Is ‘e-money’ a money laundering risk?

Elvera Bartels

Investigations have joined United kingdom-registered electronic cash establishments (EMIs), which can difficulty pre-paid out payment playing cards or electronic wallets, to cash laundering, fraud and other fiscal wrongdoing. Critics argue that the Financial Carry out Authority, below pressure to allow the UK’s fintech sector, has unsuccessful to offer correct oversight of the country’s EMI sector. But experts informed Tech Keep an eye on that the cash laundering pitfalls of e-cash are overstated – and pale in comparison to individuals of cryptocurrency.

E-cash establishments, which can difficulty prepaid playing cards or electronic wallets, have been joined to cash laundering (Graphic by andreswd / iStock)

What is ‘e-money’?

‘e-money’ is a specific type of electronic fiscal assistance, in which a typical “fiat” forex, these as lbs . or dollars, is saved in a payment card or wallet. It is not to be bewildered with cryptocurrencies, which are distinct from fiat currencies, or central financial institution electronic currencies, which are instantly managed by central banking institutions.

Under the EU’s second Payment Providers Directive (PSD2), which even now applies in the United kingdom, corporations that would like to offer e-cash solutions must sign-up as an electronic cash establishment (EMI) with their nationwide regulator. The United kingdom is home to all-around 50 % of the  450 registered EMIs in Europe, in accordance to TheBanks.eu. Lots of fintechs have secured an EMI license as it allows them to offer electronic wallets devoid of a banking license, which has bigger regulatory and capital necessities.

A string of the latest investigations have joined some EMI-license holders to cash laundering and other fiscal crimes. This week, Bloomberg claimed that the FCA has permitted EMI licenses for corporations “with executives or shareholders tied to Baltic cash laundering scandals, alleged fiscal wrongdoing in Russia and Kyrgyzstan, healthcare fraud in the US and suspected wrongdoing in Luxembourg and Australia”.

Bloomberg’s investigation follows research from Transparency Worldwide very last thirty day period which, in accordance to reviews, flagged 38% of United kingdom EMI license holders as possessing “likely cash laundering pink flags”, these as “possessing owners, administrators or senior customers of employees named in cash laundering investigations”. (Transparency International’s report was not accessible for download at the time of creating the organisation did not respond to a ask for for even more aspects from Tech Keep an eye on).

And in July very last yr, an investigation revealed by OpenDemocracy discovered Russian language web sites proposing EMIs, which includes individuals registered in the United kingdom, as a cash laundering system.

Some of these investigations have elevated uncertainties about the FCA’s regulation of the ‘e-money’ sector. Bloomberg writes that its investigation factors to “oversight weaknesses”, though Transparency International’s Ben Cowdock reportedly warned that the FCA and United kingdom govt “need to act immediately to stay away from a main scandal hitting this sector”.

Oliver Irons, a associate at law company Simmons and Simmons, who has acted for fintechs that have secured EMI licenses, disagrees. “If these reviews had been written two or a few yrs ago, I may possibly have agreed,” he claims. “The FCA failed to fully grasp e-cash then.”

But in the wake of the terrorist assault at the Bataclan nightclub in 2015, which was funded in part making use of pre-paid out payment playing cards, the EU issued a new anti-cash laundering directive. It stipulates that no a lot more than €100 can be saved on anonymous accounts. This was transposed in to United kingdom law very last yr.

Irons argues that the the latest investigations’ evidence that e-cash is currently being utilized for cash laundering is circumstantial. “I never believe they’ve exposed a elementary weak spot in the way in which ‘e-money’ is set up,” Irons claims. “e-cash establishments have had to have quite arduous anti-cash laundering checks, insurance policies and processes in position for very a though.”

e-Revenue vs cryptocurrency

Critics have suggested that the FCA has given a great deal of leeway to fintechs to bolster the domestic sector. “Of all the regulators throughout Europe, I believe the FCA is most likely the most accommodating,” claims Irons. “But it is even now a regulator, and if you ask a fintech if they’ve been accommodated by the FCA, they’d chuckle you out of the space.”

Professor Philip Treleaven, director of the Financial Computing Centre at UCL, claims the FCA has so considerably succeeded in striking a balance in between innovation and regulation. “Fintech has been effective in the United kingdom since the regulators – the Financial Carry out Authority and Financial institution of England’s PRA – have struck a fair balance to encourage innovation though trying to take away excesses,” he claims.

On the other hand, he provides, decentralised finance (an umbrella expression for cryptocurrencies and blockchain-relevant fiscal solutions) threatens regulators’ skill to tackle fraud and cash laundering. “Decentralised finance just throws the full regulatory regime out the window,” he claims. “If a counterparty misbehaves, you never know who they are.”

Irons clarifies that some corporations presenting crypto-relevant solutions have applied for EMI licences to let buyers to trade e-cash with cryptocurrency. In this article, he claims, the FCA has been much less regular, with some applicants currently being informed “you are not able to use that cash for the obtain of electronic belongings”.

Pete Swabey is editor-in-main of Tech Keep an eye on.

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