The Proposed EU Regulation on Instant Credit Transfers in euro and the Travel Rule Problem

The Agreement on the Instant Credit Transfers in euro Proposal

On the 7th of November 2023 we learned that “the Council and the European Parliament have reached a political agreement on the instant payments proposal, which will improve the availability of instant payment options in euro to consumers and businesses in the EU and in EEA countries”. On the 28th of November the text of this agreement was published (https://data.consilium.europa.eu/doc/document/ST-15764-2023-REV-1/en/pdf).

This compromise document on instant payments can be considered a breakthrough in the obligations of the obliged entities as far as sanctions filtering of payment transactions is concerned.

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The Shifting of Sanctions Screening Trick

The draft regulation, for the reasons stated in its preamble (recital 25) expects to abolish or to exchange (to use a more politically correct language) the obligation of PSPs to screen payments for sanctions “one by one” in case of instant payments in euro, for the obligation to apply “a procedure whereby payment service providers will verify at least daily their clients against EU sanctions lists”. This - as the official press release informs us - for the purpose of “removing friction in the processing of instant euro payments while preserving the effectiveness of screening of persons that are subject to EU sanctions”.

So far, so good. The proposed “trick” could work esp. as the a/m friction – as investigated by the ECB – may really be a hamper for instant payments if the demand for them is to increase many times. And the raise of this demand is to be ensured by, inter alia, the regulatory “obligation on payment service providers to ensure that the price charged for instant payments in euro does not exceed the price charged for traditional, non-instant credit transfers in euro”.

The whole a/m change of the way the sanctions regime is still to remain effective refers to the obligations formulated in the Art. 215 of TFEU. This article currently reads:

“Article 215

1. Where a decision, adopted in accordance with Chapter 2 of Title V of the Treaty on European Union, provides for the interruption or reduction, in part or completely, of economic and financial relations with one or more third countries, the Council, acting by a qualified majority on a joint proposal from the High Representative of the Union for Foreign Affairs and Security Policy and the Commission, shall adopt the necessary measures. It shall inform the European Parliament thereof.

2. Where a decision adopted in accordance with Chapter 2 of Title V of the Treaty on European Union so provides, the Council may adopt restrictive measures under the procedure referred to in paragraph 1 against natural or legal persons and groups or non-State entities.

3. The acts referred to in this Article shall include necessary provisions on legal safeguards.”

For the lay people like myself, who are assumed to understand the law without the lawyers’ assistance (because the law is “for the people”) this article is on sanctions. Sanctions against “third countries” (no EU member states), “natural or legal persons and groups or non-State entities”.

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The Unsolved Payments-on-Behalf Problem

The problem here is that some of the instant payments in euro may still be “on behalf” payments and so it is definitely not enough to demand the daily “screening of PSUs to verify whether a PSU is a listed person or entity in case of instant credit transfers” form all PSPs offering instant credit transfers. Why, because these PSPs may have other PSPs (not having direct access to an instant credit transfer system) as their customers. These PSPs (b), the ones without the direct access to an instant credit transfer system, may order the PSPs (a) having this access, to settle transactions via an instant credit transfer system in euro. However, these transactions will most probably be ordered (or received) “on behalf of” the customers of the PSPs (b) not having the direct access to the payment system discussed. Since only the PSP (a)’s customers will be screened, e.g. PSP (b) will surely be screened, none of the PSP (b)’s customers will be screened. Yet, their transfers – in the sense of the term given to it by the EU Travel Rule Regulation 2015/847 – will be settled via the instant credit transfer payment system in euro. I do not want to elaborate about it here anymore having devoted a whole article to the subject in January (https://www.dhirubhai.net/pulse/does-european-commission-want-get-non-bank-psps-ecs-eur-hansen-phd/?trackingId=rBi6fUXhR26bG6Urf8H5wQ%3D%3D). As long as not all PSPs will be directly connected to a system of instant payments in euro, and they will not be prohibited to order “payments on behalf” to other PSPs (as their customers), the problem will remain.

But is there a risk of establishing ?- by the proposed and internally agreed EU Regulation - the credit transfer in euro as the instrument of AML/CFT monitoring evasion? There is? - by the lack of encountering the Travel Rule problem in the proposed Regulation.

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The Silence on Travel Rule Obligations

As Article 215 of TFEU is on sanctions, it leaves the Travel Rule obligations, which stem from another TFEU Article, undecided at least. The Travel Rule’s (Regulation (EU) 2015/847) legal basis is more complicated but it refers – procedurally rather than for justification - to Article 114 of TFEU than any other one.

The problem comes from the fact that “payments on behalf” should – following obligations indicated in the Regulation (EU) 2015/847 - contain the information on the primary sender and the final beneficiary of the transfer. Every PSP, which participates in the effecting of such transfer, should verify whether such information – dependent on the case (where the sender and beneficiary are located, but also what the transfer is for and what is its amount) – actually accompanies the transfer or not and whether it is relatively complete. I use the non-legal term “relatively”, because each PSP should make a “risk-based” judgment whether releasing the payment to the customer or sending it further is too risky or not and what should it (this PSP) do in every particular situation.

We must be aware that the “transfer” in the sense of Regulation (EU) 2015/847 is the full “electronic way” the funds travel from the primary sender to the final beneficiary. They may travel by e.g. several consecutive credit transfers. Consecutive PSPs may “hand the funds” from the previous PSP to the next PSP via consecutive credit transfers. One of them may be the credit transfer in euro.

EBA (as well as ESMA and EIOPA since these are joint guidelines) demands to make the a/m verifications (for presence and for the relative completeness of the data on primary sender and final beneficiary) not only off-line, but in real time as well. See e.g. guidelines 20, 25, 28, 31, 56 of the “Joint Guidelines under Article 25 of Regulation (EU) 2015/847 on the measures payment service providers should take to detect missing or incomplete information on the payer or the payee, and the procedures they should put in place to manage a transfer of funds lacking the required information” (JC/GL/2017/16). Such verification may have the effect similar to the “frictions” mentioned for sanctions screening, since this transaction verification may cause credit transfers stall for additional checks and decisions from the very ordering phase till the account crediting phase.

However, the provisional agreement between the Council and the European Parliament on the instant payments proposal leaves this issue untouched. Should therefore PSPs neglect the verification of Travel Rule information for the sake of the “higher good” i.e. the undisturbed flows of instant credit transfers in euro throughout the EEA, or should PSPs continue performing the Travel Rule accompanying information verification to fulfill their regulatory obligations?

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?The above publication contains its author’s private opinions only.