Select Committee on European Union Fortieth Report


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[163] 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 above.

OBLIGATIONS ON THE PAYER'S PAYMENT SERVICE PROVIDER

  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.

OBLIGATIONS ON THE PAYEE'S PAYMENT SERVICE PROVIDER

  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.

PENALTIES

  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 VII.

THE PRESIDENCY DRAFT

Recitals

  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.

Scope

  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 8).

  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 industry.

Missing information

  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.

Co-operation obligations

  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 MP

  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 need—which you accept—for 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 possible.

  We make the following specific points.

OBLIGATIONS ON THE PAYEE'S PAYMENT SERVICE PROVIDER

  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.

PENALTIES

  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.

CO-OPERATION OBLIGATIONS (ARTICLE 14)

  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 on transfers.

  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 "Payments Regulation".

  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 reserve.

  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, not 2006.

    (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.

OBLIGATIONS ON THE PAYEE'S PAYMENT SERVICE PROVIDER

  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.

PENALTIES

  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.

CO-OPERATION OBLIGATIONS (ARTICLE 14)

  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.

ARTICLE 5(2A)(A)

  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 8.

  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 Ecofin.

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).

OBLIGATIONS ON THE PAYEE'S PSP—"REPEATED FAILURE" AND "REGULARLY FAILS TO SUPPLY"

  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.

PENALTIES

  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.

CO-OPERATION OBLIGATIONS AND DATA PROTECTION

  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.

ARTICLE 5(2A)(2) AND CLARITY

  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


 
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