INFORMATION ON THE PAYER ACCOMPANYING
TRANSFERS OF FUNDS (11549/05)
Letter from Ivan Lewis MP, Economic Secretary,
HM Treasury to the Chairman
Thank you for your letter of 8 December 2005
regarding the European Commission's revised proposal for a Regulation
on information on the payer accompanying transfers of funds. I
am sorry for the delay in responding.
To begin I think it would be helpful to update
you on progress. On 6 December 2005, the Council (ECOFIN) agreed
at its meeting that the revised text provided the basis for a
General Approach. The report to COREPER and Council noted the
UK scrutiny reserve in relation to the revised text. The European
Parliament is currently considering the Regulation and the Austrian
Presidency is aiming to achieve the adoption of the Regulation
following a first reading in the Parliament and the Council on
the basis of the General Approach agreed at ECOFIN.
I have attempted to answer the questions raised
in your letter below. In looking at the issues you raise, I consider
both the aim of the Regulation and the process through which it
is agreed in Europe. The Regulation, as you are aware, implements
Financial Action Task Force Special Recommendation VII, a key
part of international action against terrorist financing. The
deadline for implementation of Special Recommendation VII, agreed
by the members of the FATF, and applicable around the world is
the beginning of 2007. In addition, as you will know, the Regulation
is being agreed in the EU under the co-decision procedure, with
qualified majority voting in the Council. The combination of these
factors means that we place prime importance on agreeing a workable
text that implements Special Recommendation VII properly and on-time,
while ensuring that it does not interfere with the efficient operation
of payments systems or otherwise negatively affect UK interests.
In this context, and given our limited negotiating capital, the
drafting may not always be as neat as may be desirable. Nevertheless,
we believe the content of the Regulation does achieve the objectives
Turning to the specific issues raised in your
letter. You note the repetition in Articles 5(1) and 7. We take
your point that the reiteration does not clarify these provisions
as would the omission of Article 7(1) and a consequential amendment
of Article 7(2). However, as outlined above, we place prime importance
on the policy content and timing of the Regulation. As the interpretation
of Article 5(1) does not depend on the interpretation of Article
7(1) (and vice versa) and we do not think there is any inherent
ambiguity as to how either of these Articles may be interpreted,
we do not propose to reopen this issue and risk other parties
doing the same, potentially to our disadvantage.
Thank you for welcoming the changes to Article
5. We will be happy to provide a copy of the JMLSG guidance once
it is agreed.
Your letter again raises the issue of the obligations
on the payee's payment service provider. I acknowledge the logic
of your argument. However, we have consulted extensively with
industry in the UK, who have made clear that this text allows
for a regime that is workable in practice and does not impose
unnecessary additional costs. Again I do not believe that reopening
this issue would be to our advantage.
You ask about the provisions in Article 9 relating
to obligations under national law. The Proceeds of Crime Act 2002
and JMLSG guidance sets out reporting requirements and provisions
relating to "tipping-off". Work to revise the JMLSG
guidance in relation to the Regulation will consider if further
provisions in the guidance are necessary. Your letter notes again
your concern about "repeatedly" in Article 9(2). We
continue to believe that given the differences in volume and type
of transactions that different payment service providers are involved
in, it would not make sense for more detail to be included in
the Regulation. We will consider, along with industry, whether
anything need be included in the JMLSG guidance. In general terms
however, the Government believes that a risk-based approach, where
industry themselves must assess risk in every situation against
general principles, is better than the tick-box exercise that
can flow from more prescriptive rules.
The issue of penalties is still under consideration.
We acknowledge your point about criminal sanctions. Clarity in
these circumstances is, as you note, important.
The change to recital 9, removing the text which
attempted to limit the use the information on the payer can be
put to in third countries, reflects consideration of the fact
that it is not possible to enforce such a provision, as the laws
of the third country would take precedence. Article 1 of the Regulation
restricts the use the information on the payer can be put to within
the Community to use for the purposes of the prevention, investigation
and detection of money laundering and terrorist financing. This
is consistent with the Interpretative Note for Special Recommendation
I can confirm there have been no further substantial
changes to the text.
Recital 16(a) does not displace the definition
of working day applicable under Regulation 1182/71. Rather it
is aimed at making clear that in the time-limit for the provision
of information of three working days set out in Article 6, the
working days in question are those of the payment service provider
of the payer, thus avoiding confusion.
The changes to Article 2(2) both clarify the
text in the Commission's proposal and introduce substantive changes.
The changes to the original 2(2) itself are the former, while
2(2a) to 2(2f) are the latter.
The definition of transfer of funds in the proposed
Regulation is broad in order that emerging payment technologies
will be captured by the Regulation and will not be available to
those seeking to circumvent the Regulation. Due to the breadth
of the definition a number of categories of payments that do not
pose particular money laundering or terrorist financing risks
were caught within the scope of the Regulation. These additional
changes to scope were necessary to ensure that existing business
practices are not unnecessarily adversely effected by the Regulation
and therefore that the Regulation does not impose burdens on industry
and citizens without correspondingly clear benefits. Specifically,
Article 2(2a) reflects the derogation for electronic money in
the Third Money Laundering Directive, 2(2b) relates to giro payment
arrangements prevalent in some Member States, 2(2c) relates to
ATM withdrawals, 2(2d) to direct debits, 2(2e) to truncated electronic
images of cheques and 2(2f) to payments to public authorities
within a Member State.
Information accompanying transfers
We agree that it would be clearer if Article
5(2a)(a) of the Regulation expressly covered paragraph (1) as
well as paragraph (2) of Article 8 (by a simple reference to Article
Article 5(2a)(a) refers to the verification
of the payer's identity, and the storage of the information gained
by this verification in accordance with the obligations set out
in Article 8(2) (and Article 30a) 3MLD. However, Article 8(2)
does not itself expressly set out any such obligations except
by reference to the "requirements [ie obligations] set out
in paragraph 1".
As the text currently stands, we believe that
it would be hard to see how else the reference in Article 5(2a)(a)
to obligations set out in Article 8(2) could be interpreted than
as a reference to the obligations set out in Article 8(1), to
which Article 8(2) refers, and Article 8(2) (for the risk-sensitive
aspect). Given this, and the delicate balance achieved between
Member States' concerns on the issue of verification, I do not
believe that seeking amendments in the drafting of the references
to Directive 2005/60/EC would be to our advantage.
In referring to Article 9(6) of Directive 2005/60/EC
the Regulation is aimed at ensuring that existing customers' identity
is verified at appropriate times on a risk sensitive basis. To
require that existing customers' identity is verified before the
Regulation comes into force would be very costly for the banking
Your letter asks about the relationship between
Article 7 and Article 8(3). The former sets out the requirements
for the information to be sent with batch transfers sent from
inside the EU to a payee outside the EU. This requires that the
batch file contains the full information and the individual transfers
contain the account number of unique identifier. Article 8(3)
imposes an obligation on payment service providers of payees to
have effective procedures in place to detect a lack of presence
of complete information only in the batch file, without placing
any requirement in relation to the individual transfers.
Article 14 was changed at the request of a number
of Member States.
Once again I would like to express my appreciation
of your Committee's consideration of the issues raised by the
Regulation. I hope that this response answers your questions.
I trust that your Committee will now be able
to conclude that the Regulation can be adopted on the basis of
the text upon which a General Approach was reached.
2 March 2006
Letter from the Chairman to Ivan Lewis
Thank you for your letter dated 2 March 2006
which was considered by Sub-Committee E (Law and Institutions)
at its meeting on 22 March 2005.
We note that the Government "place prime
importance on agreeing a workable text that implements Special
Recommendation VII properly and on time". This objective
is apparant throughout your response to the points raised by this
Committee in our letter of 8 December 2005. While we appreciate
the difficulties of negotiating European legislation, it is regrettable
that these should lead to the adoption of legislation which you
accept is not as clear as it might be in several places. In particular
we note that you agree that the reference in Article 5(2a)(a)
of the Regulation should be to Article 8 of Directive 2005/60/EC
as a whole, and not merely Article 8(2). It is most unsatisfactory
that the Government will not seek amendment of the incorrect referencing
on the basis that reference in the Regulation to the obligations
set out in Article 8(2) could only possibly be interpreted as
reference to the obligations set out in Article 8(1), to which
Article 8(2) refers.
We stress once again the needwhich you
acceptfor clarity where criminal sanctions may be imposed.
We urge the Government to consider what changes might be made
to ensure that at each stage of the process ambiguity is avoided,
given that reopening negotiations on agreed drafting is not always
We make the following specific points.
We strongly urge the government to include guidance
in the JMLSG Guidelines as to what constitutes a "repeated"
failure to provide information under Article 9 of the Regulation.
We note that the issue of penalties is still
under consideration. We look forward to hearing the current thoughts
of the Government on this matter shortly. As we have indicated
to you previously, we are less tolerant of ambiguities in the
Regulation where criminal sanctions are being proposed.
You say that Article 14 was changed at the request
of a number of Member States. At page 2 of your letter, you advise
that "Article 1 of the Regulation restricts the use the information
on the payer can be put to within the Community to use for the
purposes of the prevention, investigation and detection of money
laundering and terrorist financing". We do not agree that
Article 1 provides this reassurance. As you note in your letter,
Special Recommendation VII, which the Regulation is intended to
implement, aims to ensure that information is available for the
purposes of identifying suspicious transactions which may be linked
to terrorist activity. Although the obligation of PSPs to co-operate
applies only to authorities responsible for combating money laundering
or terrorist financing, the information provided could be passed
by these authorities to other bodies. The restriction in Article
14 should be retained to prevent improper use being made of information
We have decided to retain this proposal under
scrutiny. We note that the Austrian Presidency hopes to achieve
the adoption of the Regulation on the basis of the General Approach
agreed at the EcoFin meeting on 6 December 2005. It would be helpful
if you would provide some indication of when the Regulation is
likely to be adopted.
23 March 2006
Letter from Ed Balls MP, Economic Secretary,
HM Treasury to the Chairman
I'm writing to update you on progress on the
As you know, the draft Regulation is an essential
part of a global framework to combat money laundering and the
financing of terrorism. I am therefore extremely grateful for
the helpful and constructive interventions that have been made
by your Committee on this UK priority.
Following the Council's agreement of a general
approach in December last year, the Austrian Presidency has coordinated
further detailed discussion between the Council and the Parliament.
Throughout this time, the government has engaged proactively with
industry and member states to deliver a Regulation that is both
effective and proportionate.
It now appears that after some uncertainty,
this dossier is entering its end-game. Ambassadors met in Coreper
on 28 June and, noting the UK scrutiny reserve, reached agreement
on a Presidency text. This was then considered by the Parliament
on 6 July, which also voted in favour. Consequently, the draft
Regulation will now proceed to Ecofin for adoption in the Autumn.
The text represents a finely balanced compromise
between a number of national positions both within the Parliament
and the Council. We believe that it delivers UK objectives in
full and that UK interests, particularly those of industry, are
now best served by building support behind it. In order to do
so, I hope that the Committee will be able to lift its scrutiny
Since my predecessor last wrote to the Committee
on 2 March this year, the text has developed in certain areas,
some of which are particularly relevant to points made in your
letter of 23 March. In particular:
(i) there will be a considerably longer lead-in
time for Member States to fulfil the Regulation's requirement
for "effective, proportionate and dissuasive" penalties.
Such penalties are now required to be in place by December 2007,
(ii) a review clause has been inserted into
the text for a "full economic and legal assessment of regulation"
within five years of the regulation coming into force. This will
look particularly at the issue of scope.
(iii) there is now greater clarity for those
firms that detect that other payment service providers regularly
fail to supply the required information on the payer (Article
8). In particular, there is also an explicit reference to national
guidance on this point.
(iv) for transfers of sums below EUR 1,000,
the payment service provider is required to take a risk-based
approach to verification rather than prescriptively being required
to verify the name of the customer in each and every case. This
is entirely in line with the UK's approach to regulation.
Now that Member States have agreed the details
of a text to be submitted to the Parliament, I would like to update
you on the particular points raised in your letter to my predecessor
of 23 March.
Your Committee urged the government to develop
JMLSG guidelines as to what constitutes a "repeated failure"
to provide information under Article 9 of the Regulation.
JMLSG guidance is authored by the industry,
and approved by the Treasury, in order to provide practical assistance
in meeting obligations under the UK's money laundering regime.
A draft has now been prepared by industry that will be the subject
of extensive examination and development in coming months before
final endorsement by the Treasury. The materiality of "repeated"
failures to provide information will obviously differ depending
on the context and we accept the Committee's recommendation to
work with industry to ensure that there is no inappropriate or
unhelpful ambiguity on this point.
The timetable for the introduction of penalties
has been extended significantly. The development of an enforcement
and sanctions regime has obviously been limited by the ongoing
negotiation on the text itself. The scope of new penalties, including
the regulatory and legal changes necessary to enforce them, therefore
remains under consideration. In drawing up new Regulations on
this point, it will be important to maximise the consistency of
our approach with the existing money laundering regulations which
set out civil and criminal penalties in some detail.
Your Committee was concerned that information
obtained for anti-money laundering or terrorist finance measures
might be used for other purposes. I am pleased to say that the
current text re-introduces a restriction here from the Commission's
original proposal. Article 14 now states that:
Payment service providers shall respond fully
and without delay, in accordance with the procedural requirements
established in the national law of that Member State, to enquiries
from the authorities responsible for combating money laundering
or terrorist financing of the Member State in which the payment
service provider is situated, concerning the information on the
payer accompanying transfers of funds and corresponding records.
Without prejudice to national criminal law
and the protection of fundamental rights, those authorities may
use that information only for the purposes of preventing, investigating
or detecting money laundering or terrorist financing.
I hope that this goes someway to reassure the
Committee on this point.
Your Committee advised that a reference in Article
5(2a)(a) to the Money Laundering Directive should relate more
clearly to the whole of Article 8 rather than Article 8(2).
My predecessor has written on this point and
I am afraid that the Presidency text, which reflects a delicate
compromise between national positions, is unchanged from previous
versions. We are therefore considering how to achieve maximum
clarity on the issue of verification requirements in the enforcement
provisions. We are also considering the extent to which this can
be achieved by guidance incorporating the substance of Article
Overall, we have successfully developed a Regulation
that will bring the EU in line with important international terrorist
finance standards in a way that is effective, proportionate and
based on extensive engagement with industry.
Once again, I would like to express my thanks
to your Committee for its most helpful consideration of this issue.
Given the stage of the negotiations and the sensitivity of the
compromise agreed thus far, I very much hope that the Committee
will feel able to lift its reserve in advance of a decision by
10 July 2006
Letter from the Chairman to Ed Balls MP
Thank you for your letter dated 10 July 2006
which has been considered by Sub-Committee E (Law and Institutions).
As we have stated on several occasions, we consider
it important that a directly applicable instrument which may lead
to criminal sanctions be very clear in its terms. We note that
the new text replaces "repeated failure" by a PSP to
provide information under Article 9 of the Regulation with a reference
to where a PSP "regularly fails to supply the required information".
We trust that your assurance to work with industry to ensure that
there is no unhelpful ambiguity as to what constitues a "repeated
failure" will also apply to clarifying "regular"
failure in future guidelines.
We note what you say regarding the matter of
penalties. We are disappointed that you have not provided more
details on this issue but your reference to the money laundering
regime is helpful. We understand that criminal (as well as civil)
penalties are envisaged and again stress the need for clarity
in defining obligations which may give rise to these penalties.
We are very pleased to see the provision restricting
the use to which data obtained under the Regulation can be put
re-introduced into the text.
As we have said in correspondence with your
predecessor, it is regrettable that the difficulties of negotiating
European legislation sometimes leads to the adoption of instruments
which are not as clear as they might be. We welcome your efforts
to achieve clarity at the implementation stage, although we recall
that, as a Regulation, the scope for flexibility in implementation
will be limited.
We have decided to clear this proposal from
scrutiny. We understand that the Commission will in due course
produce a revised text. This should be deposited for scrutiny
in the normal way. If the new text accords with the description
and explanation given in your letter we would expect to be able
to complete our scrutiny speedily.
25 July 2006
163 Correspondence with Ministers, 45th Report of
Session 2005-06, HL Paper 243, pp 441-443. Back