Global Payments Newsletter, January 2021 | Hogan Lovells – JDSupra – JD Supra

Key developments of interest over the last month include:

  • United Kingdom: HM Treasury consults on regulatory approach to cryptoassets and stablecoins.
  • Italy: Government repeals the money transfer tax.
  • Europe: European Central Bank outlines its plans for digital euro.

In this Newsletter:

  • Regulatory Developments
  • Payment Market Developments
  • Surveys and Reports

Regulatory Developments

United Kingdom: HM Treasury consults on regulatory approach to cryptoassets and stablecoins

On 7 January 2021 HM Treasury (HMT) published a combined consultation paper and call for evidence on the regulatory approach to cryptoassets and stablecoins.

In outline, the consultation proposes:

  • A policy approach that would involve specific requirements being implemented by independent regulators (e.g. via rules or codes of practice) within a wider framework of objectives and considerations set out by HMT.
  • Expansion of the regulatory perimeter, with the introduction of a regulatory framework for “stable tokens” (i.e. tokens which maintain a stable value by referencing asset(s)), drawing on existing e-money and payments legislation. The FCA would authorise and supervise relevant entities carrying out certain activities in the UK. A stable token arrangement could also be subject to Payment Systems Regulator (PSR) and Bank of England regulation under certain circumstances.

The call for evidence covers a broad range of questions on cryptoassets:

  • the application of existing regulation to security and investment tokens;
  • DLT-based financial market infrastructures, including the potential benefits of adopting DLT for trading, clearing and settlement, and the adequacy of existing legislation;
  • the extent to which other unregulated tokens and Decentralised Finance (DeFi) should be brought within the regulatory perimeter, and the risks and opportunities presented by DeFi.

The deadline for responses is 21 March 2021. HM Treasury will also undertake a programme of stakeholder engagement before publishing its final response.

See more information here.

Italy: Government repeals the money transfer tax

On 30 December 2020 the Italian Government repealed the tax on money remittances outside the EU executed through payment institutions which was introduced in 2018.

Among several measures provided for by the Budget Law for financial year 2021 (Law No. 178/2020), the Italian Government decided to put an end to the issue relating to the tax on transfers of money abroad executed through payment institutions governed by Art. 114-decies of Legislative Decree No. 385 of 1 September 1993 (the “Tax”), by expressly repealing the Tax at Art. 1, para. 1120.

The Tax was introduced by Art. 25-novies of Law Decree No. 119 of 23 October 2018 – the so-called Tax Decree – and provided for a 1.5% tax on each money transfer exceeding EUR 10 to non-EU countries (excluding commercial transactions) executed by payment institutions carrying out a money remittance service.

Immediately following its entry into force, the Tax had raised numerous issues, the main ones being:

  • its discriminatory nature, as the Tax was only applicable to transactions executed by payment institutions (and not also to money transfer transactions executed by other payment services providers); and
  • the fact that the Tax appeared to be in breach of the Community principle of free movement of capital.

See more information here.

Europe: ECB letter on Eurosystem plans for digital euro

On 30 December 2020 the European Central Bank (ECB) published a letter (dated 22 December 2020) to the European Parliament on plans for a digital euro.

In the letter, the ECB explains that the Eurosystem is carrying out conceptual study and practical experimentation on the technical solutions that could support the issuance of a digital euro. The role of commercial banks in a digital euro system is also outlined, along with the possible impact on their provision of credit.

The ECB considers that a digital euro should be made available on an equal basis in all euro area countries through supervised intermediaries. To avoid the risk of large shifts from private money to digital euro, a digital euro would be designed as an attractive means of payment, not a form of investment.

In the interests of fostering innovation, the ECB states that a digital euro should be integrated with the current payment systems, creating synergies with the services provided by supervised intermediaries and leveraging private initiatives that are in accordance with the Eurosystem’s payments strategy.

A Eurosystem consultation on the design and issues surrounding the possible introduction of a digital euro closed on 12 January 2021. It is available from the ECB’s digital euro hub.

United Kingdom: EU-UK Trade and Cooperation Agreement announced

On 24 December 2020 the UK and the EU announced that they had agreed an EU-UK Trade and Cooperation Agreement (TCA). The UK ratified the TCA on 30 December and the TCA now applies provisionally until 28 February 2021, by which time it is hoped that the necessary EU ratification steps are completed, including the consent of the European Parliament, and adoption by Council Decision. The TCA was brought into effect in UK law by the swift passing of the European Union (Future Relationship) Act 2020. The UK government has published a summary explainer.

In relation to financial services, the TCA confirms that UK and EU firms may benefit from third country access to each other’s markets and non-discriminatory treatment. However, there are some carve-outs and “reservations”. These include a typical “prudential carve-out” which allows both parties to take any measure it deems necessary for prudential reasons, such as protecting investors, depositors or policyholders, or ensuring the integrity and stability of their financial systems, so long as it is not used to avoid commitments under the TCA.

In addition, both the UK and the EU have exempted financial services from the most favoured nation (MFN) provision, which means that preferential terms granted to another party in the future need not be extended to the UK or the EU. They have also retained the right to impose a specific legal form on a financial services subsidiary (on a non-discriminatory basis).

The UK has some specific reservations in the TCA, for example, only firms having their registered office in the UK can act as depositaries of the assets of investment funds.

The TCA includes provision confirming that it covers any new service that could be supplied under existing regulation. It also guarantees access by foreign firms to any self-regulatory bodies required for the conduct of their business, and to public clearing and payments systems.

In the TCA, the UK and EU also agree to make best endeavours to ensure that internationally agreed standards in the financial services sector for regulation and supervision, for the fight against money laundering and terrorist financing, and for the fight against tax evasion and avoidance, are implemented and applied in their territory. These include standards adopted by the G20, the FSB, the BCBS, the IAIS, IOSCO and the FATF.

Accompanying the TCA is a Joint Declaration on financial services regulatory cooperation in which the UK and the EU agree to enter into a memorandum of understanding by March 2021 establishing a framework for regulatory cooperation on financial services. This framework will be based on a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers. It will facilitate:

  • bilateral exchanges of views and analysis relating to regulatory initiatives and other issues of interest;
  • transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; and
  • enhanced cooperation and coordination including in international bodies as appropriate.

In addition, the UK and EU commit to “discuss” how to move forward with equivalence decisions. The TCA does not include any provision for equivalence in financial services. In its Q&A on the TCA, the Commission explains that these are unilateral decisions for each party and are not subject to negotiation.

For an overview of the impact of the TCA on data protection, see more information here.

United Kingdom: FCA final temporary transitional power directions and Brexit instruments published

On 22 December 2020 the FCA published the final versions of its final onshoring instruments, related guidance and Temporary Transitional Power (TTP) directions.

The transitional directions and instruments apply from the end of the Brexit transition period (that is, 11.00 pm on 31 December 2020).

United Kingdom: PRA publishes policy statement on changes required before end of Brexit transition period

On 28 December 2020 the PRA published a policy statement (PS30/20) on changes to its rules, as well as the use of temporary transitional directions, required before the end of the Brexit transition period.

PS30/20 contains the final versions of the PRA Rulebook: (EU Exit) Instrument 2020 (PRA 2020/29) (Appendix 1) (the Instrument), the PRA transitional direction (Appendix 2) and related guidance (Appendices 4 to 7). Most provisions of the Instrument commence at the end of the Brexit transition period (that is, 11pm on 31 December 2020). The transitional direction came into force at 11pm on 31 December 2020.

United Kingdom: FCA publishes an update on regulatory change as Brexit transition period ends

On 31 December 2020 the FCA published a press release about regulatory changes for firms as the Brexit transition period ends, including the impact of the temporary permissions regime (TPR), the financial services contracts regime (FSCR) and the temporary transitional power (TTP).

United Kingdom: House of Commons EU Scrutiny Committee report looks at EU cryptoasset and DLT legislative proposals

On 18 December 2020 the House of Commons European Scrutiny Committee published its 33rd report of the 2019-21 session. Among other things, section 4 of the report considers the EU’s proposed Regulation on markets in cryptoassets (MiCA), proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT)) and proposed Directive amending the MiFID II Directive (2014/65/EU) to clarify the legal position of certain cryptoassets under existing EU financial services legislation.

Although the new EU rules will not apply directly to or in the UK, the Committee is concerned that the EU proposals raise several issues including the following:

  • UK-based cryptoasset issuers and UK-based cryptoasset service providers with business interests in the EU may be impacted by the current proposals, which introduce location requirements and do not contain an equivalence regime, meaning that non-EU firms might need to establish a legal entity or registered office in an EU member state to operate.
  • Given existing interdependencies between the UK and EU financial systems, the EU’s approach to mitigating risk could have a detrimental impact on the UK should the market for stablecoins grow sufficiently large to have a potential impact on financial stability.

The Committee’s concerns are reflected in an explanatory memorandum submitted to it by John Glen, Economic Secretary to the Treasury, which sets out the government’s position on the EU’s proposed approach.

For information on HM Treasury’s consultation on the UK regulatory approach to cryptossets and stablecoins, see the first item in this Newsletter.

United Kingdom: FCA announces temporary registration regime for cryptoasset businesses under MLRs 2017

On 16 December 2020 the FCA published a press release announcing the establishment of a temporary registration regime for certain existing cryptoasset businesses that have applied to it for registration under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs 2017), and whose applications are still being assessed.

From 10 January 2020, cryptoasset businesses that operated immediately before that date had to comply with the MLRs 2017, including a requirement to be registered with the FCA by 10 January 2021. New businesses that began operating after 10 January 2020 must obtain full registration with the FCA before conducting business.

The temporary registration regime applies to existing cryptoasset businesses that applied for registration before 16 December 2020, and whose applications the FCA has not yet assessed. This is designed to enable those businesses to continue to trade after 9 January 2021 until 9 July 2021, pending the FCA’s determination of their application.

Firms that failed to submit an application by 15 December 2020 are ineligible for the temporary registration regime, so they had to return cryptoassets to customers and stop trading by 10 January 2021. Failure to cease trading by that date incurs the risk of being subject to the FCA’s criminal and civil enforcement powers.

United Kingdom: Law Commission publishes call for evidence on smart contracts

On 17 December 2020 the Law Commission published a call for evidence on smart contracts, seeking evidence and views on the following, with an overview of the legal and practical issues encountered by the Commission in relation to each topic:

  • What is a smart contract?
  • Formation of smart contracts.
  • Interpretation and smart contracts.
  • Remedies and smart contracts.
  • Consumers and smart contracts.
  • Jurisdiction and smart contracts.

The call for evidence closes on 31 March 2021. The Commission plans to use responses to inform its scoping study, which it aims to publish in autumn 2021.

United Kingdom: PRA publishes Dear CEO letter on 2021 priorities for supervising international banks

On 15 December 2020 the PRA published a Dear CEO letter to PRA-regulated international banks setting out the following four supervisory priorities for 2021:

  • Financial resilience: A supervisory focus in 2021 will be on assessing how firms are ensuring robust credit risk management practices.
  • Operational risk and resilience: There will be a continuing focus on how firms are ensuring that risk and control frameworks are operating effectively in the current working environment.
  • LIBOR transition: The PRA will monitor firms’ progress against the targets of the Working Group on Sterling Risk Free Reference Rates and targets for non-GBP exposures where relevant.
  • Financial risks resulting from climate change: There will be an increasing PRA engagement with home state supervisors over 2021.

The intention is that the priorities will complement the PRA’s ongoing supervision and the feedback banks have received following their most recent periodic summary meeting.

United Kingdom: PRA publishes Dear CEO letter on 2021 priorities for supervising UK deposit-takers

On 15 December 2020 the PRA published a Dear CEO letter to UK deposit-takers setting out the following six supervisory priorities for 2021:

  • Financial resilience: The Bank of England will conduct a stress test in 2021 to consider the financial resilience of major UK banks and building societies.
  • Credit risk: In anticipation of an increase in customers in financial difficulty, arrears and default over 2021, the PRA will maintain engagement across the sector to assess whether firms have robust credit risk management practices, and whether they are considering an appropriate range of scenarios in determining provisioning levels.
  • Operational risk and resilience: There will be a continuing focus on how firms are ensuring that risk and control frameworks are operating effectively in the current working environment. The PRA is planning to set standards for operational resilience and outsourcing during 2021.
  • LIBOR transition: The PRA will monitor firms’ progress against the targets of the Working Group on Sterling Risk Free Reference Rates and targets for non-GBP exposures where relevant.
  • Competition and future regulatory frameworks: The PRA is aiming at finalising its approach for new and growing banks in the first half of 2021, and is also considering a “strong and simple” framework for smaller non-systemic UK banks and building societies (with a discussion paper planned for the first half of 2021).
  • Financial risks resulting from climate change: This remains a key priority for the PRA. In addition, the PRA continues to view strong governance at firms as key to underpinning progress in meeting its expectations.

The intention is that the priorities will complement the PRA’s ongoing supervision and the feedback deposit-takers have received following their most recent periodic summary meeting.

Egypt: National Bank of Egypt to allow transfer remittances through post offices

On 22 December 2020 the National Bank of Egypt (NBE) signed a Memorandum of Understanding with Egypt Post to facilitate the exchange of remittances from Egyptians abroad through post offices across the country.

See more information here.

United Kingdom: HM Treasury publishes summary of draft rules for proposed new special administration regime for PIs and EMIs

On 17 December 2020 HM Treasury (HMT) published a summary of proposed draft rules to accompany the new special administration regime for payment institutions (PIs) and electronic money institutions (EMIs). The summary is published as a new annex to the consultation on this proposed special administration regime that was issued on 3 December 2020 (as to which, see the December 2020 edition of our Global Payments Newsletter).

As with the draft regulations, the draft rules are closely modelled on the equivalent provisions in the existing special administration regime for investment banks. Key points of difference with the related investment bank provisions include:

  • omissions to reflect that payment institutions (PIs) and electronic money institutions (EMIs) do not undertake deposit-taking activities. This includes the omission of any role for the Financial Services Compensation Scheme as creditor;
  • different contents for a special administrator’s statement of affairs, including details of the individuals that use or hold funds through the institution, security interests and relevant safeguarding measures used;
  • new provisions that approved costs incurred by the administrator due to a breach of the institution’s safeguarding regime will be paid out of the institution’s own assets, with any shortfall being met out of the asset pool;
  • provisions setting out reasonable measures that the administrator needs to take before a hard bar takes effect; and
  • omission of provisions allowing a claimant or the FCA to submit a claim following the bar date.

As with the investment bank rules, the draft rules will set out the specific procedural requirements in relation to court proceedings for commencing a special administration procedure. The Insolvency Rules Committee will be consulted in due course in finalising the detail of the draft rules.

The principal consultation closed at midnight on 14 January 2021. Responses specifically on the proposals for the draft rules can be submitted until midnight on 28 January 2021.

United Kingdom: PSR publishes update on merchant survey disclosure in card-acquiring services market review

On 17 December 2020 the Payment Systems Regulator (PSR) announced that it has extended the deadline for submitting comments on its interim report relating to its market review into card-acquiring services to 5pm on 9 February 2021. For more on the interim report, see the September 2020 edition of our Global Payments Newsletter.

On 27 November 2020 the PSR published a notice of intention to operate a confidentiality ring following publication of the interim report, as part of plans to disclose material underlying the merchant survey commissioned as part of the market review from IFF Research (as to which, see the December 2020 edition of our Global Payments Newsletter). The PSR has now also confirmed that it will run the merchant survey confidentiality ring for three weeks starting on 20 January 2021.

Nigeria: Central Bank directs payment companies to cease transfers of remittances in local currency

On 16 December 2020 the Central Bank of Nigeria (CBN) published a circular to international money transfer operators (IMTOs) and payment service providers (PSPs) entitled ‘Additional Operational Guidelines on Receipt of Diaspora Remittances’.

The CBN directs payment switching and processing companies to stop local currency transfer of diaspora remittances received through IMTOs. The bank also directs mobile money operators (MMOs) to disable wallets from receipt of funds from IMTOs.

According to the CBN, its new directions are aimed at ensuring compliance with its recent policy which allows beneficiaries of diaspora remittances to receive the proceeds in foreign currency.

United Kingdom: Competition Appeal Tribunal refuses Visa’s application for a CJEU preliminary ruling in MIFs damages actions

On 22 December 2020, the Competition Appeal Tribunal (CAT) issued a ruling refusing an application by Visa Europe Limited, Visa Europe Services LLC and Visa UK Limited (together, Visa) for the CAT to make a reference to the Court of Justice of the European Union (CJEU) for a preliminary ruling on the question of whether, in a situation where Visa and Mastercard operate independently in setting the level of Multilateral Interchange Fees (MIFs), in a claim alleging an infringement of Article 101(1) of the TFEU, each scheme’s MIFs should be judged against a counterfactual in which the other scheme remains free to compete by setting its own MIFs independently at higher positive rates.

The CAT concluded there was no justification, within the terms of Article 267 of the TFEU, to refer the proposed question to the CJEU in order to decide the cases pending before the CAT.

Europe: European Commission publishes new Cybersecurity Strategy and proposes revised NIS Directive and new Directive on resilience of critical entities

On 16 December 2020 the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy launched a new EU Cybersecurity Strategy, aimed at strengthening the EU’s collective resilience against cyber threats and helping to ensure that all citizens and businesses can fully benefit from trustworthy and reliable services and digital tools.

Also on 16 December 2020 and as a key component of the new EU Cybersecurity Strategy, the EU released its proposed revisions to the existing Directive 2016/1148 on the security of network and information systems (NIS2). The proposals are intended to build on and repeal the existing NIS framework. They involve a number of significant changes being made to the existing regime, including widening the scope of the law’s application to additional industry sectors, strengthening the existing rules on security requirements and incident reporting, while also increasing the maximum fines that can be applied.

NIS2 comes just over two years after the original NIS Directive 2016/1148 (NIS1) was intended to take effect across EU Member States. It has been introduced in order to address various criticisms and issues identified with NIS1 and to reflect the increasingly widespread digitisation of the European economy, which has accelerated further during the COVID-19 pandemic.

The introduction of NIS2 will occur in parallel to a new proposed directive concerning the resilience of critical entities in sectors such as energy and transport. This also forms part of the same package of measures announced as part of the new Cybersecurity Strategy.

The NIS2 proposal will now be subject to negotiations between the Council of the EU and the European Parliament. Following the publication of the final version, Member States will be given 18 months to transpose the Directive into national law.

See more information here.

United States: Federal Reserve and others propose a requirement for computer security incident notification

On 12 January 2021, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) published a Notice of Proposed Rulemaking (NPRM) entitled Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers (Proposed Rule), which would create accelerated notification obligations for banking organizations and bank service providers in the event of a “‘computer-security incident’ that rises to the level of a ‘notification incident.’”

The Proposed Rule focuses on security events that disrupt financial institutions’ operations and not just security events that impact sensitive customer information, some of which would not be covered by the Proposed Rule.

The Proposed Rule would require a “banking organization” to notify its primary regulator no later than 36 hours after reasonably determining that a qualifying incident has occurred, and it would require a “bank service provider”(both terms defined below) to notify a banking organization immediately upon detecting that an incident materially impacting such organization has occurred.

The Proposed Rule would apply to:

1. “Banking organizations,” which are defined as:
a. For the OCC, national banks, federal savings associations, and federal branches and agencies;
b. For the Board, all U.S. bank holding companies and savings and loan holding companies; state member banks; the U.S. operations of foreign banking organizations; Edge and agreement corporations; and
c. For the FDIC, all insured state non-member banks, insured state-licensed branches of foreign banks, and state savings associations
and
2. “Bank service providers,” which the Proposed Rule defines as “a bank service company or other person providing services to a banking organization that is subject to the Bank Service Company Act.”

Comments are due by 12 April 12 2021, 90 days from publication in the Federal Register.

See more information here.

United Kingdom: FCA publishes results of financial resilience survey and announces further survey

On 7 January 2021 the FCA published a new webpage setting out the data from its COVID-19 financial resilience survey during 2020.

The survey was sent to 23,000 firms in two tranches (June and August 2020). The survey was then repeated for all 23,000 firms after a 3-month interval from the initial survey. All firms surveyed are solo-regulated firms. The aim was to understand the real-time effect that the COVID-19 pandemic is having on firms’ finances. The FCA has also been using existing regulatory reporting data, enhanced data purchased from a third-party provider and in-depth analysis of liquidity for a number of the most significant firms.

According to a related FCA press release, some of the key findings were:

  • Between February and May to June 2020, firms across the sectors experienced significant change in their total amount of liquidity.
  • 59% of respondents expected COVID-19 to have a negative impact on their net income.
  • The payments and e-money sector has the lowest proportion of profitable firms, followed by wholesale financial markets, investment management, insurance intermediaries and brokers, retail lending and retail investments.
  • The retail lending sector has made most use, in proportion to the sector’s size, of the available government support.

On 8 January 2021 the FCA published a statement announcing that it will be conducting a further survey which it planned to email to relevant firms during the period from 13 to 19 January 2021. Completion of the survey is mandatory. The FCA will use the survey data, along with existing data, to support its ongoing work. It also expects to carry out a further survey in the future.

Israel: Tax Authority asks residents to disclose their cryptocurrency holdings

On 23 December 2020 it was reported that the Israeli Tax Authority (ITA) is now requiring residents to disclose their cryptocurrency holdings for taxation purposes.

Dozens of Israelis who own digital currencies have recently received notification from the ITA telling them they must fully disclose their assets for tax purposes. The ITA requested data from cryptocurrency exchanges in Israel and outside of the country in order to obtain the data and information regarding the accounts held by Israelis.

India: Central bank unveils new fund to support digital payments infrastructure

On 5 January 2021 the Reserve Bank of India (RBI) announced operating guidelines for the Payments Infrastructure Development Fund (PIDF). The main objective of the PDIF scheme is to increase payment acceptance devices in the country, at lower acceptance infrastructure cost.

The PIDF will have initial capital of INR 3.5 billion (USD 47.8 million), of which INR2.5 billion will be funded by the RBI and the remaining INR1bn will come from authorised card networks in India. Also, banks will contribute INR1 per debit card and INR3 per credit card issued. The same applies to new entrants in the card payments ecosystem.

The PIDF will be valid for three years, starting from 1 January 2021. The RBI can extend this period for a further two years if required. Its objective is to deploy three million payment acceptance touchpoints, comprising one million physical and two million digital devices every year.

Pakistan: Government launches its new digital payments system

On 11 January 2021 Pakistan announced a new government-run digital payment system aimed at boosting financial inclusion and government revenue. The new system is called Raast or ‘direct way’ and will be rolled out in three phases finishing in early 2022.

Developed through a collaboration between the State Bank of Pakistan and the Bill & Melinda Gates Foundation, with support from the World Bank, the UK and the United Nations, one goal for Raast is to boost involvement of women in the formal economy.

Using Raast, merchants, businesses, individuals, fintechs, and government entities will be able to send and receive payments through the internet, mobile phones, and agents. In addition, government payments including salaries and pensions, as well as payments for nationwide financial support programmes, will be made through the new system.

India: Finance Ministry proposes new Bitcoin tax law

On 29 December 2020 the Times of India reported that the country’s finance ministry is working on the introduction of Bitcoin (BTC) tax laws in India. According to the article, the ministry’s Central Economic Intelligence Bureau (CEIB) recently put forward a proposal to India’s Central Board of Indirect Taxes & Custom (CBIC) to consider imposing an 18% goods and services tax (GST) on Bitcoin trading margins.

Based on the CEIB estimates, India’s Bitcoin trading market is in excess of Rs 40,000 crore per annum (about $5.4 billion). Levying an 18 percent tax on trading could result in an extra Rs 7,200 crore ($974 million) in additional government revenue per year. As part of the proposed Bitcoin taxation plan, the CEIB called for cryptos to be regarded as an intangible asset class and treated as current assets for GST purposes.

The report further notes that unregulated cryptocurrency exchanges continue to pose a significant challenge for the government, especially after the Supreme Court’s March 2020 decision to lift a two-year ban imposed by the Reserve Bank of India on banks and financial institutions dealing with digital currencies.

United Kingdom: JMLSG sets out areas in its AML/CTF guidance affected by Brexit

On 14 January 2021 the Joint Money Laundering Steering Group (JMLSG) published a press release setting out areas within the JMLSG anti-money laundering (AML) and counter-terrorist financing (CTF) guidance (the Guidance) that are affected by the completion of the UK’s exit from the EU on 31 December 2020.

The Guidance is based on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs) (as amended). The JMLSG explains that certain provisions in the MLRs were derived from the UK’s membership of the EU, and there are still some references in the Guidance based on the premise of the UK’s membership of the EU, which were in turn based on those provisions in the MLRs (prior to legislative amendments). These references are therefore no longer appropriate and the JMLSG will amend them in due course.

Europe: EBA publishes opinion on interplay between legal frameworks for AML and CTF and deposit protection

On 14 December 2020 the EBA published an opinion, addressed to the European Commission and national competent authorities (NCAs), on the interplay between the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4) and the Deposit Guarantee Schemes Directive (2014/49/EU) (DGSD).

In the opinion, the EBA considers:

  • The roles and responsibilities of different regulatory authorities in mitigating money laundering and terrorist financing risks, including co-operation between authorities, and information gathering and exchange. In particular, the EBA looked at the collection of information on anti-money laundering (AML) and counter-terrorist financing (CTF) for deposit guarantee scheme (DGS) payouts.
  • The question of whether depositors should be notified when they are not eligible for a payout in line with existing DGSD provisions or when their payout is deferred or suspended because of money laundering or terrorist financing concerns.

An accompanying EBA press release explains that the opinion is aimed at informing the Commission’s ongoing reviews of MLD4 and the DGSD, as well as being addressed to the national authorities with a view to implementing some changes already under the current legal framework and ahead of the potential future revisions of MLD4 and the DGSD.

United Kingdom: National risk assessment of money laundering and terrorist financing 2020 published

On 17 December 2020 HM Treasury and the Home Office published the national risk assessment (NRA) 2020 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692).

The NRA considers the key money laundering and terrorist financing risks for the UK, how these have changed since the UK’s second NRA in 2017, and the action taken since then to address these risks.

Among the key findings are:

  • The traditional high-risk areas of money laundering remain. These include financial services, money service businesses and cash, but new methods continue to emerge within these areas as criminals adapt to increased restrictions and exploit technological and sectoral vulnerabilities.
  • Cash-based money laundering is still heavily characterised by the use of cash-intensive businesses to disguise criminal wealth sources, or by smuggling large amounts out of the UK. But there has been an increase in the abuse of cash-related services, e.g. cash deposit services in Post Offices, the use of cash couriers, and cash and valuables in transit companies. This is in addition to continued abuse of legitimate UK services such as money transmission and retail banking.
  • The cryptoasset ecosystem has developed and expanded considerably in the last three years, leading to an increased money laundering risk.
  • Knowledge of money laundering and terrorist financing risks has greatly improved since 2017, which is leading to an improvement in the mitigations in multiple areas. But so far there is insufficient evidence to support a reduction of risk to any sector.

Payment Market Developments

Kenya: Co-operative Bank of Kenya launches its new global money transfer solution

On 15 December 2020 Co-operative Bank of Kenya, a leading financial institution in Kenya and the larger East Africa region, partnered with Thunes, a cross-border payment provider, to launch an alternative global money transfer solution: Co-opRemit. Co-opRemit streamlines the process of real-time money transfers particularly within Africa, allowing Co-op Bank customers in Kenya to move funds across the world quickly at an affordable rate.

India: National Payments Corporation of India launches RuPay POS

On 31 December 2020 the National Payments Corporation of India announced that it now allows Indian merchants to accept RuPay domestic card payments on standard NFC phones. The RuPay POS solution enables merchants to turn their Android smartphones into POS terminals and accept tap-and-pay payments from RuPay cardholders via the PayNearby payments app.

Ukraine: Football club rewards its fans with digital tokens

On 4 January 2021 Ukrainian football club Dynamo Kyiv announced that its fans will soon be able to earn digital tokens that they can store in a mobile wallet and spend in-person at the team’s stadium and online at its digital marketplace. The club has partnered with Moonwalk, a company specializing in creating digital economies for brands, to create the team’s own digital economy.

Colombia: European partnership allows faster money transfers for Colombian migrants

On 10 December 2020 Azimo, a digital money transfer service, announced its partnership with cross-border payments platfrom dLocal. The new offering will allow Colombian migrants in Europe and Australia to access fast remittances to most home banks.

India: Mastercard launches new B2B payments alliance in India

On 15 December 2020 Mastercard announced a new alliance with payments solution provider EnKash aimed at expanding the use of commercial cards in India. The partnership will enable banks to generate greater spends on the cards that they issue and offer better profits and service to their customers.

United States: Zytara launches its own stablecoin

On 15 December 2020 a US fintech Zytara announced plans to launch its own Zytara dollar (ZUSD). ZUSD will be a stablecoin issued in partnership with Prime Trust, a Nevada-chartered trust company, and is aimed at providing a simplified payments experience for Gen-Z gamers.

Global: EMQ expands its payments capabilities into South Korea

On 5 January 2021 global financial settlement network EMQ announced its expansion into South Korea. The company will now be offering its enterprise customers a more efficient cross-border payments experience.

Global: VibePay launches its new business offering based on open banking

On 6 January 2021 the mobile payments provider VibePay announced the launch of its new open banking powered dashboard, VibePay Business, aimed at helping SMEs to increase reach and build better connections with their customers, in turn driving sales and engagement.

Singapore: YouTrip expands its presence in Southeast Asia

On 6 January 2021 Singapore multi-currency mobile wallet YouTrip announced its new partnership with Visa aimed at fast-tracking its growth in wider Southeast Asia. YouTrip’s goal is to allow Southeast Asia travellers to access cross-border payment solutions including wholesale exchange rates and no FX fees in over 150 currencies.

Global: Mastercard launches cybersecurity Trust Centre for SMEs

On 11 January 2021 Mastercard announced the launch of its new Trust Centre for small and medium sized businesses (SMEs). The objective of the newly established centre is to help SMEs to better protect their business and reputation through free online access to trusted cybersecurity research, education, resources and tools.

Surveys and Reports

United Kingdom: Pay.UK report on impact on current account switching behaviours

On 6 January 2021 Pay.UK published a report on how COVID-19 has affected current account switching attitudes and behaviours in the UK.

The report sets out the findings from a study of 1,000 people across the UK. It finds that current account switching in 2020 was 30% lower compared to previous years. It explores the mechanisms that have driven these changes, including the pandemic and wider changes to the financial services market.

The report focussed on key Current Account Switch Service (CASS) priority groups (the financially vulnerable, people aged 18 to 24 and SMEs). It found that the impact of the pandemic on switching bank accounts has led to more people feeling financially vulnerable, with some SMEs thinking switching could be risky.

According to Pay.UK, the findings suggest that the whole current account ecosystem has a role to play in making sure that people can switch if they want to. The Pay.UK CASS team will use the report’s findings to inform its strategy over the coming year, working with CASS participants, consumers, firms and regulators on the way forward for the current account market. Pay.UK is planning to work with current account providers and consumer representatives to facilitate the review and updating of the CASS.

Global: FATF publishes updated report on COVID-19 AML and CTF risks and policy responses

On 16 December 2020 the Financial Action Task Force (FATF) published a report entitled Update: COVID-19-related Money Laundering and Terrorist Financing – Risks and Policy Responses.

In the updated report, the FATF:

  • highlights the latest developments using input from the FATF Global Network of over 200 countries and jurisdictions, and from private and public sector webinars in July and September 2020;
  • sets out how criminals continue to exploit the COVID-19 crisis, illustrated by a selection of case studies;
  • confirms the concerns that it expressed in May 2020, including changing financial behaviours with more online purchases, increased financial volatility and economic contraction caused by job losses and company closures, and a looming global economic crisis.

The FATF will continue to monitor the impact of the pandemic on global money laundering and terrorist financing risks and on AML/CTF regimes, working closely with observer organisations and the network of FATF-Style Regional Bodies to understand regional specificities. It will provide further updates, should the impacts significantly evolve.

The FATF concludes by stating that it continues to be critical for jurisdictions, financial institutions, and designated non-financial businesses and professions to identify, assess, and understand the particular money laundering and terrorist financing risks that they face, and take corresponding mitigating action in line with the FATF Recommendations.

Global: FSB non-bank financial intermediation report 2020

On 16 December 2020 the Financial Stability Board (FSB) published its global monitoring report on non-bank financial intermediation (NBFI) 2020, setting out the results of the FSB’s annual monitoring exercise that assesses global trends and risks from NBFI.

The report covers data to the end of 2019 from 29 jurisdictions, together representing over 80% of global GDP. The FSB’s particular focus was on those parts of NBFI that may pose bank-like financial stability risks or regulatory arbitrage.

Key findings from the monitoring exercise include:

  • The growth of the NBFI sector in 2019 outpaced that of banks, expanding by 8.9%.
  • Since the financial crisis, there have been changes in the pattern of links between banks and other financial intermediaries.

In addition, the report includes two case studies analysing the impact of COVID-19 on the NBFI sector in general and on money market funds specifically.

In a related press release, the FSB states that it will take steps to strengthen its monitoring with the aim of increasing the resilience of NBFIs.

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Author: Sarosh Nanavati