EMIs: Balancing Innovation with Regulation
We are living in a fast-paced digital era where everything is expected to be delivered easily, fast and efficiently.
Innovation and Digitalization
We are living in a fast-paced digital era where everything is expected to be delivered easily, fast, and efficiently. We are experiencing a constant digitalization of every single aspect of our life. Whoever lacks in adapting to this digital transformation is left behind as all indications support that the new norm is virtual rather than conventional. The financial industry is not the exception as in recent years it has experienced arguably one of the most radical innovations with the expansion of fintech technology. Cryptos, NFTs, Blockchain technology, mobile payments, alternative insurance, transaction delivery, EMIs, and the list is endless. Technology has reshaped how the economy works and will continue to radically alter the financial industry with the development of the Metaverse and Web 3.0.
Even though innovation is always welcomed, nonetheless modernization has created a wholly new and young “world” that is vulnerable to criminal exploitation and abuse from illicit forces. Innovative technologies have given criminals new tools in their arsenal that they can utilize for their benefit, for money laundering activities and concealment of their identity. Criminal elements use the fintech industry due to its fast-paced characteristics, its lax regulation, and the gaps in whatdogs’ understanding of the issues at hand. EMIs, for example, are a notable component of modern money laundering schemes.
Before analyzing the use of EMIs in money-laundering schemes and what needs to change let’s back it up a bit and actually explain what are EMIs and how they have come about to be one of the key players of the fintech industry.
Electronic Money & Electronic Money Institutions (EMIs); A Brief History
According to the European Central Bank “Electronic Money (e-money) is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer. The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions.” Therefore e-money is:
Electronically – including magnetically – stored (e.g. chargeable internet-based account, magnetic card);
Issued on receipt of funds for the purpose of making payment transactions (conversion of bank money into electronic money); and
Accepted by a natural or legal person other than the electronic money issuer.
The aforementioned is what e-money has come to be today. However, e-money has been on the agenda of the EU and the European Monetary Institution (predecessor of European Central Bank) since the early 90s. In 1993 electronic money was limited to pre-paid cards, and the EU's banking authority conducted research on the topic. In May 1994, the authority revealed the findings of its investigation. It was suggested that multi-purpose prepaid cards had the real potential to radically improve efficiency for payment transactions. For several reasons it was also supported that only credit institutions be allowed to issue prepaid cards and the central banks agreed with this recommendation and welcomed the development of the first electronic money products.
The status quo did not last long and as soon as in 1995 talks of broadening the scope of e-money and the companies that can offer them had commenced. The European Union's member states, bank regulators, and central banks quickly began discussing the benefits of extending the issuance (of e-money) to additional financial organizations. Out of the discussions, an entirely new sort of financial organization known as a "narrow bank" was developed, one with a lower capital requirement and only with the ability to issue electronic money. In September 2000, the first Electronic Money Directive (EMD) was approved. This “narrow-bank” is the predecessor of EMIs.
EMIs are the digital equivalent to traditional banks as Clients' money is saved in an "electronic wallet" instead of a bank account. An online platform is used by the EMIs, but they also have the authority to oversee transactions and issue debit cards as well. Either the platform or the debit card supplied to an EMIs customer can be used to make payments.
Conventional banks, even though they try to catch up with the recent technological advancements, lack when it comes to digital services. EMIs are designed to provide all their services online via user-friendly platforms. The account holder can send and receive money, check their balances and pay their employees simply by using their smartphone. An EMI can also offer advanced and custom-made solutions tailored to a client’s needs.
Additionally, EMIs are flexible and adaptable as their respective regulations and legislations are not as strict as the ones fencing in the conventional banks. Thus, EMIs can offer a vast selection of options to their customers in order to transfer money as swiftly as possible and offer various choices when it comes to cards and wire transfers.
Why choose an EMI over a traditional banking institution?
1. They accept high-risk clients
Most European banks will not accept any clients coming from high-risk jurisdictions (as per the FATF, EU Tax, and EU High-Risk Lists) or high-risk industries (such as gaming, gambling, Forex, financial services, etc.).
On the other hand, EMIs have the technology and expertise to perform adequate due diligence checks and service, such clients, on a satisfactory level while also offering multi-currency accounts to cover all their clients’ needs.
2. Onboarding and maintenance costs
The onboarding and running costs of an EMI account are significantly lower in comparison to a traditional bank account. Furthermore, many banks apply a negative interest rate to all deposit accounts whereas this does not apply to EMIs. Due to the fact that an e-money licence or payment institution licence is significantly cheaper than a bank licence, there is a higher number of EMIs which in turn, creates competition between the operators. What does this mean for the end customer? Better service at a lower cost!
3. 24/7 Customer Support
While most traditional banking institutions offer customer support during normal business hours either by phone, email, or walk-in service, most EMIs offer 24/7 online customer support. This means that if you encounter any problems with your EMI account, platform, or if you simply have a query, a dedicated team is at your fingertips ready to respond!
4. Multi-currency accounts and foreign exchange
Most banking institutions offer accounts in a selection of currencies. This means that in the case of payment in a different currency, the client is charged exchange rates. This does not usually apply to EMIs, as they offer accounts in a multitude of currencies and even multi-currency accounts to hold funds of various currencies under one account.
5. Digital accessibility, flexibility, and adaptability
We are living in a fast-paced digital era and therefore we expect everything in our lives to be digitalized and as easy, fast, and efficient as possible. Conventional banks, even though they try to catch up with the recent technological advancements, lack when it comes to digital services. EMIs are designed to provide all their services online via user-friendly platforms. The account holder could send and receive money, check their balances, and pay their employees simply by using their smartphones. An EMI can also offer advanced and custom-made solutions tailored to a client’s needs.
*This is only applicable to EU Banking Institutions (European Deposit Insurance Scheme)
**For EMIs, all services are offered online. The lack of “bricks-and-mortar” offices, means that the running cost of the institution is kept low and therefore onboarding and processing costs are significantly lower
Innovation vs Regulation; UK’s Example
From the aforementioned, it is evident that fast-paced digitalization is part of our lives and the application of it is everywhere, but especially apparent in the financial industry. One of the examples presented as a benefit of engaging with an EMI rather than a traditional bank is the fact EMIs are less rigid and tend to onboard clients who are of higher risk and could have been rejected by other credit institutions. This is not meant to imply that e-money services are necessarily suspect or inherently “dangerous” conduits of money laundering, but rather that proper regulation is vital to mitigate any criminality forces.
The fintech industry in the United Kingdom is one of the most dynamic in the world, with a wide spectrum of innovative companies expanding rapidly. Therefore, the UK is the perfect market for research and making conclusions. Transparency International, a non-profit and non-governmental organization aimed to use anti-corruption strategies to combat global corruption and to prevent criminal actions that arise from corruption has identified money laundering red flags at 38% of the UK’s EMIs. As a world leader in this industry, the percentage of EMIs where red flags were identified is a worrisome result as the UK is home to more than 200 such businesses, Revolut being one of the most notable names. Revolut is a household name in both the UK and in EU jurisdictions such as Cyprus. The demand for e-money services is high and the fintech industry is complying with this demand providing the supply.
As aforementioned, the application to acquire an EMI license is a much less taxing and onerous process than acquiring a banking license. This is arguably very logical as EMIs are drastically smaller organizations than banks (in most instances) and offer a narrower set of services (e.g. no lending powers, no depository services, etc). Even though the regime is less strict, it would be absurd to expect them to be subjected to the same level of regulation as full-scale banking, particularly because they do not often involve the offer of credit. Nevertheless, there are persistent indications that the sector is somewhat vulnerable to criminal exploitation and there are apparent gaps in understanding the real issues and risks at hand by both EMI licensees and the authorities regulating them.
Back in 2020, the openDemocracy campaign group argued that EMIs were “being touted as a replacement for networks through which billions of dollars of dark money moved in and out of the former Soviet Union”. Research results made by these organizations (openDemocracy & Transparency International) should be taken into account in order to better protect the market. It may be circumstantial, but there appears to be a considerable body of evidence that EMIs constitute a danger of money laundering. And it makes perfect sense intuitively that criminal elements would target a new sector of financial services where understanding of it is still limited, especially given that watchdogs focus is still on other parts of the industry (e.g. traditional banking). What we need to do is identify and perform the perfect balancing act where the regulatory regime does not act as the Sun to innovation’s wings of Icarus, but at the same time has the right regulated environment protected from abuse.
Even though EMI regulation is less strict than that of the banking sector this does not suggest that it is non-existent. The EU regulatory regime on EMIs features some of the most important anti-money laundering rules of the industry offering both investor and customer protection if followed properly. Cyprus is one EU member state that is emerging as an important EMI hub allowing institutions to passport their services in the EU whilst enjoying one of the most attractive headquartering jurisdictions in Europe.
Cyprus & Our Services
Cyprus, since antiquity, was known as the crossroad of 3 continents – Europe, Asia, and Africa. Located in the East of the Mediterranean Sea, the island is well known to the business and tourism world. Due to its strategic location, and despite its small size, the island has established a strong reputation as a “center of excellence” and a dynamic business hub. An EU member state with a modern and efficient tax system, aligned with all EU and international regulations. Currently, Cyprus tax resident companies can enjoy a double tax treaty with over 65 countries worldwide.
The corporate tax rate is set at 12,5% but a number of exceptions apply, such as dividends from foreign sources, disposals of shares, no withholding taxes on payments made abroad, foreign exchange rates etc. It is worth mentioning that Cyprus has implemented an IP tax regime that can be utilized by IP-related companies, decreasing the tax rate to as low as 2,5%.
Cyprus is an emerging EMI licensing jurisdiction which allows companies to passport their services throughout the EU reaching a large audience of potential clients.
While the UK is a world leader in Electronic Money, it is arguably losing its attractiveness after the Brexit as it will be exponentially harder to passport services across the EU from a UK based institution.
Our Services Include:
Advisory support towards the authorization and registration of an EMI;
Preparation of the Application File in accordance with current regulatory requirements, to include, among others:
Design and build the EMI structure based on your needs and in a cost-efficient way;
Prepare a custom-built Operations Manual based on your needs and in the most efficient manner;
Prepare the Money Laundering Manual and Know Your Client (KYC) policies based on your needs and in the most efficient manner;
Prepare the business plan;
Complete the application form to be submitted to the relevant EU regulatory authority;
Review the questionnaires of the shareholders, directors and heads of departments of the proposed EMI;
Locate qualified executive and non-executive directors (if needed);
Complete the relevant checklists;
Prepare necessary justifications to be submitted to the relevant EU regulatory authority, as applicable;
Prepare the letter(s) to accompany the application in the event that any exceptions may be requested;
Guide you in providing all the necessary documentation and certificates;
Answer any relevant questions concerning the application process, and;
Respond on your behalf to the authority’s queries and suggestions related to the application.
Locating qualified Directors and personnel for EMIs and Banks;
Compliance consulting to EMIs and Banks, and;
Executive training for EMI and Bank personnel
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
We are a team of experienced professionals, all sharing a unique drive for learning and development through teamwork. The Group utilizes its various core activities to implement customized solutions for its clients. Our collective experience spans the areas of Global Corporate & Fiduciary Services, Assurance & Advisory Services, Fund Administration, Tax Advisory, Corporate Governance, Financial Services, Private Wealth Services and Compliance.
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