Money laundering and terrorist financing remain two main priorities on the international agenda and domestically, for regulators. The 4MLD, which is due to be transposed in to domestic law next month, dedicates its focus to preventing the financial system from being used for money laundering and terrorist financing.
Where the Third Money Laundering Directive gave leeway to low risk service providers, the Fourth Directive (4MLD) introduces broad changes to this sector. For instance, the previous Money Laundering Directive allowed for simplified customer due diligence (SCDD) however the 4MLD imposes stricter Know-Your Customer(KYC) and Customer Due Diligence (CDD) obligations. The opportunity for customers to maintain anonymity using certain money products and services are the very reason why the 4MLD calls for tighter controls.
Some of Europe’s nastiest terrorist attacks were funded and carried out from the use of prepaid cards to reloadable products. Essentially, where controls were not tight enough, businesses within this sector can expect to conduct identity verification for its users in the near future.
How can these changes negatively impact e-money businesses?
Although these measures seek to act as a means of financial crime control, from a business perspective, it may also potentially provide unfair advantage to conventional bank issued products. For example, under the 4MLD, prepaid cards can still be funded up to 100 euros without ID verification. Reloadable cards on the other hand will have a monthly cap of 250 euros unless the user has undergone the CDD process. Should a customer wish to exceed these limits, they will have to go through the customer-due-diligence process. While this may deter criminals from using it as a method to carry out their illicit activity, for genuine customers, the attractiveness of the product is diminished. It is also likely that the compliance costs will be passed on to consumers which may drive customers towards using bank issued products. As a result of stricter CDD rules, customers may be inclined to use their bank accounts if it means they do not have to go through what seems like an application process to gain access to a prepaid or reloadable card.
Secondly, where e-money businesses are now required to carry out CDD procedures on certain customers, there will also be the costs of data protection and data retention to bear. For larger conventional banks, this will be a standard procedure they are used to, however for smaller businesses, this requirement could make a big difference and could potentially lead some to abandon providing this service.
Under the 4MLD, virtual currency exchange platforms will be added to the list of regulated entities and will also be subject to report any suspicious activity that occurs on the platform. Previously, virtual currency platforms, who exchanged various forms of payments in for digital currency were unregulated. The danger was that virtual currency balances could be converted in to anonymous prepaid cards to carry out transactions worldwide. It could also be used to carry out all sorts of criminality as the users’ identity would remain anonymous. As such, the 4MLD’s requirement for virtual currency exchange platforms to carry out CDD on all relationship is a welcome development of the law. On the downside, virtual currency platforms and e-money issues must prepare to adjust to these regulatory changes. Undoubtedly, the implementation of systems and strategies to facilitate regulatory compliance will come at a cost. Only time will tell if the above possibilities will draw business away from these platforms.