Is ‘e-money’ a money laundering risk?

Joseph B. Hash

Investigations have linked United kingdom-registered electronic revenue establishments (EMIs), which can challenge pre-paid out payment playing cards or digital wallets, to revenue laundering, fraud and other money wrongdoing. Critics argue that the Financial Conduct Authority, less than tension to permit the UK’s fintech sector, has failed to supply right oversight of the country’s EMI industry. But specialists told Tech Monitor that the revenue laundering dangers of e-revenue are overstated – and pale in comparison to these of cryptocurrency.

e-money and money laundering
E-revenue establishments, which can challenge pay as you go playing cards or digital wallets, have been linked to revenue laundering (Image by andreswd / iStock)

What is ‘e-money’?

‘e-money’ is a precise type of digital money service, in which a typical “fiat” forex, these kinds of as lbs . or bucks, is stored in a payment card or wallet. It is not to be bewildered with cryptocurrencies, which are unique from fiat currencies, or central lender digital currencies, which are immediately managed by central banking institutions.

Less than the EU’s second Payment Providers Directive (PSD2), which nevertheless applies in the United kingdom, corporations that want to offer you e-revenue services have to sign up as an electronic revenue establishment (EMI) with their countrywide regulator. The United kingdom is dwelling to about 50 % of the  450 registered EMIs in Europe, in accordance to TheBanks.eu. Lots of fintechs have secured an EMI license as it enables them to supply digital wallets without the need of a banking license, which has bigger regulatory and funds prerequisites.

A string of new investigations have linked some EMI-license holders to revenue laundering and other money crimes. This 7 days, Bloomberg noted that the FCA has approved EMI licenses for corporations “with executives or shareholders tied to Baltic revenue laundering scandals, alleged money wrongdoing in Russia and Kyrgyzstan, healthcare fraud in the US and suspected wrongdoing in Luxembourg and Australia”.

Bloomberg’s investigation follows research from Transparency Global last thirty day period which, in accordance to studies, flagged 38% of United kingdom EMI license holders as acquiring “probable revenue laundering pink flags”, these kinds of as “acquiring house owners, administrators or senior users of employees named in revenue laundering investigations”. (Transparency International’s report was not available for download at the time of creating the organisation did not answer to a request for additional specifics from Tech Monitor).

And in July last year, an investigation released by OpenDemocracy recognized Russian language internet sites proposing EMIs, including these registered in the United kingdom, as a revenue laundering system.

Some of these investigations have raised uncertainties about the FCA’s regulation of the ‘e-money’ industry. Bloomberg writes that its investigation factors to “oversight weaknesses”, even though Transparency International’s Ben Cowdock reportedly warned that the FCA and United kingdom federal government “need to act swiftly to prevent a important scandal hitting this sector”.

Oliver Irons, a companion at legislation agency Simmons and Simmons, who has acted for fintechs that have secured EMI licenses, disagrees. “If these studies experienced been published two or a few several years ago, I might have agreed,” he claims. “The FCA didn’t recognize e-revenue then.”

But in the wake of the terrorist attack at the Bataclan nightclub in 2015, which was funded in section working with pre-paid out payment playing cards, the EU issued a new anti-revenue laundering directive. It stipulates that no far more than €100 can be stored on nameless accounts. This was transposed in to United kingdom legislation last year.

Irons argues that the new investigations’ evidence that e-revenue is becoming made use of for revenue laundering is circumstantial. “I never feel they’ve exposed a essential weak point in the way in which ‘e-money’ is established up,” Irons claims. “e-revenue establishments have experienced to have quite rigorous anti-revenue laundering checks, procedures and treatments in place for rather a even though.”

e-Cash vs cryptocurrency

Critics have prompt that the FCA has provided a large amount of leeway to fintechs to bolster the domestic industry. “Of all the regulators throughout Europe, I feel the FCA is probably the most accommodating,” claims Irons. “But it is nevertheless a regulator, and if you ask a fintech if they’ve been accommodated by the FCA, they’d snicker you out of the area.”

Professor Philip Treleaven, director of the Financial Computing Centre at UCL, claims the FCA has so far succeeded in striking a harmony between innovation and regulation. “Fintech has been successful in the United kingdom for the reason that the regulators – the Financial Conduct Authority and Lender of England’s PRA – have struck a fair harmony to stimulate innovation even though striving to clear away excesses,” he claims.

Having said that, he provides, decentralised finance (an umbrella time period for cryptocurrencies and blockchain-similar money services) threatens regulators’ ability to tackle fraud and revenue laundering. “Decentralised finance just throws the total regulatory regime out the window,” he claims. “If a counterparty misbehaves, you never know who they are.”

Irons explains that some corporations providing crypto-similar services have used for EMI licences to allow prospects to trade e-revenue with cryptocurrency. Here, he claims, the FCA has been a lot less dependable, with some applicants becoming told “you are unable to use that revenue for the order of digital assets”.

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

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