UK considers its options for electronic identification and e-money under 5MLD
The Treasury is considering how best to implement the latest changes to the EU’s anti-money laundering framework. The outcomes on electronic identification of customers and e-money will be of particular interest to innovators in the finance sector. For e-money issuers, these could include a ban on anonymous prepaid cards.
Our previous blog on the consultation focuses on the cryptoasset sector, parts of which may be subject to AML rules for the first time. Here, we consider the proposals on electronic identification (relevant to all firms that are subject to AML rules) and the bespoke regime for UK issuers of e-money.
Electronic identification processes
AML rules require firms to identify, and verify the identity of, their customers. The current rules do not specify how these customer due diligence procedures should be carried out. In practice, firms increasingly perform these remotely.
To avoid any uncertainty, 5MLD now clarifies that the identification of customers may be performed electronically. The electronic identification process must be one which is accepted by the local regulator. Guidance from JMLSG – an authoritative source for the industry when interpreting AML rules – already suggests best practice for using electronic evidence to verify a customer’s identity. This guidance is approved by the Treasury, so it is likely to be sufficient for the purposes of 5MLD, but this is to be confirmed.
5MLD also specifies that the identification process must be “secure”. In its consultation, the Treasury asks whether additional rules or guidance are needed to clarify what is “secure” in this context.
What is e-money?
E-money is an electronic store of monetary value on a device, like a pre-paid card, that can be used for making payments. UK issuers of e-money need to be either registered with, or authorised by, the Financial Conduct Authority. Those e-money institutions must comply with AML rules. E-money products are seen to pose money laundering risks because they offer anonymity and provide an easy route for criminals to convert criminal proceeds into other payment methods (see our blog on AML risks in the e-money sector).
Thresholds for CDD
The risk of e-money being used for money laundering is lower where its use is limited to small value payments. 5MLD permits some AML rules to be disapplied for low risk e-money products where, among other things:
- the maximum balance and maximum monthly transaction are limited to €150 (down from €250), and
- cash withdrawals do not exceed €50 per transaction (down from €100).
The Treasury says that it plans to implement these new thresholds in UK law, subject to the feedback it receives from its consultation.
The upshot would be that e-money institutions will have to carry out due diligence measures on more customers in the future because more products will fall within the scope of the AML rules.
Payments from non-EU anonymous cards
5AMLD also prevents EU financial institutions from accepting payments which are carried out using anonymous prepaid cards issued in non-EU countries. The exception to this would be if those non-EU cards meet requirements that are equivalent to the EU’s AML rules for those products.
In practice, this change could mean banks and other financial institutions setting up processes to flag and potentially block payments from some cards. Some firms may also choose to monitor whether any non-EU jurisdictions adopt rules which are equivalent to the EU requirements.
Banning anonymous prepaid cards
Finally, 5MLD gives EU Member States the option of banning payments carried out using anonymous prepaid cards. The Treasury’s consultation asks for views on whether the UK should prevent payments using anonymous prepaid cards. If the feedback from the consultation is in favour of a ban, the difficulty will be how to define in UK law what type of card should be caught by it.
The consultation is open until 10 June 2019. The Treasury will then confirm its approach on the points raised before the 10 January 2020 deadline for implementing 5MLD.