Filed Under: Banking and Finance, Markets

The FATF report on New Payment Methods has very sensible conclusions

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I thoroughly enjoyed popping along to the recent conference on Mobile Money & Migrant Remittances and meeting up with friends from around the world there. I was on the Strategy Panel covering financial inclusion, and this coincidentally, the day after I had been quoted in Warren’s “Washington Internet Daily“:

Mobile payment systems are often treated with a lighter regulatory touch than mobile banking, to reach as many users as possible, Birch said. The need to integrate the “unbanked” into society should “tip the value” toward less regulation of low-value transactions, he said.

An entirely accurate representation of my views. A correspondent wrote in response:

Very sensible words! Not sure if you have actually read FATF’s NPM report from October 2010, but it is actually pretty good, and recommends the right thing: a light KYC regime (including no verification) for specific low risk accounts, praising the power of transactions limits and monitoring.

As it happens, I hadn’t read the FATF New Payment Methods report, so I downloaded it to take a look and discovered some surprisingly sensible conclusions. By “New Payment Methods”, or NPM, the FATF means specifically internet payment systems, mobile payment systems and prepaid card products. My correspondent had noted, to my surprise, that some of their conclusions echo my own ranting on the topic: that is, a light-touch KYC regime (including no verification for specific low risk accounts), with attention paid to setting the right transaction limits and appropriate monitoring and reporting requirements. The report is based on a number of case studies, so the conclusions are based in practical analysis, however it must be said that they are probably not statistically utterly sound.

The project team analysed 33 case studies, which mainly involved prepaid cards or internet payment systems. Only three cases were submitted for mobile payment systems, but these involved only small amounts.

Personally, I found many of the case studies in chapter four of the report uninteresting. Yes, in some cases prepaid cards, or whatever, were used as a part of a crime, but in many of the frauds so were cash and bank accounts. One of the case studies concerned the use of multiple prepaid cards by an individual found to have 12 legally-obtained driving licences in different names (and $145,000 in cash). I’d suggest that cracking down on the driving licence issuing process ought to be more of a priority! The issue of access to transaction record is, I think, much more complicated than many imagine. You could, for example, imagine transaction records that are encrypted with two keys–your key and the system key–so that you can go back and decrypt your records whenever you want, but the forces of law and order would need to obtain a warrant to get the system key. Sounds good. But I might not want a foreign, potentially corrupt, government department to obtain my transactions for perfectly good reasons (like it’s none of their business).

The report says very clearly that the overall threat is “difficult” to assess (so some of the rest of it, I think, is necessarily a trifle fuzzy) but also that the anti-money laundering (AML) and counter terrorist financing (CTF), henceforth AML/CTF, risks posed by anonymous products can be effectively mitigated. I agree. And I also strongly agree with chapter three of the report notes that electronic records give law enforcement something to go on where cash does not. This is something that I’ve mentioned previously, both on this blog and in a variety of other fora, because I think it’s a very important point.

I said that I was not sure that keeping people out of the “system” was the best strategy (because if the terrorists, drug dealers and bank robbers on the run stay in the cash economy, then they can’t be tracked, traced or monitored in any way)

[From Digital Money: Anti-anti money laundering]

The report goes on to expand on the issue of mitigation and, to my mind, deals with it very well. It says that:

Obviously, anonymity as a risk factor could be mitigated by implementing robust identification and verification procedures. But even in the absence of such procedures, the risk posed by an anonymous product can be effectively mitigated by other measures such as imposing value limits (i.e., limits on transaction amounts or frequency) or implementing strict monitoring systems.

Why is this so important? As well as keeping costs down for industry and stimulating the introduction of competitive products, the need for identification is a barrier to inclusion. This link between identification and inclusion is clear, whatever you think about the identification system itself. India is turning out to be a fascinating case study in that respect.

The process would benefit beneficiaries of welfare schemes like old-age pension and NREGA, enabling them to draw money from anywhere as several blocks in Jharkhand have no branches of any bank and would save them from travelling to distant places for collecting money.

[From Unique numbers will save duplication in financial transactions – Ranchi – City – The Times of India]

But I can’t help cautioning that while customer identification is difficult where no national identity scheme exists, but there is a scheme it may give a false sense of security because obtaining fraudulent identities might be easier than obtaining fraudulent payment services in some jurisdictions or where officials from dodgy regimes (like the UK) are at work…

Prosecutor Simon Wild told the court Griffith abused his position by rubber stamping work permit applications that were obviously fake or forged using false names and references.

[From British embassy official ‘nodded through scores of visa applications’ | Mail Online]

For low risk products, then, the way forward is absolutely clear: no identification requirements, potentially strong authentication requirements and controlled access to transactions records. One small problem, though, that the report itself highlights: there are no uniform, international, cross-border standards for what constitutes a “low risk” product. But that’s for another day.

Finally, I couldn’t help but notice that the payment mechanisms that scored worst in the high-level risk table (on page 23) and therefore the one that FATF should be working hardest to crack down on is cash.

These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers

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