to be the main driver behind the growth in prepaid cards.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

4.5 Technical Means to Ensure Compliance

Q5: Is it possible to prevent new payment methods from being used as a means to effect a person-to- person transfer of funds? Do technical means exist to ensure such compliance, and if so, is it possible to estimate their costs?

Based on the interviews conducted for this study, it appears that some products are aimed at P2P transactions and would be the same products if P2P was restricted (transfers between payment cards). However, the only concrete example of such a card identified in this study only allowed person to person transfer between cardholders of the same provider. Other products (such as 4-party payment card system) ensure financial inclusion of individuals who would otherwise be transacting in cash. The status of 4-party payment cards after a potential change in scope of the FTR remains unclear. The online payment service provider interviewed for this study has a clear distinction in its offer between payments made on a merchant’s website and payments made as P2P.

The one risk identified by an Italian bank is if a person sets up a “fake” merchant. In that case it would be impossible for a payment service provider to distinguish between a payment for goods and services and a P2P payment.

In the case of 4-party payment card systems it is important to understand what kind of market the product is designed for. The product was identified by EMA members as mainly existing in Italy, which was confirmed by an Italian public authority representative. Users are often individuals without access to bank accounts, for example irregular migrant workers who use it as a means to receive remuneration for work. Other users include allowances for children or other family members.

The alternative for the user of this product would therefore typically be cash payments. Cash is characterised by the lowest possible level of traceability. It is therefore from a regulatory perspective not desirable to prohibit payment products only to see them being replaced by cash. In Italy, for example, as a part of the combat against tax fraud, interviewees confirmed that the Monti government had further reduced the legal threshold for cash transactions to just € 1,000 (only three years ago the permitted threshold was € 12,500) 26 . This limits the cash payment option in Italy. It should also be considered that nothing prevents an individual from opening a second account with a limited sum of money and passing on the associated debit card to an anonymous third party.

It should therefore be stressed that this product serves the purpose of financial inclusion and would probably be replaced by cash if prohibited.

The products offered by the two interviewed payment card companies are specifically aimed at P2P transfers. For that reason they are also equipped with data fields for enabling to carry the information required for wire transfers and generally carry the information required under the FTR.

The online prepaid payment provider interviewed for this study stated that it imposes restrictions on P2P transactions but only in jurisdictions outside the EU. It confirms that this would be possible also within the EU jurisdictions, but at a very high cost.

26 http://www.businessweek.com/magazine/italys-cap-on-cash-payments-12082011.html

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

5.0 Conclusions and Recommendations

This study examined a range of products using e-money and NPM. These included:

an online prepaid payment facility;

a mobile product transferring value between payment cards; and

4-party and 3-party prepaid payment cards.

It can be concluded that:

removing the € 1,000 transaction threshold for e-money in Article 3(3) would have consequences for payments below € 1,000. Such e-money payments, where they are used to make person to person transfers, have been included into the scope of the new international standards with respect to wire transfers. A number of stakeholders have expressed concerns about how this change, if implemented into the revised EU Regulation, would articulate with Article 11(5)(d) of the 3rd AMLD which allows simplified due diligence measures to be applied to E-money products below a threshold of €2,500 for devices that can be recharged;

for payments below € 1,000 which are not made from an account the identity of the customer would need to be provided, but not verified. For payments above € 1,000, verification of the customer information would still be necessary.

a differentiation of domestic intra and extra EU payments was found to be possible for all the products based on the location of the customer;

all products falling under the scope of the Regulation appear to carry unique information which would allow identification of the specific transaction. In some cases, this would also allow the identification of the payer and the payee involved in the transaction. In all cases, this ability to identify the transaction would allow monitoring for AML/CFT purposes;

industry stakeholders are in favour of a flexible approach to the specifics of a unique identifier. An Italian regulator argues that standardisation will become necessary;

it appears that some e-money and NPM products are aimed specifically at P2P transfers and would be impacted by new rules stemming from the revision of FATF Recommendation 16. This would in particular imply identification of both the payer and the payee in the case of P2P transfers;

the status of other products (such as 4-party payment card system) is uncertain after a potential revision of the FTR. This however, is a relatively rare niche product. A policy stakeholder argued that the product helps ensure financial inclusion and would otherwise be replaced by cash;

online payment products are often characterised by 3-party systems where the provider collects information on both the payer and the payee. In this situation all relevant information about the payer and the payee is already being collected; and

the market for e-money is growing but P2P remains a very small proportion. A bank consulted for this study argued that the P2P feature was not a central driver for growth of e-money products.

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

6.0

Annexes

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

6.1

Bibliography

Joint Committee (EBA, ESMA, EIOPA) December 2012. Report on the application of AML/CTF obligations to, and the AML/CTF supervision of e-money issuers, agents and distributors in Europe.

Matrix. 2012. Study on the application of the Regulation on information accompanying transfers of funds. Research conducted for the European Commission DG MARKT

Innopay & Ecommerce Europe. 2012. Online Payments 2012 – Moving beyond the web.

FATF-GAFI. 2010. Money Laundering using New Payment Methods

ECB. 2008. Electronic Money Institutions, current trends, regulatory issues and future prospects. Legal Working Paper Series No 7 / July 2008

FATF-GAFI. 2006. Report on New Payment Methods

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

6.2 Discussion Guide for Interviews

DISCUSSION GUIDE FOR INTERVIEWS

Date and location of interview

Interviewee name(s), organisation and position

Interviewer name

Introduction E-money and new payment methods (NPM) are a digital equivalent of cash, stored on an electronic device or remotely at a server. One common type of e-money is the 'electronic purse', where users store relatively small amounts of money on their payment card or other smart card, to use for making small payments. But e-money can also be stored on (and used via) mobile phones or in a payment account on the internet.

The aim of this study is to get an understanding of the use of products using e-money and NPM and to analyse the extent to which the inclusion of some of these products within the scope of the Funds Transfer Regulation could become necessary and feasible, and to understand the possible impacts.

1. Please briefly summarise your position and role within your organisation.

2. Please indicate the types of products using e-money or NPM, which you offer:

 

Products used for the purchases of goods and services exclusively

Products which could be used for person2person transfers

Description of the product(s)

   

What is the amount of transactions of your current

   

offer (in % compared to total

transactions) for

?

What is the growth trend in comparison to “traditional products” (e.g. credit cards bank drafts etc)

   

Is the payer identified for transactions using these products?

   

Is the payee identified for transactions using these products?

   

Do transfers from these products carry unique information which allow the identification of the specific transaction (e.g. a card

   

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

number, a unique transaction reference number)?

Which are the typical users of these products(e.g. low/high income groups, remitters)?

transaction reference number)? Which are the typical users of these products(e.g. low/high income groups, remitters)?
transaction reference number)? Which are the typical users of these products(e.g. low/high income groups, remitters)?
transaction reference number)? Which are the typical users of these products(e.g. low/high income groups, remitters)?
transaction reference number)? Which are the typical users of these products(e.g. low/high income groups, remitters)?

3. With regard to products using e-money or NPM, which cannot be used for person-to-

person transactions

27

:

a. Are there examples of such products, which currently do not carry a transaction number?

b. If a transaction number were to become mandatory, what would be the impact on users and providers of these products,? Can you identify any costs /benefits for such a case?

c. What safeguards/technical means exist to prevent/detect possible circumvention (e.g. in case possibilities exist with the payment product to purchase other payment products which can then be sent to other natural persons)?

d. What would be the costs of such means for users and suppliers of these products?

4. With regard to products using e-money or NPM which can be used for person-to-person transactions:

a. Are there currently examples of such products where the payee and/or payer is not identified for transactions using such products?

b. What would be the impact on users and providers of these products if the identification of the payer and the payee were to become mandatory? Can you identify any impacts/ costs / benefits for such a case?

5. With regard to products using e-money and NPM, which allow for person2person transfers:

a. Are there examples of such products that do not carry unique information which would at least allow identification of the specific transaction (e.g. a card number, a unique transaction reference number)?

b. Which of these products (if any) function across borders (intra-EU, extra-EU)?

6. If the identification of the payer and the payee were to become mandatory, would it be possible for those products using e-money and new payment technologies which can be used for person2person transfers as well as those products using e-money and NPM where no card number or unique transaction reference number accompanies the transaction :

27 For person to person, this should be understood as "natural person" to "natural person".

Additional research to assess the impact of potentially changing the scope of Art. 3 of the Regulation on information accompanying transfer of funds (Regulation EC No. 1781/2006)

a. to differentiate between intra-EU and extra-EU transfers? (intra-EU the information requirements are lower)

b. What would be products?

the impact of doing so

for users and suppliers of these

7. In your opinion, how has the e-money and NPM market developed in recent years? Has it been growing? If so, why? What benefits is it bringing?

8. Are you aware of any industry reports outlining the current market size and trends of different types of NPM and e-money?

Thank you very much for your help.