In terms of legal changes, 2018 was a very interesting year in Europe. The payments industry had to face many challenges, the most important and well known of which were the PSD2 and GDPR implementation as well as the adoption of the 5th and 6th Anti-Money Laundering Directive. What’s more, many EU Member States continued to face problems with the 4th Anti-Money Laundering Directive (4 AMLD), even though the deadline of its implementation expired in June 2017.
All these abbreviations are well known in compliance departments and lawyers probably still have nightmares about them.
Source: https://eur-lex.europa.eu/statistics/2018/legislative-acts-statistics.html?locale=en
Interestingly in 2018, the EU alone adopted 264 basic and 154 amended legal acts. The number increases exponentially when one adds the legal acts passed in each country.
What does that mean for the payment industry? The fact is that any new relevant regulation generates significant costs and usually means the reorganisation of at least some of the processes already in place. However, these high investments often don’t address the underlying problem.
This can pose a serious threat to the entire payment ecosystem – from the cardholder, the merchant and acquirer, to the payment organisation issuing the card. To illustrate how this can be prevented, let’s look at the example of cryptocurrency payments.
The payment industry’s response to cryptocurrency
One of the core selling points of cryptocurrency is its anonymity. This stands in strong contrast to the payment industry which has successfully fought for more transparent transactions and is constantly working to improve their methods of verifying entities that are part of the payment value chain. From the industry’s perspective this is necessary to counteract serious threats like fraud and to maintain the trust of their clients.
An excellent example of how the industry does this is the work of Mastercard, who regularly issue updates of their Business Risk Assessment and Mitigation (BRAM) standards (more about the requirements later). In the first half of 2018, the industry lived mainly on the news published in the Revised Standards AN 1695 (regarding Cryptocurrency Merchants) and AN 1683 (regarding High-Risk Securities Merchants).
Mastercard is a global institution that is trusted by millions of card holders around the globe. When they change their rules, it has immediate repercussions for all market participants – often effectively overwriting more ambiguous or tolerant local regulations.
Self-regulation = the best regulation?
At every step, European legislators try to convince the industry that they keep their hand on the pulse and that the law is a trendsetter for business. This claim cannot be accepted unconditionally in the payment industry.
The above-mentioned standards issued by Mastercard are an excellent example of the fact that effective and current regulation of market activities can be successfully initiated by industry leaders and bring legislative confusion under control. In this context, Mastercards actions should be assessed positively, as they not only rely on the regulations already in place, but also force merchants to adapt sufficiently in advance of the regulations.
In the transaction chain, it is crucial to properly emphasize the role of merchants. They are the first link and have direct contact with the cardholder. Mastercard’s comprehensive due diligence package for cryptocurrency merchants currently consists of the following requirements (among others):
evidence of legal authority – requirement to provide a copy of a licence that expressly authorises the merchant to engage in such trading activity;
legal opinion - the requirement considered by the merchants to be the most difficult to meet, as the legal opinion must be addressed to the acquirer and reasoned by a reputable law firm located in each country where cryptocurrency activity will occur or be offered to cardholders;
effective controls – special certification from a qualified independent third party.
Despite some initial concerns as to the burden of the requirements, they are now accepted by the industry because Mastercard stepped up to create facts on the ground that provide a clear guidance for acquiring banks that previously had to deal with sometimes very ambiguous legal frameworks.
A recipe for success? It does not exist.
The payment industry is of particular importance not only economically, but also socially. The development of payments is one of the driving forces of globalization: it facilitates the convenient acquisition of goods and services from all over the world without leaving home. It should therefore come as no surprise that payment organisations are demanding more and more from their members, as card users are also demanding more and more from payment organisations.
There is no universal recipe for success to fulfil these demands, but we need to take action that will allow us to increase the chances of success. Analysing the recently introduced rules, including those introduced by Mastercard, one can conclude that the market has good ideas for fighting fraud. Nevertheless, it is essential to update requirements on an on-going basis. The creativity of criminals is unlimited – the payment industry has to react quickly to not fall behind.
In the end, even the best rules don’t help if they aren’t thoroughly implemented. Every participant in the payment space should keep in mind that Ignorance is not an excuse – eloquently stated by Jonathan Trivelas, Director, Compliance and Fraud at Mastercard, speaker at RiskConnect 2018 conference. The efforts of industry leaders to improve the safety of market participants should be assessed positively and supported.
About Kamil Kalenczuk
Kamil Kalenczuk is a lawyer from Woloszanski & Partners Law Firm specializing in providing services to entrepreneurs. Experienced in managing multi-threaded legal projects, on a daily basis he works with clients in the field of new technology and regtech law, corporate governance, as well as labour law.
About WLAW
Woloszanski & Partners Law Firm specializes in rendering legal advisory services for entrepreneurs. Our Law Firm offers comprehensive legal services. In particular Woloszanski & Part specialize in commercial law, civil law and companies law.
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