By Stefan Fruschki, Head of Regulatory Management, Institutional Cash Management, Deutsche Bank

To strengthen the payments industry’s efforts to combat money laundering and terrorist financing, the EU Funds Transfer Regulation 2015 (FTR 2015) came into effect on 26^th June 2017. Stefan Fruschki, Head of Regulatory Management, Institutional Cash Management, Deutsche Bank, warns the regulation’s unclear guidelines could potentially disrupt payments flows

Reinforcing anti-money laundering (AML) and counter-terrorist financing (CTF) practices has long been a priority worldwide. EU Funds Transfer Regulation 2015 (FTR 2015), which came into effect in June, answers the call. The regulation broadens the existing requirements of its predecessor, FTR 2006, relating to the obligatory payment information that payment service providers (PSPs) must provide when transmitting funds.

There is more to FTR 2015 than meets the eye, however. Concerns are mounting that FTR’s obligations are, in places, open to interpretation. If unresolved, these ambiguities could have numerous repercussions, including inadvertent regulatory breaches and disciplinary action against senior managers (who are personally liable for the regulation’s observance). And above all, any misinterpretations could harm efforts to achieve the ultimate regulatory objective: to fight the financing of illicit activities.

FTR 2015’s extended requirements and scope

Of course, it must be stressed that, in this endeavour, FTR 2015 better ensures the full traceability of payment transactions. As such, the regulation represents a critical evolution in efforts to detect, prevent and investigate money laundering and terrorist financing.

In short, the regulation necessitates that certain information – including the full names, account numbers, and addresses of both the payer and payee – accompanies transfers of funds. This applies to all funds transfers, irrespective of currency, sent or received by PSPs (or intermediaries) established in the EU and the three additional countries in the European Economic Area (EEA) –Iceland, Liechtenstein, and Norway.

While it is European by name, FTR 2015 is effectively global by nature. In fact, transfers of funds from outside the EEA to an EEA-based PSP are covered by the regulatory scope – although non-EEA PSPs cannot breach the regulation directly. Yet in these instances, it is recommended that non-EEA PSPs transmit as much of the regulatory required information that respective local laws (namely, local data protection laws) deem permissible.

Moreover, FTR 2015 imposes additional requirements obliging intermediary PSPs to establish processes to detect whether or not the information has been transmitted – and in the correct designated data fields of the payment message scheme. Transmitting funds with insufficient information is considered a “payment failure”. In such cases, the receiving PSP is obliged to decide whether to execute, suspend or even reject the transfer.

By evaluating FTR 2015’s implications, what becomes apparent is that financial institutions must not underestimate the scale of the incoming procedural change. The danger, of course, is that PSPs are underprepared – deeming the changes more a minor evolution, rather than revolution. And given that the consequences of non-compliance are severe – above all for society – this is even more crucial.

From the payments perspective, if a PSP transmits insufficient information repeatedly, or commits similar “payment failures”, the repercussions are clear. The offending PSP could be reported to the regulatory authorities – and even be ruled to cease all future business relationships with the affected PSP. Ensuring that a common understanding of these requirements exists among financial institutions and regulatory authorities is, therefore, critical. 

Regulatory uncertainty could disrupt payments

But herein lays the obstacle to FTR 2015’s smooth transition: the regulation itself leaves significant room for interpretation – and does not fully specify what PSPs must do to meet these obligations. Failing to ensure a clear regulatory framework has the potential to cause significant repercussions – namely disruptions to the smooth flow of payments as well as a fragmentation of the regulatory landscape. And with the regulation’s effective date fast approaching, the industry must work together – and at speed – to understand and resolve these regulatory ambiguities.

Given that regulatory reporting is a mandatory component, PSPs require a consistent understanding of when (and how) to escalate malpractice to the competent authorities. Yet one major area of uncertainty is how to define a “repeated failure”. Indeed, FTR 2015’s guidelines provide no guidance – potentially leading PSPs to determine “repeated failures” based upon a combination of quantitative and less qualitative criteria, which is far from black and white.

A similar lack of clarity clouds the process of PSPs detecting what the European Supervisory Authorities (ESAs) call “linked” transactions. Indeed, it is not feasible to define “linked transactions” as those originating from a payments account to the same payee within a short timeframe (say, within a six-month period). This is because defining these transactions thus would also capture recurring payments within this recommended process.

The ESAs issued draft guidelines in April to support the industry’s preparations for FTR 2015’s effective date. Yet these guidelines have not fully addressed these grey areas. While some clarity has been provided, the guidelines remain limited in scope. And it remains to be seen whether further enhancements will be made during FTR 2015’s public consultation phase, which finished on 5^th June 2017.[1]

A common understanding remains critical

These implementation hurdles, however, do not eclipse the importance of FTR 2015 and the objectives it aims to achieve. Representing more than a financial regulation, FTR 2015 holds the safety of society above all else as its main priority.

With this in mind, now is the time for financial institutions and regulators to work together. Ensuring there exists a common understanding of FTR 2015’s scope and requirements will be crucial to ensure the safest regulatory framework for combating both money laundering and terrorist financing. And this, Deutsche Bank believes, may be best established via the commencement of a more open dialogue among all industry players. The industry can consider this a call for immediate action.

[1]https://www.eba.europa.eu/documents/10180/1807814/Consultation+Paper+on+draft+Joint+Guidelines+to+prevent+transfers+of+funds+can+be+abused+for+ML+and+TF+%28JC-GL-2017-16%29.pdf