Response to consultation on Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures
Question 1: Do you agree with the proposed provisions? If you do not agree, please explain how you think these provisions should be amended, and set out why they should be amended. Please provide evidence of the impact these provisions would have if they were maintained as drafted'?
Firstly in relation to the requirment for the PSPs and CASPs to screen all transfers of funds and crypto-assets (including domestic transactions) it is important to stress out that the potential risk reduction is disproportionate to the expenditure needed for implying such mechanism.
Currently, many EU countries (including France, Belgium, Germany, the Netherlands) do not monitor domestic transactions in terms of sanctions lists, which means that there are mechanisms within the EU to ensure that bank clients are not on sanctions lists. In the opinion of the banking community, uniform, daily verification of all clients with sanction lists, carried out by all financial market institutions, not only banks is the most effective way to reach that goal.
Financial sector entities (including non-bank payment service providers) are obliged to identify their clients, including verifying whether they are not subject to sanctions. If such cases are identified, institutions take appropriate actions, including: freezing of assets or severing relationships or refusing to establish them. In order to properly fulfill the described obligations, the financial sector has implemented a number of mechanisms to ensure the correctness of the customer identification process. With this in mind, the risk of a situation in which entities subject to sanctions would be able to freely transfer funds using the domestic settlement system should be assessed as very low.
Even in the case of effective implementation of this type of systems, constant monitoring of domestic flows by "filtering" accompanying information using sanction lists would involve the risk of constant delays in the execution of payments, which would be further intensified in a situation where similar activities were carried out both by the Bank of the payer and the recipient of the domestic payment. This problem would be particularly visible in the case of transactions executed immediately - e.g. Polish Express Elixir System. Polish instant payment system ('Express Elixir'), despite several similiarites to the SEPA Instant Payments will not be excluded from the need of implementation of the sanction monitoring mechanism which would cause possible delays in the execution of payments.
The possibility of extending the transaction processing time may translate into the exposure of customers to property damage resulting from the unpredictable date of posting the transaction and delays in the actual recording of funds, which may undermine the certainty and stability of the domestic settlement system, as well as the liquidity of the banking sector and result in payment backlogs. This situation will result in both a significant increase in the number of complaints in the financial sector and a significant increase in the number of customer complaints to state authorities.
Furthermore, the introduced SEPA Instant Payments regulation, after full implementation, may result in a significant shift away from domestic transaction systems (covered by the sanctions scanning requirement) in favor of SEPA Instant Payments due to the introduced cost restrictions for SEPA instant payments and a greater guarantee of trouble-free transfer of funds (no screening of transactions against EU sanctions lists).
It is also important to mention that regulatiors on the other markets classify domestic instant payment systems as low risk systems - e.g. OFAC:
"Domestic instant payment systems—i.e., those in which all transactions involve only accounts maintained at U.S. banks, excluding foreign correspondent accounts—generally pose a lower risk of sanctions exposure than instant payment systems that permit cross-border transactions. OFAC expects that U.S. banks, which are subject to stringent U.S. regulatory requirements and supervisory examinations, are already performing risk-based due diligence on their customers at onboarding and at regular intervals thereafter, including screening their customers to identify a potential sanctions nexus. Accordingly, solely domestic instant payment transactions generally pose a lower sanctions risk than those involving accounts maintained at non-U.S. banks, which may not be subject to similar regulatory requirements and examinations."
Source : https://ofac.treasury.gov/media/928316/download?inline
In terms of other guidelines specified in the document, it should be stressed out that they provide very little support to national NCAs/relevant bodies in terms of ongoing cooperation with PSPs/CASPs and the preparation of guidelines (including industry guidelines) enabling the effective implementation of obligations.
Other comments have been specified in the attached document.