Is ‘e-money’ a money laundering risk?

Lavern Vogel

Investigations have linked United kingdom-registered digital revenue institutions (EMIs), which can issue pre-paid out payment playing cards or electronic wallets, to revenue laundering, fraud and other economical wrongdoing. Critics argue that the Fiscal Perform Authority, below strain to permit the UK’s fintech sector, has failed to offer right oversight of the country’s EMI current market. But authorities advised Tech Observe that the revenue laundering pitfalls of e-revenue are overstated – and pale in comparison to all those of cryptocurrency.

E-revenue institutions, which can issue pay as you go playing cards or electronic wallets, have been linked to revenue laundering (Image by andreswd / iStock)

What is ‘e-money’?

‘e-money’ is a certain variety of electronic economical service, in which a traditional “fiat” currency, this kind of as lbs . or pounds, is saved in a payment card or wallet. It is not to be baffled with cryptocurrencies, which are unique from fiat currencies, or central bank electronic currencies, which are directly controlled by central financial institutions.

Underneath the EU’s second Payment Expert services Directive (PSD2), which even now applies in the United kingdom, organizations that would like to provide e-revenue expert services need to sign up as an digital revenue establishment (EMI) with their nationwide regulator. The United kingdom is residence to about 50 % of the  450 registered EMIs in Europe, in accordance to TheBanks.eu. Many fintechs have secured an EMI license as it enables them to offer electronic wallets with out a banking license, which has increased regulatory and money necessities.

A string of latest investigations have linked some EMI-license holders to revenue laundering and other economical crimes. This week, Bloomberg documented that the FCA has authorized EMI licenses for organizations “with executives or shareholders tied to Baltic revenue laundering scandals, alleged economical wrongdoing in Russia and Kyrgyzstan, healthcare fraud in the US and suspected wrongdoing in Luxembourg and Australia”.

Bloomberg’s investigation follows research from Transparency Global final thirty day period which, in accordance to stories, flagged 38% of United kingdom EMI license holders as getting “likely revenue laundering pink flags”, this kind of as “getting owners, administrators or senior customers of personnel named in revenue laundering investigations”. (Transparency International’s report was not obtainable for down load at the time of creating the organisation did not reply to a request for additional particulars from Tech Observe).

And in July final 12 months, an investigation posted by OpenDemocracy discovered Russian language web pages proposing EMIs, together with all those registered in the United kingdom, as a revenue laundering system.

Some of these investigations have elevated uncertainties about the FCA’s regulation of the ‘e-money’ current market. Bloomberg writes that its investigation factors to “oversight weaknesses”, even though Transparency International’s Ben Cowdock reportedly warned that the FCA and United kingdom federal government “need to act swiftly to steer clear of a important scandal hitting this sector”.

Oliver Irons, a partner at legislation organization Simmons and Simmons, who has acted for fintechs that have secured EMI licenses, disagrees. “If these stories had been published two or three decades back, I may possibly have agreed,” he states. “The FCA failed to have an understanding of e-revenue then.”

But in the wake of the terrorist assault at the Bataclan nightclub in 2015, which was funded in aspect employing pre-paid out payment playing cards, the EU issued a new anti-revenue laundering directive. It stipulates that no more than €100 can be saved on nameless accounts. This was transposed in to United kingdom legislation final 12 months.

Irons argues that the latest investigations’ proof that e-revenue is currently being used for revenue laundering is circumstantial. “I do not think they have uncovered a fundamental weak spot in the way in which ‘e-money’ is established up,” Irons states. “e-revenue institutions have had to have quite arduous anti-revenue laundering checks, policies and methods in area for fairly a even though.”

e-Funds vs cryptocurrency

Critics have recommended that the FCA has given a good deal of leeway to fintechs to bolster the domestic current market. “Of all the regulators across Europe, I think the FCA is probably the most accommodating,” states Irons. “But it is even now a regulator, and if you check with a fintech if they have been accommodated by the FCA, they’d giggle you out of the home.”

Professor Philip Treleaven, director of the Fiscal Computing Centre at UCL, states the FCA has so significantly succeeded in putting a harmony involving innovation and regulation. “Fintech has been effective in the United kingdom since the regulators – the Fiscal Perform Authority and Lender of England’s PRA – have struck a reasonable harmony to inspire innovation even though trying to take out excesses,” he states.

Nonetheless, he provides, decentralised finance (an umbrella time period for cryptocurrencies and blockchain-associated economical expert services) threatens regulators’ capacity to deal with fraud and revenue laundering. “Decentralised finance just throws the entire regulatory routine out the window,” he states. “If a counterparty misbehaves, you do not know who they are.”

Irons points out that some organizations featuring crypto-associated expert services have used for EMI licences to allow for prospects to trade e-revenue with cryptocurrency. Here, he states, the FCA has been a lot less consistent, with some applicants currently being advised “you won’t be able to use that revenue for the invest in of electronic assets”.

Pete Swabey is editor-in-chief of Tech Observe.

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