Response to consultation on Guidelines to prevent transfers of funds can be abused for ML and TF
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These are conditional payments, which can also be known as escrow payments.
These payments must be included within the ‘information accompanying credit transfers’ directive (hereafter the ‘directive), as if they are not included then money laundering and terrorist financing become immediately easy and undetectable.
All that a money launderer or terrorist financer would need to do if conditional payments are not included in the directive is to make a conditional payment rather than a straight payment. The money launderer or terrorist financer would then ensure that the condition came to pass, so that the payment is remitted and reaches its intended destination without being regulated under the directive.
Since the payment was made as a conditional payments, if conditional payments were not included in the directive then the payment described above would not be captured in the legislation, and the money launderers and terrorist financers would have free reign to make payments through conditional payments and side-step and avoid the legislation, and launder and terrorist-finance freely and undetectably, with hardly any effort.
Conditional payments can be made in two ways – i) through a dedicated escrow service, and ii) through an online marketplace where the marketplace acts for both the buyer and the seller and receives payment from the buyer and remits that payment on to the payer (without the marketplace becoming a party to the underlying transaction).
Examples of escrow services are Escrow.com and Transpact.com – examples of online marketplaces remitting payment (hereafter called ‘remitting marketplaces’) are AirBnB.com and Viagogo.com (there are many thousands of such remitting marketplaces in different sectors which remit client payments).
The escrow service or remitting marketplace are not part of the underlying transaction in any way (in the case of a remitting marketplace, the marketplace acts as the matchmaker – introducing the buyer and seller – but once introduced then the remitting marketplace takes no further role in the underlying transaction that the buyer and seller undertake together, except for receiving funds from the buyer, holding those funds as client funds, and then remitting those funds to the seller or back to the buyer).
The definition of ‘payer’, ‘payee’, ‘payment service provider‘, ‘intermediary payment service provider’, ‘payment account’ in the directive are all significantly problematic with relation to escrow services and remitting marketplaces.
What is the mechanism in law whilst the funds are held in conditional escrow ?
For some very quick transactions, such typically as domain name payments which nearly always flow through escrow, a transaction can take no more than a few minutes in total, and payment can (and is often) received cleared in the seller’s bank account within a few minutes of the very start of the purchase transaction.
These payments closely resemble standard direct payment from buyer to seller - from an AML/CTF point of view, there is no real difference between a conditional payment and a straight payment.
In these cases, is the remitting marketplace or escrow service acting as a payment service provider, and should the buyer’s details be passed in the payment to the seller, or is it the escrow service or remitting marketplace making payment ?
For other otherwise identical transactions, payment can take much longer.
For example, some construction conditional payments are held by the remitting marketplace or escrow services for some years before being passed on to the seller of services.
Although schematically and process-wise identical in every way to the domain sale payments noted above, these construction payments seem very different.
It might seem that the remitting marketplace or escrow service is acting as a separate trust in holding the payment, and payment is made from the buyer to the trust, and then from the trust to the seller conditionally at a later date at the instruction of the trust. In these situations, does directive 2015/847 apply at all in relation to both buyer and seller ? Are there instead two direct payments, one from buyer to trust, and a totally separate payment from trust to seller. If so, in the payment from buyer to trust the seller is not relevant or to be included with respect to the directive, and in the payment from trust to seller then the payer under the directive is the trust and not the original buyer. Is this what is intended with respect to information being passed ?
There are other conditional payment transactions, such as a security deposit payment, where the payment most often goes back to the payer under usual circumstances, and only on occasion goes to the payee instead. Again, these payments are conceptually identical to the domain name sale payments, but unlike those payments which are seemingly and clearly payments, these deposit payments seem anything but in regard to the definitions of the directive.
The ambiguity of the definition of ‘payer’, ‘payee’, ‘payment service provider‘, ‘intermediary payment service provider’ and ‘payment account’ in these circumstances in the directive leads to ambiguity and confusion.
Remember, in these circumstances every payer and every payee will additionally normally have its own bank or financial institution to make and receive payment to and from the remitting marketplace or escrow service. The payer and the payee both have a direct relationship both with their bank, and with the remitting marketplace or escrow service. So if the remitting marketplace or escrow service is a payment service provider, then is it an intermediary payment service provider (the buyer’s bank paying the escrow service or remitting marketplace, and the remitting marketplace or escrow service paying the seller’s bank) or a direct payment service provider ?
The EBA guidelines might be expected to remove this ambiguity.
Instead, the draft guideline as they are currently written, make matters worse.
Not only do they not clarify how remitting marketplaces and escrow services are to be regarded with respect to the definitions of ‘payer’, ‘payee’, ‘payment service provider‘, ‘intermediary payment service provider’ and ‘payment account’ in the directive, but the guidelines themselves introduce a definition that increases ambiguity.
Remitting marketplaces have been unclear whether they are included within EU AML/CTF and Payment Directives for some years, and in some member states remitting marketplaces have been allowed to make payments in a completely unregulated way, sometimes for very large payment turnovers in the multiple millions or more.
This practice will be put to an end when the Payment Services Directive 2 (PSD2) comes into full force on 13th January 2018, since PSD2 specifically brings remitting marketplaces within the definition of Payment Service Providers (PSP).
However, the EBA draft guidelines do not use this definition of PSP, but instead the definition from the directive, which itself only refers to a previous dated EU directive 2007/64, which it could be argued may or may not include remitting marketplaces.
The EBA guidelines should instead define ‘Payment Service Providers’ as defined in PSD2 (EU 2015/2366).
By doing so, the EBA guidelines will remove all doubt that the guidelines and directive include remitting marketplaces and escrow services.
If not done, then a major, easy-to-use and significant loophole is left for money launderers and terrorist financers.
Doing so (linking PSP’s with PSD2) will not resolve the further ambiguity in relation to how payments by such services fall within the directive and guidelines, and the guidelines need to give guidance as noted above as to how such services are to be treated, and what the status of the various parties are.
As Europe’s leading escrow service, with day-to-day experience on the anti-money laundering and counter terrorist-financing issues involved in this area, we stand ready to provide the EBA with any information you may require.
This is an important area that needs close scrutiny, as the money laundering and terrorist financing challenges in this area are great.
Question 1: Do you agree with the general considerations in Chapter 1? In particular, do you agree that these are necessary to ensure an effective, risk-based and proportionate approach to complying with Regulation (EU) 2015/847? If you do not agree, clearly set out your rationale and provide supporting evidence where available. Please also set out what you consider to be the common principles that apply to both, the PSP of the payee and the intermediary PSP, and why.
I wish to bring the EBA’s attention to a significant and large tranche of payments for which the general considerations in Chapter 1 are insufficient.These are conditional payments, which can also be known as escrow payments.
These payments must be included within the ‘information accompanying credit transfers’ directive (hereafter the ‘directive), as if they are not included then money laundering and terrorist financing become immediately easy and undetectable.
All that a money launderer or terrorist financer would need to do if conditional payments are not included in the directive is to make a conditional payment rather than a straight payment. The money launderer or terrorist financer would then ensure that the condition came to pass, so that the payment is remitted and reaches its intended destination without being regulated under the directive.
Since the payment was made as a conditional payments, if conditional payments were not included in the directive then the payment described above would not be captured in the legislation, and the money launderers and terrorist financers would have free reign to make payments through conditional payments and side-step and avoid the legislation, and launder and terrorist-finance freely and undetectably, with hardly any effort.
Conditional payments can be made in two ways – i) through a dedicated escrow service, and ii) through an online marketplace where the marketplace acts for both the buyer and the seller and receives payment from the buyer and remits that payment on to the payer (without the marketplace becoming a party to the underlying transaction).
Examples of escrow services are Escrow.com and Transpact.com – examples of online marketplaces remitting payment (hereafter called ‘remitting marketplaces’) are AirBnB.com and Viagogo.com (there are many thousands of such remitting marketplaces in different sectors which remit client payments).
The escrow service or remitting marketplace are not part of the underlying transaction in any way (in the case of a remitting marketplace, the marketplace acts as the matchmaker – introducing the buyer and seller – but once introduced then the remitting marketplace takes no further role in the underlying transaction that the buyer and seller undertake together, except for receiving funds from the buyer, holding those funds as client funds, and then remitting those funds to the seller or back to the buyer).
The definition of ‘payer’, ‘payee’, ‘payment service provider‘, ‘intermediary payment service provider’, ‘payment account’ in the directive are all significantly problematic with relation to escrow services and remitting marketplaces.
What is the mechanism in law whilst the funds are held in conditional escrow ?
For some very quick transactions, such typically as domain name payments which nearly always flow through escrow, a transaction can take no more than a few minutes in total, and payment can (and is often) received cleared in the seller’s bank account within a few minutes of the very start of the purchase transaction.
These payments closely resemble standard direct payment from buyer to seller - from an AML/CTF point of view, there is no real difference between a conditional payment and a straight payment.
In these cases, is the remitting marketplace or escrow service acting as a payment service provider, and should the buyer’s details be passed in the payment to the seller, or is it the escrow service or remitting marketplace making payment ?
For other otherwise identical transactions, payment can take much longer.
For example, some construction conditional payments are held by the remitting marketplace or escrow services for some years before being passed on to the seller of services.
Although schematically and process-wise identical in every way to the domain sale payments noted above, these construction payments seem very different.
It might seem that the remitting marketplace or escrow service is acting as a separate trust in holding the payment, and payment is made from the buyer to the trust, and then from the trust to the seller conditionally at a later date at the instruction of the trust. In these situations, does directive 2015/847 apply at all in relation to both buyer and seller ? Are there instead two direct payments, one from buyer to trust, and a totally separate payment from trust to seller. If so, in the payment from buyer to trust the seller is not relevant or to be included with respect to the directive, and in the payment from trust to seller then the payer under the directive is the trust and not the original buyer. Is this what is intended with respect to information being passed ?
There are other conditional payment transactions, such as a security deposit payment, where the payment most often goes back to the payer under usual circumstances, and only on occasion goes to the payee instead. Again, these payments are conceptually identical to the domain name sale payments, but unlike those payments which are seemingly and clearly payments, these deposit payments seem anything but in regard to the definitions of the directive.
The ambiguity of the definition of ‘payer’, ‘payee’, ‘payment service provider‘, ‘intermediary payment service provider’ and ‘payment account’ in these circumstances in the directive leads to ambiguity and confusion.
Remember, in these circumstances every payer and every payee will additionally normally have its own bank or financial institution to make and receive payment to and from the remitting marketplace or escrow service. The payer and the payee both have a direct relationship both with their bank, and with the remitting marketplace or escrow service. So if the remitting marketplace or escrow service is a payment service provider, then is it an intermediary payment service provider (the buyer’s bank paying the escrow service or remitting marketplace, and the remitting marketplace or escrow service paying the seller’s bank) or a direct payment service provider ?
The EBA guidelines might be expected to remove this ambiguity.
Instead, the draft guideline as they are currently written, make matters worse.
Not only do they not clarify how remitting marketplaces and escrow services are to be regarded with respect to the definitions of ‘payer’, ‘payee’, ‘payment service provider‘, ‘intermediary payment service provider’ and ‘payment account’ in the directive, but the guidelines themselves introduce a definition that increases ambiguity.
Remitting marketplaces have been unclear whether they are included within EU AML/CTF and Payment Directives for some years, and in some member states remitting marketplaces have been allowed to make payments in a completely unregulated way, sometimes for very large payment turnovers in the multiple millions or more.
This practice will be put to an end when the Payment Services Directive 2 (PSD2) comes into full force on 13th January 2018, since PSD2 specifically brings remitting marketplaces within the definition of Payment Service Providers (PSP).
However, the EBA draft guidelines do not use this definition of PSP, but instead the definition from the directive, which itself only refers to a previous dated EU directive 2007/64, which it could be argued may or may not include remitting marketplaces.
The EBA guidelines should instead define ‘Payment Service Providers’ as defined in PSD2 (EU 2015/2366).
By doing so, the EBA guidelines will remove all doubt that the guidelines and directive include remitting marketplaces and escrow services.
If not done, then a major, easy-to-use and significant loophole is left for money launderers and terrorist financers.
Doing so (linking PSP’s with PSD2) will not resolve the further ambiguity in relation to how payments by such services fall within the directive and guidelines, and the guidelines need to give guidance as noted above as to how such services are to be treated, and what the status of the various parties are.
As Europe’s leading escrow service, with day-to-day experience on the anti-money laundering and counter terrorist-financing issues involved in this area, we stand ready to provide the EBA with any information you may require.
This is an important area that needs close scrutiny, as the money laundering and terrorist financing challenges in this area are great.