AML/CTF, Sanctions and Insider Trading

EU Final Guidelines on Fraud Reporting Under the Payment Services Directive

On July 18, 2018, the European Banking Authority published final Guidelines on fraud reporting under the revised Payment Services Directive. PSD2 aims to increase the security of electronic payments and decrease the risk of fraud. The Directive, which has applied since January 13, 2018, requires Payment Service Providers to provide, at least on annual basis, data on fraud relating to different means of payment to their national regulator. The regulators must in turn provide such data in aggregated form to the EBA and the European Central Bank. Existing data reporting practices vary across the EU. The EBA has worked with the ECB to develop these Guidelines to ensure that data is reported consistently and that the data is comparable and reliable.

The final Guidelines are addressed to PSPs, except account information service providers, and to their national regulators. The Guidelines cover payment transactions that have been initiated and executed, including the acquiring of payment transactions for card payments, identified by reference to: (a) fraudulent payment transactions data over a defined period of time; and (b) payment transactions over the same defined period. The Guidelines also set out how national regulators should aggregate the data.

Following the feedback to the EBA's consultation last year on proposed Guidelines, a number of changes have been made, including aligning the requirements with those in the ECB Regulation on payment statistics (ECB/2013/43). The main changes are:

  • it had been proposed that quarterly reporting of high-level data would be required with a more detailed set of data on a yearly basis. Instead, the final Guidelines impose one uniform set of reporting requirements on a semi- annual basis;
  • country-by-country data breakdowns are no longer required; and
  • fraudulent transactions where the payer is the fraudster are no longer within the scope of the Guidelines.

The Guidelines apply from January 1, 2019, except for the reporting of data linked to the exemptions from the requirement to use strong customer authentication provided for in the Regulatory Technical Standards on strong customer authentication (Commission Delegated Regulation (EU) 2018/389), which will apply from September 14, 2019.

The final Guidelines are available at: http://www.eba.europa.eu/documents/10180/2281937/Guidelines+on+fraud+reporting+under+Article+96%286%29%20PSD2+%28EBA-GL-2018-05%29.pdf/5653b876-90c9-476f-9f44-507f5f3e0a1e.

UK Law Commission Seeks Input on Proposals for Reform of Anti-Money Laundering and Counter-Terrorism Financing Law in England and Wales

On July 20, 2018, the Law Commission published a substantial consultation paper entitled "Anti-Money Laundering: the SARs Regime," seeking views on proposals to reform the law of England and Wales governing anti-money laundering. In particular, the report considers issues around Suspicious Activity Reports, which are the mechanism by which the private sector make disclosures relating to money laundering and terrorism financing.

The Law Commission has identified a number of legal difficulties that arise from the current regime and, following extensive fact-finding meetings with stakeholders, it has also identified a number of issues in the current regime that are causing particular practical difficulties. In the consultation paper, the Law Commission: (i) identifies the most pressing problems and proposes provisional solutions to improve the current regime; (ii) consults on reforming the consent regime within the Proceeds of Crime Act 2002 ("POCA"), which sets out the process whereby an individual who suspects that they are dealing with the proceeds of crime can seek permission to complete a transaction by disclosing their suspicion to the U.K. Financial Intelligence Unit of the National Crime Agency; and (iii) seeks to generate and consider ideas for long term reform.

The key elements of the anti-money laundering regime of England and Wales are located in Part 7 of POCA, which sets out the money laundering offences, legal obligations to report suspected money laundering (and criminal offences for failure to disclose), the "consent regime" of authorized disclosures which offer protection from criminal liability and a prohibition on "tipping off" (warning an alleged money launderer that a report has been made to the authorities or an investigation has begun). The POCA regime is supplemented by EU law and by the Terrorism Act 2000.

The Law Commission has identified the following legal difficulties within the current POCA regime (and parallel issues within the counter-terrorism financing regime) and makes proposals to address them:

  • the "all-crimes" approach, whereby any criminal conduct that generates a benefit to the offender will be caught by the regime as "criminal property" and the consequent impact of this on the scope of reporting;
  • the terminology used in Part 7 of POCA and the meaning of appropriate consent;
  • the meaning of "suspicion" and its application by those with obligations to report suspicious activity;
  • fungibility, criminal property and issues arising from mixing criminal and non-criminal funds;
  • the extent to which information should be shared between private sector entities;
  • the wide definition of criminal property that applies to the proceeds of any crime and has no minimum threshold value; and
  • what should constitute a "reasonable excuse" for failure to make a disclosure within Part 7 of POCA.

The Law Commission's extensive fact-finding meetings with stakeholders have revealed that the following issues cause particular difficulties in practice:

  • the large volume of disclosures to the UKFIU (on average, 2000 SARs are received per working day);
  • the low intelligence value and poor quality of many of the disclosures that are made in accordance with present legal obligations;
  • misunderstanding of the authorized disclosure exemption by some reporters;
  • abuse of the authorized disclosure exemption by a small number of dishonest businesses and individuals;
  • defensive reporting of suspicious transactions leading to high volume reporting and poor quality disclosures;
  • the overall burden of compliance on entities under duties to report suspicious activity; and
  • the impact of the suspension of transactions on reporting entities and those that are the subject of a SAR.

Comments on the consultation paper are invited by October 5, 2018. In the light of the responses the Law Commission receives to the consultation, it will decide on final recommendations to be presented to the U.K. Government.

The consultation paper is available at: https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2018/07/Anti-Money-Laundering-the-SARS-Regime-Consultation-paper.pdf  and the summary of the consultation is available at: https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2018/07/AML-Summary-paper.pdf.

Financial Action Task Force Reports to G20 and FATF's US Presidency Announces Priority Work for 2018–2019

On July 19, 2018, the Financial Action Task Force published its report to the G20 Finance Ministers and Central Bank Governors. The report gives an overview of recent FATF work and its proposed next steps in its current workstreams. The United States takes over the FATF Presidency for the period July 2018 to June 2019 and has separately published a document summarizing its priority and other initiatives for the duration of its presidency.

The FATF report provides updates on its work in the following workstreams:

  • FATF's work program on virtual currencies/crypto assets. The FATF is pursuing several workstreams in the area of virtual currencies/crypto assets, covering: (i) the money laundering and terrorist financing risks; (ii) the regulatory environment; and (iii) global standards and guidance, including review of the FATF's 2015 guidance on a risk-based approach to virtual currencies.
  • countering the financing of proliferation of weapons of mass destruction—this work will be prioritized during the U.S. presidency;
  • countering the financing of terrorism—under the U.S. presidency, the FATF will focus further work on improving the effectiveness of CTF efforts, including improving information sharing and coordination and by the development of guidance to help countries better understand terrorist financing risks;
  • improving transparency and the availability of beneficial ownership information—the FATF has published a detailed report jointly with the Egmont Group of financial intelligence units;
  • improving the effectiveness of the criminal justice system, via FATF engagement with judges and prosecutors;
  • de-risking; and
  • digital identity—under the U.S. presidency, the FATF will continue its work to understand digital ID and verification technologies and will prioritize its ongoing work stream to ensure that the FATF Standards are compatible with the growing use of digital forms of customer identification.

The FATF report to the G20 is available at: http://www.fatf-gafi.org/media/fatf/documents/reports/FATF-Report-G20-FM-CBG-July-2018.pdf  and the objectives for the FATF's U.S. Presidency 2018–2019 are available at: http://www.fatf-gafi.org/media/fatf/content/images/Objectives-FATF-XXX-(2018-2019).pdf.

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