Is ‘e-money’ a money laundering risk?

Investigations have joined British isles-registered electronic cash establishments (EMIs), which can concern pre-compensated payment playing cards or digital wallets, to cash laundering, fraud and other monetary wrongdoing. Critics argue that the Economical Perform Authority, underneath stress to enable the UK’s fintech sector, has failed to provide correct oversight of the country’s EMI sector. But specialists informed Tech Watch that the cash laundering threats of e-cash are overstated – and pale in comparison to these of cryptocurrency.

E-cash establishments, which can concern pay as you go playing cards or digital wallets, have been joined to cash laundering (Impression by andreswd / iStock)

What is ‘e-money’?

‘e-money’ is a particular variety of digital monetary company, in which a common “fiat” currency, these kinds of as pounds or dollars, is stored in a payment card or wallet. It is not to be confused with cryptocurrencies, which are unique from fiat currencies, or central financial institution digital currencies, which are straight controlled by central financial institutions.

Under the EU’s second Payment Products and services Directive (PSD2), which still applies in the British isles, corporations that want to present e-cash services should sign up as an electronic cash establishment (EMI) with their nationwide regulator. The British isles is dwelling to close to fifty percent of the  450 registered EMIs in Europe, according to TheBanks.eu. Many fintechs have secured an EMI license as it will allow them to provide digital wallets without a banking license, which has higher regulatory and money prerequisites.

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

Bloomberg’s investigation follows research from Transparency Intercontinental previous month which, according to studies, flagged 38% of British isles EMI license holders as getting “possible cash laundering red flags”, these kinds of as “getting proprietors, directors or senior associates of employees named in cash laundering investigations”. (Transparency International’s report was not readily available for download at the time of producing the organisation did not react to a ask for for even further details from Tech Watch).

And in July previous 12 months, an investigation released by OpenDemocracy determined Russian language web sites proposing EMIs, which include these registered in the British isles, as a cash laundering system.

Some of these investigations have raised uncertainties about the FCA’s regulation of the ‘e-money’ sector. Bloomberg writes that its investigation details to “oversight weaknesses”, when Transparency International’s Ben Cowdock reportedly warned that the FCA and British isles governing administration “need to act rapidly to stay clear of a main scandal hitting this sector”.

Oliver Irons, a associate at law business Simmons and Simmons, who has acted for fintechs that have secured EMI licenses, disagrees. “If these studies had been penned two or 3 many years back, I may have agreed,” he suggests. “The FCA didn’t fully grasp e-cash then.”

But in the wake of the terrorist attack at the Bataclan nightclub in 2015, which was funded in component making use of pre-compensated payment playing cards, the EU issued a new anti-cash laundering directive. It stipulates that no additional than €100 can be stored on anonymous accounts. This was transposed in to British isles law previous 12 months.

Irons argues that the modern investigations’ proof that e-cash is currently being utilized for cash laundering is circumstantial. “I will not assume they’ve exposed a fundamental weak spot in the way in which ‘e-money’ is set up,” Irons suggests. “e-cash establishments have had to have rather demanding anti-cash laundering checks, guidelines and treatments in position for really a when.”

e-Revenue vs cryptocurrency

Critics have recommended that the FCA has given a large amount of leeway to fintechs to bolster the domestic sector. “Of all the regulators across Europe, I assume the FCA is most likely the most accommodating,” suggests Irons. “But it is still a regulator, and if you question a fintech if they’ve been accommodated by the FCA, they’d laugh you out of the room.”

Professor Philip Treleaven, director of the Economical Computing Centre at UCL, suggests the FCA has so considerably succeeded in placing a harmony in between innovation and regulation. “Fintech has been effective in the British isles because the regulators – the Economical Perform Authority and Financial institution of England’s PRA – have struck a acceptable harmony to motivate innovation when striving to eliminate excesses,” he suggests.

Even so, he provides, decentralised finance (an umbrella expression for cryptocurrencies and blockchain-related monetary services) threatens regulators’ skill to deal with fraud and cash laundering. “Decentralised finance just throws the entire regulatory routine out the window,” he suggests. “If a counterparty misbehaves, you will not know who they are.”

Irons clarifies that some corporations giving crypto-related services have utilized for EMI licences to make it possible for prospects to trade e-cash with cryptocurrency. Listed here, he suggests, the FCA has been a lot less dependable, with some applicants currently being informed “you cannot use that cash for the order of digital assets”.

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