3 December 2002
The Treasury issued a consultation document in May 2002 on proposals under consideration by the Government to amend the Money Laundering Regulations 2001
(i) regarding the supervision of money service businesses (largely bureaux de Change) in banks and other financial institutions, and
(ii) to require all money remitters to include originator information on wire transfers.
This relates to implementation of Special Recommendation 7 of the Financial Action Task Force (FATF).
The consultation period closed on 19 August 2002.
16 responses were received from:
Association of British Travel Agents
British Bankers’ Association
British Cheque Cashers Association
Building Societies Association
Electronic Money Association
Financial Supervision Commission, Isle of Man
Global Money Transfer
Information Commissioner
Investment Management Association
London Investment Banking Association
MasterCard International
MoneyGram International
Nationwide Building Society
The Bailiff of Jersey
TTT Moneycorp Ltd
Visa International
The draft Money Laundering Regulations 2003, which were issued for consultation on 15 November 2002, include a requirement that FSA regulated firms inform the FSA if they carry on money service business activities.
In October 2002, the FATF issued a draft interpretative note on the implementation of Special Recommendation 7. FATF has invited comments by 30 November 2002. The Government will await the outcome of this consultation before deciding how to implement the recommendation.
Regulation of Money Service Businesses (MSBs)
Since June 2002, establishments providing money service businesses (MSB) (for example, bureaux de change, money transfer and cheque cashing) have been supervised by HM Customs and Excise, and have been required to register with HM Customs and Excise and to pay an annual fee (currently £100 per branch). This supervision does not cover MSBs in firms already regulated by the Financial Services Authority (FSA) (for example, bureaux de change in banks).
The Government believes it is important that effective supervision of MSB activities should extend across the whole MSB sector and cover both businesses regulated by the FSA and those that are outside the FSA regime. It therefore proposed to enable the FSA more effectively to supervise MSB activities in those firms that it currently regulates.
Two options were proposed:
(i) retain the current system whereby FSA regulated firms would have no formal supervisory oversight in respect of their MSB activities; or
(ii) introduce a requirement for FSA regulated firms to inform the FSA if they carry on MSB activities so that the powers and sanctions available to Customs and the FSA will be close as possible in nature.
All ten respondents who expressed a preference on this issue preferred the second option.
Two of these respondents commented that the lack of intention to charge FSA regulated firms a licence fee in respect of their MSB activities was unfair and inequitable, compared with those MSBs supervised by Customs.
One respondent suggested that the estimate of 75 firms being affected was conservative, so the FSA’s additional costs in supervising MSB activities could be more than the “marginal” additional costs stated in the consultation document.
In October 2001, the Financial Action Task Force (FATF) issued eight Special Recommendations on Terrorist Financing. Special Recommendation 7 stated that countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information on funds transfers, and that enhanced scrutiny and monitoring of activity should be carried out in relation to funds transfers which do not contain complete originator information.
The Government proposes to introduce legislation requiring all businesses that conduct money transfer services to include originator information when transferring funds. The Government is considering exempting payments to and from Automated Clearing Houses (ACHs), such as BACS, as these typically include regular bill and salary payments and are likely to present a low money laundering risk.
One respondent expressed concern that the proposals will result in a far wider impact and associated cost than is necessary.
Four respondents observed that, as regulated institutions must already identify their customers, they should be able to provide information about a customer to investigating authorities if required, without the need for each transaction to include customer information. This would require the originating firm to retain full records of the ordering customer rather than provide identification information at the time of transmission.
One respondent commented that in these proposals, the UK will significantly exceed measures imposed in other comparable jurisdictions. Another commented that in order to protect the UK’s competitive position, the UK’s implementation of this recommendation must not exceed that of other countries.
Four respondents suggested that there ought to be standardised co-ordinated legislation across countries. It was suggested that countries within the same trading blocks should act together to implement this legislation (both in its nature and timing) to create a level playing field, and that the legislation should not be implemented until it is known how other FATF countries are to approach the enforcement of the recommendation.
Two respondents commented that banks will need a significant period of time for implementation of multiple and complex changes to IT systems and other procedures and that the banks will need to reach agreement with corporate customers on practical procedures for implementation. One of these also noted that customers will need time to adapt systems and that guidance will take time to be developed and will need to be approved by the Money Laundering Advisory Committee and Treasury Ministers; and suggested that a six month implementation period is the minimum that should be considered.
Five respondents commented that compliance costs would not be negligible, suggesting that there will be considerable costs in systems development. One of these suggested that, to limit costs, a minimum limit below which originator information is not required (e.g. £5,000) should be considered. They also suggested that Service Level Agreements could be used to set conditions under which information should be provided to other financial institutions, e.g. within 48 hours. Another three respondents commented that the requirement to include the address of the originator would create significant bureaucratic burdens and administrative costs, which one described as “disproportionate”.
Another respondent suggested that there may be some technological difficulties in inputting the required information into their payment transfer systems, but did not envisage any significant costs in implementing the proposal, except possible software amendment costs.
One respondent commented that the Statutory Instrument should define ‘wire transfers’, ‘representation of monetary value’ and ‘originator’. They also suggested that the definition of ‘originator’ should address situations where the originating customer is not the beneficial owner of the funds (e.g. fiduciaries).
One respondent suggested that the following transfer methods should be outside the scope of the recommendation: card payments (except person to person transfers), internal transfers (within the same regulated Group), inter-financial institution transfers, cheques/drafts and securities (including derivatives).
Another respondent commented that transmission of money “by any means” should cover both electronic payments and those made by cheque as many building societies refuse to provide information about the underlying account when providing cheques.
Respondents also suggested, or supported the suggestion, that the following exemptions should be introduced to ensure that the implementation can be focused and effective (number of respondents suggesting each in brackets): BACS (no remitter address field, intra-UK system) (1), cross border payments into or from Automated Clearing Houses (ACH) (1), ACH transfers (2), domestic transfers (1), certain types of SWIFT messages which are being phased out and which do not contain sufficient space for originator’s account details (1), exceptional cases (certain individuals and entities should be able to apply for an exemption, e.g. where they are high profile) (1).
One respondent had reservations about the approach of listing exemptions in guidance, and the legal status of these exemptions.
Another respondent could see the rationale for exempting ACHs, but was concerned that there is currently no effective mechanism for confirming the source of funds collected by direct debit or where payment is authorised by debit/credit card.
One respondent commented that the exclusion of ACHs such as BACS from the proposed regulations would be inequitable as it would contradict the intended equal treatment for all money service businesses.
One respondent commented that exemptions for types of transfer may be easy to circumvent, so consideration could be given to restricting the exemption to payments below a specified value.
One respondent commented that the Regulations should explicitly exclude electronic money. This is because, it argued, electronic money is a closed system in which transfers of value are restricted within its confines and that electronic money purchased or redeemed using debit cards would have to be within the requirements of the card issuer.
One respondent commented that it is not possible for intermediary banks to check the completeness or accuracy of information contained in an incoming message – a requirement on intermediaries to implement the recommendation would seriously hinder banks’ efforts to create a low cost, single European framework for processing cross-border payments.
One respondent expressed concerns about the extent to which the proposal provides a proportionate response to a problem and requested reconsideration of the approach being proposed, because it does not take proper account of the privacy of personal information and the data protection rights of individuals. The also noted that it is not clear whether the proposed amendment will bring within the scope of the Act organisations not already subject to data protection legislation; and that the Lord Chancellor would have to make an Order to allow data to be transferred outside the EEA, but there would be concerns about security of the personal information.
Another respondent commented that clarification of the position, under the Data Protection Act, regarding circumstances where customer’s permission is not required before disclosing personal details (e.g. for the prevention or detection of crime) should be given. A third respondent noted that data protection issues will need to be considered.
One of these respondents observed that there may be considerable public disquiet when the extent of the requirements become generally publicly known.
Two respondents commented that many money transfer establishments do not hold account details of their customers and would be opposed to passing these on to third parties, or have customers who do not have accounts with them. This would make it difficult to provide an account number on transfers.
One respondent commented that the proposal does not provide a clear indication of the type and level of information gathering requirements to be imposed.
Another commented that many customers are not UK domiciles and do not have fixed UK addresses, or they have foreign addresses which cannot be verified.
One respondent suggested that a statement regarding the treatment of overseas offices would be helpful; such a statement should confirm that overseas offices of the banks should continue to act in accordance with local law and regulation, it suggested.
One respondent noted that the definition from the Money Laundering Regulations 1993 could imply that card payments are included in Special Recommendation 7, but suggested that they were not intended to fall within the scope of the recommendation drafted by FATF. They asked the Government to clarify that all card payments that are processed over a closed network do not fall within the requirements regarding originator information.
Another respondent expressed concern that too strict an interpretation of Special Recommendation 7 might stifle person-to-person credit card payments.
Enhanced scrutiny of transfers lacking originator information
One respondent commented that the second half of Special Recommendation 7 (requiring institutions to carry out in-house scrutiny of transfers) should be underpinned by legislation – otherwise many MSBs will not carry out the scrutiny.
Another commented that rather than conduct enhanced scrutiny of funds transfers that lack originator information, the emphasis should be on regulated banks to provide the necessary information.
HM Treasury
December 2002