The German banking and payments landscape is often described as conservative: While its neighbours and the emerging markets in Europe are adopting new payment technologies fast and declaring war on cash, the German regulators resist new payment technologies and declare war on e-money. Duygu Tavan reports
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When the second e-money directive (2EMD) was issued in April, the German Finance Ministry interpreted its requirements in its own way and introduced AML legislation that destroys any opportunities in general purpose reloadable prepaid products in Europes biggest economy.
Germanys AML laws make what is a global growing and lucrative business case a complex and costly one: Non-finance institutions, such as estate agents, casinos, solicitors, petrol stations, bakeries and even supermarkets, are just as much affected by them as are non-bank e-money product and service providers. The local legislation requires prepaid card distributors to comply with KYC standards and record the consumers information for five years regardless of the top-up value. The legislation also requires companies with more than nine employees to appoint an AML commissioner.
Germanys home-grown AML legislation restricts prepaid more than the regulations in other countries.
The issue is this: If the e-money provider is not based in Germany, the regulator cannot control them. But they can control the legislation in Germany. It seems to be more a case of political, rather than security issues. According to one industry insider, the German Finance Ministry has even approached its French and Benelux counterparts to convince them to adopt what Michael Mueller, Group CEO and Co-Founder of paysafecard.com and member of the Prepaid Forum Deutschland, calls a harsh regime to no effect.
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By GlobalDataIn this era of electronic money and the war on cash, Germany seems to be shooting itself in the foot.
The regulators from finance, securities agencies and labour unions argue that money on prepaid cards could be withdrawn from ATMs, leading to easy money laundering. The prepaid-supporting industry bodies argue the economy is still so cash-based the regulator wants to protect their authority in e-payments.
In the latest case of the collision of pro and con opinions on Germanys anti-money laundering legislation, industry stakeholders clashed on 19 October at a public hearing in the Bundestag.
Criminal intent
At the hearing, a Federal Criminal Police representative described a horrific scenario in which prepaid cards appealed to criminals and argued that so far, only a fraction of the prepaid crime that is possible, has occurred.
The counter argument came by the German Confederation of Skilled Crafts ZDH, which argued that the collection of KYC data goes against of the German governments efforts to reduce bureaucracy, and that the required role for an AML commission will only increase costs without actually effectively fighting money laundering.
ZDH is, according to a spokesperson, against the legislation in its current format. The spokesperson argues that, if for instance a bakery wants to issue prepaid cards, it will still need to apply KYC procedures even when the card is in a closed-loop system and obviously has no high-value stored on the card.
So if a drug dealer decides to pay back its distributors with a prepaid bakery card, it technically is money laundering. But: What is the likelihood of such a scenario?
Mueller argues that the legislation clearly violates the 2EMD and criticises its lack of differentiation between prepaid issuing and distribution.
The issue is that if an e-money institution issues a gift card, for instance, it needs to comply with KYC standards. If a bank issues gift cards, there is no such obligation. Banks are not yet regulated in that way. So e-money institutions are treated differently.
Mueller argues that the Finance Ministry actually knows very little about prepaid.
The regulator based its arguments on the outcome of the FSCS report which found that Germany had to tighten its AML regulation. However, the report did not specifically refer to money laundering via e-money products.
They argue that prepaid cards can be used for crime. But we oppose that. Statistics show money laundering crime has gone up from 11,000 to 40,000 in the year to end-2010.
E-payments crime has risen from 64 to 90 and prepaid is a tiny fraction of this. So there is no evidence for prepaid crime. There might be a risk of money laundering, but there no clear evidence. If there is a risk of cash out and e-money transfers, then there should be verification when that money is redeemed or transferred.
Gilles Coccoli, managing director of PrePay Solutions, agrees that the KYC process at the till point makes it a too complex and costly business case.
AML regulation is being localised across Europe, but there needs to be a common spirit. The solution would be no KYC at the till point and monitoring buying behaviour. If somebody buys 10 cards, that is not normal. If the merchant sells those 10 cards, they will be held accountable to prove anti-money laundering actions. We would have to report the merchant and they would be called upon by the financial regulator and lose their licence.
The chances of money laundering are limited. PrePay Solutions runs a system that monitors how many cards are bought at once one would have to have a very clever scheme, such as buy one card a day and top it up to its limit. But if KYC takes place at the till, it is impossible to do business with prepaid, Coccoli says.
The issue of prepaid clearly goes beyond security it is an issue of banks versus non-banks.
We have not got one bank as a member. Banks are pretty happy with the law. The real reason behind the law, Mueller argues, is that a lot of e-money distribution takes place via non-banks. There will be exemption of the law for the German Geldkarte so there is clear evidence that the AML legislation has anything to do with AML. It is political.
The ZDH spokesperson believes that the problem does not lie directly with the banks. It lies with the opinion of the Federal Criminal Agency (BKA) and the Law Enforcement Agencies who think that every little e-money value can serve as money laundering, they say.
Coccoli highlights the relatively low threshold limit for prepaid cards and argues that the risk of money laundering is relative low. If this legislation kills prepaid business opportunities, it could have a wider, negative impact on the economy. Prepaid replaces cash securely and is an efficient tool for fund distribution, argues Coccoli.
But, as the ZDH spokesperson highlights, the Finance Ministry is not interested in the economic impacts of prepaid.
