Money-laundering obligations relating to the issuance of e-money are going to be more product-specific in the future

For the first time, BaFin has presented a precise requirements catalogue for applications for exemptions under Section 25 i (5) KWG

After the Financial Action Task Force (FATF) recently published its guidance on a risk-based approach to monitoring innovative forms of payment for money-laundering, BaFin published an Informational Memorandum on applications for exemption under Section 25i (5) KWG. Therein the Federal Financial Services Supervisory Authority [BaFin] announced that it wished to make the duty of care under money-laundering laws more product-specific. However, it is questionable whether this approach can actually meet the requirements formulated by the FATF.

FATF guide

In June 2013, FATF published its guideline on a risk-based approach to monitoring innovative forms of payment for moneylaundering. The document was expected to attract particular attention in Germany, especially with respect to e-money products. The guideline is primarily directed at legislators and regulatory authorities and expressly recommends – in application of the proportionality principle – to avoid applying a uniform requirements catalogue to diverse products in combating money-laundering and terrorism.

Risk-based approach

The better practice, as suggested by FATF is to assess the individual risks associated with a particular product and determine the obligations under money-laundering laws on that basis. As the foundation for such a risk-based approach, FATF recommends the creation of a specific risk-matrix, which includes both the factors that increase risk, such as anonymity, the lack of face-to-face contact with customers, the ability to receive cash, and global application options, as well as counter-measures that reduce risk, such as the introduction of maximum amounts and threshold values.

Statutory framework in Germany

It is interesting that, in making observations about country-specific regulatory approaches, the FATF guideline cites Germany as the only example of a European country with a particularly rigid approach to evaluating e-money products. Specifically, FATF cites Section 25 i KWG, which waives customer identification for cash payout of e-money only if the amount of e-money paid out on a monthly basis does not exceed EUR 100 (although the relevant EU Directive has a threshold of EUR 250).

Informational Memorandum on Section 25i (5) KWG

German regulators seem to have taken full note of these observations. By 16 October 2013, BaFin had already published a new Informational Memorandum on Section 25 i (5) KWG, which enables e-money providers to be exempted from certain duties of care under the money-laundering laws if they file an application. According to BaFin, Section 25 i (5) KWG will play a stronger role in the future to take into account the risk-based approach advocated by FATF. However, BaFin concedes that such applications have often taken a long time to process in the past and were therefore not very practical for the applicant. Consequently, it is necessary to clarify the prerequisites for an exemption application in order to avoid delays in the future. According to BaFin, domestic credit institutions and e-money institutions are generally entitled to file an application under Section 25 i (5) KWG. Moreover, e-money agents and distribution partners can also apply to be exempted from certain obligations incumbent upon them. In other respects, a separate application must be filed for each individual e-money product.

In its Informational Memorandum, BaFin specifically requires a precise description of the particular e-money-product in any such application submitted. This includes a description of the

-Type of e-money carrier (physical card, online credit, etc.),
-Channels of distribution (online-based, through agents and the like),
-Ability to reload and method of doing so,
-Product features,
-Possible uses and acceptance points,
-Organization of the distribution network,
-Redemption options,
-Monitoring of e-money transactions and
-Measures to minimize risk.

The applicant must also describe with particularity the precise duties of care from which he wishes to be exempted in the future. For example, the applicant may apply to be exempted from the duty to obtain customer identification. It is not possible to be exempted from all the duties imposed by money-laundering laws.

Product risk analysis

In addition, a product risk analysis must be prepared as part of the application. This constitutes the core element of the application. The applicant must state and substantiate why he believes that the particular e-money product is exposed to a low level of risk or why the counter-measures undertaken significantly reduce the risk. This analysis must include all the stations through which the e-money passes, i. e. payout, uploading, distribution network, and acceptance points. In addition, the applicant must attach all model agreements with customers, distribution partners, and acceptance points to the application.

Discretion still accorded to BaFin

In summary, BaFin’s Informational Memorandum permitting applications under Section 25 i (5) KWG should be welcomed since applicants now have a precise requirements catalogue to guide them for the first time. However, if one compares the Informational Memorandum with the goals formulated in FATF’s guideline, doubts arise as to whether the right to submit an application under Section 25 i (5) KWG is actually sufficient for a risk-based approach to monitoring money-laundering in Germany. It is noteworthy that BaFin has at no time established what characteristics an e-money product must have in order to be granted an exemption as a matter of course. Applicants must thus comply with the very extensive requirements catalogue in the Informational Memorandum without having any guarantee that they will actually be exempted from particular duties of care if the meet certain requirements. The determination of the risk of money laundering and the waiver of related obligations that depends on this determination remain in the sole discretion of BaFin.

Conclusion

In its guideline, FATF advocated a risk-based approach to monitoring e-money products for money laundering. In Germany, this goal is to be implemented through an exemption under Section 25 i (5) KWG, which has been fleshed out for the first time in an Informational Memorandum issued by BaFin. However, exemptions from the duties of care under money-laundering legislation remain in the sole discretion of BaFin and the requirements for submitting an exemption application are anything but minor. Thus e-money providers must still overcome high hurdles to obtain any relaxation of the duties of care under money-laundering laws.