Focus on distribution structures

The main focus at present is on the distribution structures for e-money: should other persons and undertakings involved in product distribution be subject to anti-money laundering supervision in addition to the actual e-money issuer? And if so, what form should this supervision take and which supervisory authority is responsible?

These questions become particularly acute if an e-money issuer located abroad distributes a product in Germany. In this case, there is a danger that gaps and loopholes in anti-money laundering supervision will be exploited: since the issuer is not physically present in Germany BaFin has no jurisdiction over it. In turn, the issuer’s home country supervisory authority often may not have sufficient resources to, any legal basis for, and/or any interest in supervising an e-money issuer’s foreign distributors.

The gaps in supervision described above are particularly dangerous in the context of e-money, since experience shows that the number of cases of e-money being misused for money laundering has increased rapidly in Germany in recent years. Anonymous e-money products from foreign providers that can be acquired for cash in Germany via retailer distribution networks are a particular problem here.

German lawmakers reacted to this development last year by including German and foreign e-money issuers’ distributors¹⁾ in the catalogue of entities covered by section 2 (1) nos. 2b and 2c of the German Money Laundering Act (Geldwäschegesetz – GwG). As a result, e-money issuers’ distributors domiciled in Germany are subject in principle to the full range of obligations laid down in the GwG.

Moreover, effective 29 December 2011, the Act to Optimise the Prevention of Money Laundering (Gesetz zur Optimierung der Geldwäscheprävention– GWPräOptG) introduced the new section 25i of the German Banking Act (Kreditwesengesetz – KWG), which regulates the organisational and customer due diligence obligations in the e-money business. These obligations apply not only to e-money issuers but – pursuant to section 3 (2) sentences 3 and 4 of the GwG in conjunction with section 25i (2), (4) and (5) of the KWG – to their distributors as well.

Introduction of product-based supervision of e-money

According to the explanatory memorandum, section 25i of the KWG enables BaFin not only to supervise individual institutions and distributors but also to perform anti-money laundering supervision of e-money products used on the market. The legal basis for this product-based supervision is set out in section 25i (2), (4) and (5) of the KWG.

This serves first of all to grant BaFin far-reaching powers up to and including prohibiting the use of particular e-money products if the facts give reason to assume that these entail an increased risk of money laundering, the financing of terrorism, or other criminal offences. Secondly, in those cases in which there is only a low money laundering risk, BaFin can grant far-reaching exceptions and exemptions from the anti-money laundering obligations as well as other obligations. The upshot of this is that the nature and extent of the anti-money laundering obligations incumbent on e-money issuers and distributors can be specified individually for each product, and that they may differ substantially from product to product depending on their respective risk assessments.

The provisions contained in section 25i (2), (4) and (5) of the KWG also apply to e-money agents who distribute e-money products of foreign issuers. This provides BaFin with an effective legal basis for also taking action against risky e-money products that are distributed in this way.

Criticism from the e-money sector

German lawmakers were initially criticised by the German and European e-money sector for subjecting e-money issuers’ distributors to anti-money laundering supervision. In particular, foreign issuers without any branches in Germany use domestic distributors – often retailers, petrol stations, or kiosks – to sell their e-money products such as prepaid cards to German customers. Some e-money providers fear that the anti-money laundering obligations will be too much for their distributors, or that they themselves will be unable to guarantee that their distributors comply with them. In their view, there is a danger that not enough distributors will be willing or able to meet the anti-money laundering requirements. They argue that this could lead to their distribution network – and hence a substantial portion of their revenue in Germany – collapsing.

The economic interests of the e-money sector must be balanced against the state’s legitimate interests in the effective prevention of money laundering. The new concept of anti-money laundering supervision of e-money products allows German supervisors to exercise the discretion granted to EU member states by Article 11 (5) of the Third Money Laundering Directive flexibly, in line with the concrete money laundering risk associated with the individual product. Based on the new statutory regulations, BaFin can establish a body of administrative practice that on the one hand does not create unreasonable barriers for issuers, but that on the other hand ensures effective prevention and significantly reduces the risk posed by e-money products in connection with money laundering, the financing of terrorism and other criminal offences in Germany.

Interest in Germany’s experiences

The coming months will show how the new concept of anti-money laundering supervision of e-money products proves itself in practice. Everyone involved should be aware of the fact that the developments in the German market are also being closely watched at European and global level. Although the EU’s Second E-money Directive was actually supposed to have been transposed into national law by 30 April 2011, roughly one-third of EU member states still have to do this.²⁾ What is more, the European Commission is already planning to revise this Directive and the Third Money Laundering Directive. This means that the experiences currently being gained on the German market will be taken into account by other member states and European lawmakers in their future decisions.

The concept of anti-money laundering supervision of e-money products is also likely to attract interest at global level: after the Financial Action Task Force (FATF) found in its October 2010 typology report that e-money products were indeed being misused for money laundering and that action was needed in this area, it is currently developing a best practice paper on the use of a risk-based approach to e-money products. Here, too, Germany will contribute its experiences of e-money product supervision.

Footnotes

1) The term “distributors” in the following covers both e-money agents within the meaning of section 1a (6) of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) (entities covered by the provisions of the Money Laundering Act in accordance with section 2 (1) no. 2b of the GwG) and undertakings and persons who distribute or re-exchange e-money (entities covered by the provisions of the Money Laundering Act in accordance with section 2 (1) no. 2c of the GwG).

2) Transposed by Germany by the required deadline.