Viewpoint: 4AMLD and Its Impact on the Prepaid Industry in Europe
By Robert Courtneidge, Locke Lord
Although it still hasn’t been adopted, the “Proposal for a directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing” (4AMLD), as currently drafted, is concerning for the prepaid industry and specifically the simple low-value prepaid products that are used in many countries across Europe. These products rely upon the current relaxed customer due diligence (CDD) regime called “simplified due diligence” (SDD). SDD enables products to be distributed with minimum friction at the POS without requiring the purchaser to provide supporting evidence of identity, such as a passport. It’s clear that to replace SDD with standard CDD measures would remove key distribution channels for these low-value products or reduce sales to such an extent that it renders them uneconomical to continue.
Today’s Environment and How It Could Change under 4AMLD
Current requirements under the 3rd Anti-Money Laundering Directive 2005/60/EC (3AMLD) allow SDD to be used:
(a) For nonreloadable e-money products, where the maximum load on the product is €250 (€500 for national use only if agreed by the country). Note: This was increased by the 2nd E-money Directive (2000/46/EC) from €150.
(b) For reloadable e-money products, where the maximum load in any year is €2,500 and maximum redemption is €1,000.
The proposal for 4AMLD states:
“Simplified and Enhanced Customer Due Diligence: In the proposal, obliged entities would be required to take enhanced measures where risks are greater and may be permitted to take simplified measures where risks are demonstrated to be less. With regard to the current (Third) AMLD, the provisions on simplified due diligence were found to be overly permissive, with certain categories of client or transaction being given outright exemptions from due diligence requirements. The revised Directive would therefore tighten the rules on simplified due diligence and would not permit situations where exemptions apply. Instead, decisions on when and how to undertake simplified due diligence would have to be justified on the basis of risk, while minimum requirements of the factors to be taken into consideration would be given.”
To move to a risk-based approach with no outright exemptions makes the ability of prepaid companies to use these products very difficult. As a result of this, the Prepaid International Forum has issued a position paper to the European Commission that states in its executive summary:
“The lack of clear rules on simplified due diligence (SDD) under the draft threatens the continued commercial viability of issuers of low-value, low-risk prepaid payment instruments that are currently distributed and used without full verification of the customer’s identity.”
We, therefore, propose to introduce a provision into 4AMLD that permits the application of SDD measures for electronic money (e-money) products provided that:
- Appropriately low monetary thresholds are applied to purse and transaction limits;
- The issuer has adequate transaction monitoring mechanisms in place;
- Transfer of e-money to or from SDD products is restricted to situations where all payment instruments or accounts involved are issued by the same issuer; and
- The redemption is restricted to an appropriately low monetary amount where redemption is allowed without fully verifying the identity of the customer.
Certainty is needed in this industry because it is not commercially feasible to apply a risk-based approach for such low-value products. We don’t know if these proposed changes will be considered prior to the next reading of 4AMLD, but what we can say is that if it is not, and it goes through as drafted, it will drive out a whole section of the prepaid market from Europe.
Robert Courtneidge is the global head of cards and payments at international law firm Locke Lord. He’s also co-founder of the Prepaid International Forum, noted for his knowledge and experience in the e-money area, where he has acted on matters for major financial institutions around the world. Last year he ranked No. 6 in the Payment Power 10. Based in London, he can be reached at [email protected].
In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.