Is ‘e-money’ a money laundering risk?

Investigations have linked Uk-registered electronic revenue institutions (EMIs), which can concern pre-paid payment cards or electronic wallets, to revenue laundering, fraud and other economic wrongdoing. Critics argue that the Economical Perform Authority, below tension to permit the UK’s fintech sector, has failed to deliver good oversight of the country’s EMI marketplace. But gurus informed Tech Keep an eye on that the revenue laundering threats of e-revenue are overstated – and pale in comparison to these of cryptocurrency.

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

What is ‘e-money’?

‘e-money’ is a unique sort of electronic economic provider, in which a typical “fiat” forex, this sort of as kilos or dollars, is saved in a payment card or wallet. It is not to be confused with cryptocurrencies, which are distinctive from fiat currencies, or central financial institution electronic currencies, which are instantly managed by central banks.

Under the EU’s next Payment Services Directive (PSD2), which even now applies in the Uk, businesses that want to offer you e-revenue products and services ought to sign-up as an electronic revenue institution (EMI) with their national regulator. The Uk is home to about 50 percent of the  450 registered EMIs in Europe, in accordance to TheBanks.eu. A lot of fintechs have secured an EMI license as it lets them to deliver electronic wallets without a banking license, which has bigger regulatory and capital requirements.

A string of current investigations have linked some EMI-license holders to revenue laundering and other economic crimes. This 7 days, Bloomberg reported that the FCA has authorised EMI licenses for businesses “with executives or shareholders tied to Baltic revenue laundering scandals, alleged economic wrongdoing in Russia and Kyrgyzstan, health care fraud in the US and suspected wrongdoing in Luxembourg and Australia”.

Bloomberg’s investigation follows research from Transparency Intercontinental previous thirty day period which, in accordance to reports, flagged 38% of Uk EMI license holders as owning “likely revenue laundering purple flags”, this sort of as “owning entrepreneurs, directors or senior associates of staff members named in revenue laundering investigations”. (Transparency International’s report was not accessible for obtain at the time of producing the organisation did not react to a request for even further particulars from Tech Keep an eye on).

And in July previous 12 months, an investigation published by OpenDemocracy recognized Russian language websites proposing EMIs, like these registered in the Uk, as a revenue laundering mechanism.

Some of these investigations have elevated doubts about the FCA’s regulation of the ‘e-money’ marketplace. Bloomberg writes that its investigation factors to “oversight weaknesses”, while Transparency International’s Ben Cowdock reportedly warned that the FCA and Uk government “need to act quickly to steer clear of a big scandal hitting this sector”.

Oliver Irons, a associate at law organization Simmons and Simmons, who has acted for fintechs that have secured EMI licenses, disagrees. “If these reports had been composed two or three decades ago, I could have agreed,” he suggests. “The FCA did not realize e-revenue then.”

But in the wake of the terrorist assault at the Bataclan nightclub in 2015, which was funded in element using pre-paid payment cards, the EU issued a new anti-revenue laundering directive. It stipulates that no a lot more than €100 can be saved on anonymous accounts. This was transposed in to Uk law previous 12 months.

Irons argues that the current investigations’ evidence that e-revenue is being utilized for revenue laundering is circumstantial. “I do not believe they’ve exposed a elementary weak spot in the way in which ‘e-money’ is set up,” Irons suggests. “e-revenue institutions have had to have relatively arduous anti-revenue laundering checks, policies and procedures in position for fairly a while.”

e-Income vs cryptocurrency

Critics have prompt that the FCA has presented a lot of leeway to fintechs to bolster the domestic marketplace. “Of all the regulators throughout Europe, I believe the FCA is in all probability the most accommodating,” suggests Irons. “But it is even now a regulator, and if you question a fintech if they’ve been accommodated by the FCA, they’d chortle you out of the home.”

Professor Philip Treleaven, director of the Economical Computing Centre at UCL, suggests the FCA has so considerably succeeded in placing a stability concerning innovation and regulation. “Fintech has been thriving in the Uk for the reason that the regulators – the Economical Perform Authority and Financial institution of England’s PRA – have struck a reasonable stability to persuade innovation while hoping to remove excesses,” he suggests.

Even so, he provides, decentralised finance (an umbrella time period for cryptocurrencies and blockchain-similar economic products and services) threatens regulators’ ability to tackle fraud and revenue laundering. “Decentralised finance just throws the total regulatory regime out the window,” he suggests. “If a counterparty misbehaves, you do not know who they are.”

Irons clarifies that some businesses giving crypto-similar products and services have utilized for EMI licences to make it possible for shoppers to trade e-revenue with cryptocurrency. Below, he suggests, the FCA has been considerably less regular, with some candidates being informed “you can not use that revenue for the order of electronic property”.

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